Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Related To Proposed Changes to The Options Clearing Corporation's Rules, Clearing Fund Methodology Policy, and Clearing Fund and Stress Testing Methodology, 67977-67981 [2019-26730]

Download as PDF Federal Register / Vol. 84, No. 239 / Thursday, December 12, 2019 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–26733 Filed 12–11–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87672; File No. SR–OCC– 2019–806] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Related To Proposed Changes to The Options Clearing Corporation’s Rules, Clearing Fund Methodology Policy, and Clearing Fund and Stress Testing Methodology December 6, 2019. I. Introduction On October 10, 2019, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2019–806 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled Payment, Clearing and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 3 to make changes to OCC’s Clearing Fund and stress testing rules and methodology.4 The Advance Notice was published for public comment in the Federal Register on November 12, 2019,5 and the Commission has received no comments regarding the changes proposed in the Advance Notice.6 The 9 17 CFR 200.30–3(a)(12). U.S.C. 5465(e)(1). 2 17 CFR 240.19b–4(n)(1)(i). 3 15 U.S.C. 78a et seq. 4 See Notice of Filing infra note 5, at 84 FR 61120. 5 Securities Exchange Act Release No. 87475 (Nov. 6, 2019), 84 FR 61120 (Nov. 12, 2019) (File No. SR–OCC–2019–806) (‘‘Notice of Filing’’). On October 10, 2019, OCC also filed a related proposed rule change (SR–OCC–2019–009) with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder (‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. In the Proposed Rule Change, which was published in the Federal Register on October 29, 2019, OCC seeks approval of proposed changes to its rules necessary to implement the Advance Notice. Securities Exchange Act Release No. 87386 (Oct. 23, 2019), 84 FR 57911 (Oct. 29, 2019). The comment period for the related Proposed Rule Change filing closed on November 19, 2019. 6 Since the proposal contained in the Advance Notice was also filed as a proposed rule change, all public comments received on the proposal are khammond on DSKJM1Z7X2PROD with NOTICES 1 12 VerDate Sep<11>2014 17:56 Dec 11, 2019 Jkt 250001 Commission is hereby providing notice of no objection to the Advance Notice. II. Background 7 As noted above, OCC proposes to revise its Clearing Fund and stress testing rules and methodology. Specifically, OCC proposes to: (1) Incorporate a new set of stress test scenarios to be used in the monthly sizing of OCC’s Clearing Fund that are designed to capture the risks of extreme moves in individual or small subsets of securities; (2) revise OCC’s stress testing methodology for modeling certain volatility index futures; (3) modify OCC’s methodology for allocating Clearing Fund contribution requirements to standardize the margin risk component of the allocation formula for all Clearing Members; and (4) adopt an additional threshold for notifying senior management of intraday margin calls based on certain stress test results. OCC also proposes to correct certain rules concerning OCC’s cooling-off period and replenishment/ assessment powers.8 A. Sizing Stress Test Scenarios On a monthly basis, OCC establishes the size of its Clearing Fund at the level it believes is necessary to maintain sufficient financial resources to cover losses arising from the default of the two Clearing Member Groups that would potentially cause the largest aggregate credit exposure to OCC under certain stress scenarios.9 OCC determines the size of its Clearing Fund each month through an approach based on broadbased market and systemic shocks (‘‘Systemic Scenarios’’).10 OCC proposes to incorporate an additional set of stress test scenarios to be used in the monthly sizing of OCC’s Clearing Fund that are designed to capture the risks of extreme moves in individual or small subsets of securities (‘‘Idiosyncratic Scenarios’’). The Idiosyncratic Scenarios would be in addition to the existing Systemic considered regardless of whether the comments are submitted on the Proposed Rule Change or the Advance Notice. 7 Capitalized terms used but not defined herein have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/ publications/bylaws.jsp. 8 Additionally, OCC proposes clarifying and conforming changes to its Rules, Clearing Fund Methodology Policy (‘‘Policy’’), and Stress Testing and Clearing Fund Methodology Description (‘‘Methodology Description’’). 9 See Notice of Filing, 84 FR at 61121. 10 See Notice of Filing, 84 FR at 61122. See also, Securities Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37857 (Aug. 2, 2019) (SR–OCC– 2018–008) (describing OCC’s Clearing Fund sizing stress test scenarios as an approach based on hypothetical stress scenarios that assume shocks to the Cboe S&P 500 Index (‘‘SPX’’) associated with a 1-in-80-year market event). PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 67977 Scenarios. Because OCC’s monthly Clearing Fund sizing process is designed to cover OCC’s largest aggregate stress test exposures, the expansion of the set of Clearing Fund sizing stress tests could not reduce the size of OCC’s Clearing Fund. In constructing the Idiosyncratic Scenarios, OCC would shock each single-name equity (i.e., excluding exchange-traded funds, exchange-traded notes, indices, and non-equity products). OCC would evaluate the effects of such shocks on every Clearing Member Group’s portfolios. Within each Clearing Member Group’s portfolio, OCC would identify the four singlename equities for which such shocks would result in the largest losses. OCC would then identify the two Clearing Member Groups with the largest aggregate losses. The combined losses of the two identified Clearing Member Groups would represent the loss that OCC would seek to cover in its monthly Clearing Fund sizing process. OCC believes that implementing the proposed Idiosyncratic Scenarios would enhance OCC’s stress testing methodology and overall resiliency by providing a more comprehensive suite of sizing stress tests to ensure that OCC maintains an appropriate level of financial resources to cover its credit exposures under scenarios addressing both systemic market risks and idiosyncratic risks.11 B. Volatility Index Futures Under OCC’s current stress testing methodology, prices shocks for futures based on the Cboe Volatility Index (‘‘VIX’’) 12 are equivalent to a price shock for the underlying. Because the VIX has no term structure, this process produces a uniform shock across expirations of the VIX futures contracts. Futures contracts for different expirations, however, generally trade at different prices reflecting the differing future price expectations of the underlying asset.13 OCC believes that applying a uniform shock across expirations is unrealistic, and that it would lead to an overestimation of VIX futures price shocks, particularly in market decline scenarios.14 As noted above, OCC proposes to revise its stress testing methodology for modeling certain volatility index futures. 11 See Notice of Filing, 84 FR at 61122. VIX is an index designed to measure the 30-day expected volatility of the SPX. 13 When there is a large shock to the VIX it has consistently been observed that the change in price of near-term VIX future contracts is much larger than for further out expirations. See Notice of Filing, 84 FR at 61122, n. 11. 14 See Notice of Filing, 84 FR at 61122. 12 The E:\FR\FM\12DEN1.SGM 12DEN1 67978 Federal Register / Vol. 84, No. 239 / Thursday, December 12, 2019 / Notices Specifically, the proposed change would produce differing price shocks for VIX futures across the term structure. The proposed methodology would be based on SPX volatility shocks across different expirations, as opposed to the current methodology’s reliance on a single shock to the VIX. OCC believes that implementation of the proposed methodology would improve pricing for VIX futures as well as VIX options.15 C. Clearing Fund Allocation OCC allocates Clearing Fund contribution requirements to individual Clearing Members, in part, based on each Clearing Member’s proportionate share of risk margin, which OCC refers to as ‘‘total risk.’’ 16 The majority of Clearing Member margin requirements are based on OCC’s System for Theoretical Analysis and Numerical Simulations (‘‘STANS’’), which is OCC’s proprietary risk management system. The margin requirement for certain Clearing Members’ accounts, however, is calculated using the Standard Portfolio Analysis of Risk Margin Calculation System (‘‘SPAN’’), which reflects customer gross margining.17 OCC proposes to define ‘‘total risk’’ as based on the same margin model for all Clearing Members.18 OCC believes it is more appropriate to use the same margin risk measurement for all Clearing Members when allocating Clearing Fund contribution requirements to allow for a more equitable comparison across all accounts.19 khammond on DSKJM1Z7X2PROD with NOTICES D. Margin Call Notification On a daily basis, OCC evaluates the sufficiency of its financial resources based on OCC’s potential exposure to Clearing Member Groups under certain stress test scenarios (‘‘Sufficiency Stress 15 See Notice of Filing, 84 FR at 61123. OCC uses VIX futures to calculate theoretical values for VIX options. 16 Currently, OCC uses the following weighting in its allocation of clearing fund requirements: 70 percent total risk; 15 percent open interest; and 15 percent volume. See Securities Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37863 (Aug. 2, 2019) (SR–OCC–2018–008). 17 See Notice of Filing, 84 FR at 61123, n. 16 (stating that ‘‘OCC calculates margin requirements for segregated futures accounts using both SPAN on a gross basis and STANS on a net basis, and if at any time OCC staff observes a segregated futures account where initial margin calculated pursuant to STANS on a net basis exceeds the initial margin calculated pursuant to SPAN on a gross basis, OCC collateralizes this risk exposure by applying an additional margin charge in the amount of such difference to the account’’ (citation omitted)). 18 Specifically, OCC proposes to use STANS plus certain add-on charges as the basis for determining each Clearing Member’s proportionate share of total risk. 19 See Notice of Filing, 84 FR at 61123. VerDate Sep<11>2014 17:56 Dec 11, 2019 Jkt 250001 Tests’’). Based on the results of the Sufficiency Stress Tests, OCC may call for additional collateral to ensure that it maintains sufficient financial resources to guard against potential losses. For example, OCC is authorized to make an intra-day margin call against a Clearing Member Group whose Sufficiency Stress Test exposures breach a pre-determined threshold. Currently, OCC’s rules require that written notification of such intra-day margin calls in excess of $500 million be provided to OCC’s Executive Chairman, Chief Executive Officer, and Chief Operating Officer (‘‘Office of the CEO’’). OCC proposes to revise its rules to require that written notification of stress test-related intra-day margin calls also be sent to the Office of the CEO when a stress test-related intra-day margin call would exceed 75 percent of the Clearing Member’s excess net capital. OCC believes that this additional notification requirement is appropriate because it would allow OCC’s senior management to be informed as soon as practicable of, and to subsequently monitor, circumstances where a margin call may strain a particular Clearing Member’s ability to meet such requirements based on its financial condition or the amount of collateral it has available to pledge when certain pre-identified thresholds have been exceeded.20 E. Cooling-Off Period In 2018, OCC implemented a set of recovery tools, including revisions to OCC’s authority to assess its Clearing Members for funds to replenish OCC’s Clearing Fund.21 For example, OCC implemented a ‘‘cooling-off period’’ during which its authority to levy such assessments is capped, which provides certainty to Clearing Members regarding their potential obligations to OCC. In proposing such revisions, OCC intended that the cooling-off period would be triggered by any proportionate Clearing Fund charges to Clearing Members related to the default of a Clearing Member.22 OCC’s current rules, however, do not provide for a coolingoff period based on proportionate Clearing Fund charges arising out of two specific sets of circumstances: (1) In connection with protective transactions effected for the account of OCC 20 See Notice of Filing, 84 FR at 61123. Securities Exchange Act Release No. 83916 (Aug. 23, 2018), 83 FR 44076 (Aug. 29, 2018) (SR– OCC–2017–020). 22 See Notice of Filing, 84 FR at 61124. Such triggers include the assessments arising out of a Clearing Member’s failure to meet its obligations regarding confirmed trades, exercised or assigned contracts, stock loan transactions, or the liquidation of a Clearing Member’s open positions. See id. at n. 22. 21 See PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 pursuant to Chapter XI of OCC’s Rules and (2) as a result of a failure of any Clearing Member to make any other required payment or render any other required performance (as provided in clauses (v) and (vi) of OCC Rule 1006(a)). OCC proposes to revise its rules such that any proportionate Clearing Fund charges to Clearing Members related to the default of a Clearing Member, including the two listed above, would trigger a cooling-off period. III. Commission Findings and Notice of No Objection Although the Clearing Supervision Act does not specify a standard of review for an advance notice, the stated purpose of the Clearing Supervision 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 systemically important financial market utilities (‘‘SIFMUs’’) and strengthening the liquidity of SIFMUs.23 Section 805(a)(2) of the Clearing Supervision Act 24 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 Clearing Supervision Act 25 provides the following objectives and principles for the Commission’s riskmanagement 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 other areas.26 The Commission has adopted riskmanagement standards under Section 805(a)(2) of the Clearing Supervision Act and Section 17A of the Exchange Act (the ‘‘Clearing Agency Rules’’).27 23 See 12 U.S.C. 5461(b). U.S.C. 5464(a)(2). 25 12 U.S.C. 5464(b). 26 12 U.S.C. 5464(c). 27 17 CFR 240.17Ad–22. See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (Nov. 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 24 12 E:\FR\FM\12DEN1.SGM 12DEN1 Federal Register / Vol. 84, No. 239 / Thursday, December 12, 2019 / Notices 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 its operations and riskmanagement practices on an ongoing basis.28 As such, it is appropriate for the Commission to review advance notices against the Clearing Agency Rules and the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act. As discussed below, the Commission believes the changes proposed in the Advance Notice are consistent with the objectives and principles described in Section 805(b) of the Clearing Supervision Act,29 and in the Clearing Agency Rules, in particular Rules 17Ad–22(e)(2) and (4).30 khammond on DSKJM1Z7X2PROD with NOTICES A. Consistency With Section 805(b) of the Clearing Supervision 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 Clearing Supervision 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, promoting safety and soundness, reducing systemic risks, and supporting the stability of the broader financial system.31 The Commission believes that the proposed changes to OCC’s stress testing methodology are consistent with the promotion of robust risk management as well as safety and soundness at OCC. As described above, OCC proposes to expand the suite of stress tests it uses to size the Clearing Fund each month, and to revise OCC’s estimation of VIX futures prices for stress testing. The introduction of the Idiosyncratic Scenarios to the monthly sizing of OCC’s Clearing Fund would be in addition to the Systemic Scenarios OCC already uses to size its Clearing Fund and would help OCC address risks not currently contemplated by OCC’s effective date of December 12, 2016 and a compliance date of April 11, 2017 for the Covered Clearing Agency Standards. OCC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5). The Commission established an effective date of December 12, 2016 and a compliance date of April 11, 2017 for the Covered Clearing Agency Standards. OCC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5). 28 17 CFR 240.17Ad–22. 29 12 U.S.C. 5464(b). 30 17 CFR 240.17Ad–22(e)(2) and 17 CFR 240.17Ad–22(e)(4). 31 12 U.S.C. 5464(b). VerDate Sep<11>2014 17:56 Dec 11, 2019 Jkt 250001 Systemic Scenarios. Additionally, OCC proposes to revise its process for shocking VIX futures prices to reflect the actual term structure dynamics of such futures. OCC’s current use of a uniform shock for VIX futures contracts, regardless of tenure, is inconsistent with its observation that futures contracts with different expirations generally trade at different prices reflecting the differing future price expectations of the underlying asset. By enhancing its methodology for modeling price shocks for VIX futures, OCC should be able to produce more appropriate VIX futures price shocks in its stress scenarios, which in turn should enhance OCC’s ability to accurately and appropriately size its Clearing Fund. The Commission believes that these changes, taken together, are consistent with the promotion of robust risk management as well as safety and soundness at OCC. The Commission also believes that the proposed changes to OCC’s stress testing methodology are generally consistent with reducing systemic risk and supporting the broader financial system. The introduction of the Idiosyncratic Scenarios and revision of stress test shocks to VIX futures are designed to provide OCC with a more robust and accurate stress testing methodology. OCC uses its stress testing methodology to size and monitor its total financial resources. OCC relies on such resources to manage the potential losses arising out of the default of a Clearing Member under extreme but plausible market conditions. Strengthening the methodology that OCC uses to manage its financial resources, therefore, strengthens OCC’s ability to manage Clearing Member defaults, which, in turn, enhances OCC’s ability to manage systemic risk and to support the broader financial system. The Commission believes that the proposed changes regarding notice of intra-day margin requirements and allocation of Clearing Fund requirements also are consistent with the promotion of robust risk management at OCC. Currently, OCC notifies its Office of the CEO when intra-day margin calls generated in response to OCC’s daily stress tests are large in absolute terms (i.e., in excess of $500 million). OCC proposes to also notify its Office of the CEO when such margin calls are large relative to the Clearing Member against which they are made (i.e., in excess of 75 percent of the Clearing Member’s excess net capital). The Commission believes that such notification would provide additional meaningful risk management information to OCC’s senior management, which in turn could be PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 67979 used to inform critical decisions. Additionally, OCC proposes to revise its method of allocating Clearing Fund contribution requirements across Clearing Members. OCC proposes to redefine the ‘‘total risk’’ component of its Clearing Fund allocation formula such that it would rely on the same underlying model for all Clearing Members when calculating total risk (as opposed to using different models for different Clearing Members depending on their cleared positions). The proposed change would not alter the allocation weighting, but, in the Commission’s view, it would provide a more consistent metric by which to assess risks across Clearing Members.32 The Commission believes that these changes as well are consistent with the promotion of robust risk management as well as safety and soundness at OCC. Finally, the Commission believes that the proposed expansion of triggers for the cooling-off period is consistent with the promotion of safety and soundness at OCC. The Commission continues to believe that the cooling-off period provides certainty and predictability regarding Clearing Members’ maximum liability for Clearing Fund contributions.33 Currently, however, the cooling-off period would be triggered by some, but not all proportionate Clearing Fund charges to Clearing Members arising out of a Clearing Member’s failure to meet certain obligations under OCC’s rules. OCC proposes to expand the set of events that would trigger the cooling-off period to include certain protective transactions and the failure of a Clearing Member to meets its obligations under certain of OCC’s rules. The two events to be added as coolingoff period triggers are similar to the current triggers in that they pertain to proportionate Clearing Fund charges designed to manage the failure of a Clearing Member to meet its obligations to OCC. The Commission believes that including these two additional events as cooling-off period triggers would provide Clearing Members with additional certainty and predictability regarding their potential maximum liability for Clearing Fund contributions, which in turn is consistent with the promotion of safety and soundness at OCC. Accordingly, and for the reasons stated above, the Commission believes the changes proposed in the Advance 32 While the proposed change would not affect the total size of the Clearing Fund, it would result in changes to Clearing Members’ proportionate share of the Clearing Fund. 33 See Securities Exchange Act Release No. 83916 (Aug. 23, 2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR–OCC–2017–020). E:\FR\FM\12DEN1.SGM 12DEN1 67980 Federal Register / Vol. 84, No. 239 / Thursday, December 12, 2019 / Notices Notice are consistent with Section 805(b) of the Clearing Supervision Act.34 B. Consistency With Rule 17Ad–22(e)(2) Under the Exchange Act Rule 17Ad–22(e)(2)(v) under the Exchange Act requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide for governance arrangements that, among other things, specify clear and direct lines of responsibility.35 As described above, OCC proposes to add a new internal reporting requirement regarding certain intra-day margin calls. OCC may call for additional margin from Clearing Members based on the results of its Sufficiency Stress Tests. In addition to notifying its Office of the CEO when such margin calls are large in absolute terms (i.e., in excess of $500 million), OCC now proposes to also notify to its Office of the CEO when such margin calls are large relative to the Clearing Member against which they are made (i.e., in excess of 75 percent of the Clearing Member’s excess net capital). The Commission agrees that such notification would inform OCC’s senior management, who could then monitor circumstances as appropriate, when an intra-day margin call could strain the resources of a particular Clearing Member based on its financial condition. Accordingly, the Commission believes that the adoption of such a notification requirement is consistent with Rule 17Ad–22(e)(2)(v) under the Exchange Act.36 C. Consistency With Rule 17Ad–22(e)(4) Under the Exchange Act Rule 17Ad–22(e)(4) under the Exchange Act requires, in part, that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes.37 khammond on DSKJM1Z7X2PROD with NOTICES 1. Stress Testing Rules 17Ad–22(e)(4)(i) and (iii) under the Exchange Act require that a covered clearing agency’s policies and procedures meet the requirements of Rule 17Ad–22(e)(4) by maintaining financial resources at the minimum to enable OCC to cover a wide range of 34 12 U.S.C. 5464(b). CFR 240.17Ad–22(e)(2)(v). 36 17 CFR 240.17Ad–22(e)(2)(v). 37 17 CFR 240.17Ad–22(e)(4). 35 17 VerDate Sep<11>2014 17:56 Dec 11, 2019 Jkt 250001 foreseeable stress scenarios that include, but are not limited to, the default of the participant family that would potentially cause the largest aggregate credit exposure for OCC in extreme but plausible market conditions.38 Further, Rule 17Ad–22(e)(4)(vi) under the Exchange Act requires that a covered clearing agency’s policies and procedures meet the requirements of Rule 17Ad–22(e)(4) by testing the sufficiency of a covered clearing agency’s total financial resources available to meet the minimum financial resource requirements under Rules 17Ad–22(e)(4)(i) through (iii).39 As described above, OCC proposes to expand the set of stress tests that it uses to size the Clearing Fund by adding the Idiosyncratic Scenarios to its current suite of stress tests. The Idiosyncratic Scenarios are designed to capture the risk of extreme moves in individual securities or small subsets of securities while the current Systemic Scenarios are based on broad-based market and systemic shocks. Consistent with the general view that expanding the types of scenarios that a clearing agency uses in its monthly sizing process makes the clearing agency’s risk management robust to a broader range of shocks, the Commission believes that OCC’s proposal to add the Idiosyncratic Scenarios to its suite of stress tests would be a strengthening change that is consistent with the requirements of Rules 17Ad–22(e)(4)(i) and (iii) under the Exchange Act.40 Additionally, OCC proposes to revise its stress testing methodology to produce differing price shocks for VIX futures across the term structure. The proposed methodology would be based on SPX volatility shocks across different expirations, as opposed to the current methodology’s reliance on a single shock to the VIX. As discussed above, these changes would help OCC produce more appropriate VIX futures price shocks in its stress scenarios, which in turn should enhance OCC’s ability to accurately and appropriately size its Clearing Fund, consistent with the requirements of Rule 17Ad–22(e)(4)(vi). Accordingly, the Commission believes that, taken together, OCC’s proposed changes to its stress testing methodology would be consistent with the requirements of Rules 17Ad–22(e)(4)(i), (iii), and (vi).41 38 17 CFR 240.17Ad–22(e)(4)(i) and 17 CFR 240.17Ad–22(e)(4)(iii). 39 17 CFR 240.17Ad–22(e)(4)(vi). 40 17 CFR 240.17Ad–22(e)(4)(i) and 17 CFR 240.17Ad–22(e)(4)(iii). 41 17 CFR 240.17Ad–22(e)(4)(i); 17 CFR 240.17Ad–22(e)(4)(iii); and 17 CFR 240.17Ad– 22(e)(4) (vi). PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 2. Clearing Fund Allocation As noted above, Rule 17Ad–22(e)(4) under the Exchange Act generally requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes.42 OCC relies on the Clearing Fund as a source of mutualized resources available to manage losses arising out of a Clearing Member’s default. OCC’s method for allocating contributions to the Clearing Fund among Clearing Members is aligned primarily with the credit risk posed by each Clearing Member.43 OCC proposes to redefine the margin risk component of its Clearing Fund allocation formula such that it would rely on the same underlying model—STANS—for all Clearing Members (as opposed to relying on STANS for most Clearing Members and SPAN for certain Clearing Members with segregated futures accounts). The proposed change would not change the overall allocation weighting (i.e., margin risk would still account for 70 percent of Clearing Members’ Clearing Fund allocation), but the Commission believes it would provide a more consistent metric by which to assess margin risk across Clearing Members. Accordingly, the Commission believes that the proposed change is reasonably designed to support the management of OCC’s credit exposures to its participants. OCC relies on the Clearing Fund as a source of mutualized resources available to manage losses arising out of a Clearing Member’s default. OCC method for allocating contributions to the Clearing Fund is aligned primarily with the credit risk posed by each Clearing Member. The proposed change would not change the allocation weighting but, the Commission believes, it would provide a more consistent metric by which to assess risks across Clearing Members. The Commission believes, therefore, that OCC’s proposed change to its Clearing Fund allocation methodology is consistent with the requirements of Rule 17Ad–22(e)(4).44 3. Cooling-Off Period Rule 17Ad–22(e)(4)(ix) under the Exchange Act requires, in part, that a 42 17 CFR 240.17Ad–22(e)(4). Fund allocations are based on a weighting of 70% margin risk, what OCC refers to as the ‘‘total risk’’ component of its Clearing Fund allocation formula, with open interest and cleared volume weighted at 15% each. 44 17 CFR 240.17Ad–22(e)(4). 43 Clearing E:\FR\FM\12DEN1.SGM 12DEN1 Federal Register / Vol. 84, No. 239 / Thursday, December 12, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to describe its process to replenish any financial resources it may use following a default or other event in which use of resources is contemplated.45 As noted above, OCC’s current recovery tools include a cooling-off period, during which OCC’s authority to assess Clearing Members for funds to replenish OCC’s Clearing Fund is limited. Recognizing the limit that such a cooling-off period places on the financial resources available to OCC, the Commission continues to believe that the cooling-off period provides certainty and predictability regarding Clearing Members’ maximum liability for Clearing Fund contributions.46 OCC proposes to expand the set of events that would start the cooling-off period to include proportionate Clearing Fund charges to Clearing Members triggered by certain protective transactions or the failure of a Clearing Member to meet certain obligations under OCC’s rules, consistent with OCC’s original intention with its prior filing. The two events to be added as triggers for the cooling-off period are similar to the current triggers in that they pertain to amounts paid out of the Clearing Fund to manage the failure of a Clearing Member to meet its obligations to OCC. Consistent with the Commission’s statements regarding the current formulation of the cooling-off period, the Commission believes that the proposed expansion is consistent with OCC’s obligations to describe its process to replenish any financial resources it may use following a default or other event in which use of resources is contemplated as required under Rule 17Ad–22(e)(4)(ix).47 Accordingly, and for the reasons stated above, the Commission believes the changes proposed in the Advance Notice are consistent with Rule 17Ad– 22(e)(4) under the Exchange Act.48 IV. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act, that the Commission does not object to Advance Notice (SR– OCC–2019–806) and that OCC is authorized to implement the proposed change as of the date of this notice or the date of an order by the Commission approving proposed rule change SR– OCC–2019–009 whichever is later. 45 17 CFR 240.17Ad–22(e)(4)(ix). Securities Exchange Act Release No. 83916 (Aug. 23, 2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR–OCC–2017–020). 47 17 CFR 240.17Ad–22(e)(4)(ix). 48 17 CFR 240.17Ad–22(e)(4). 46 See VerDate Sep<11>2014 17:56 Dec 11, 2019 Jkt 250001 By the Commission. Jill M. Peterson, Assistant Secretary. 67981 Exchange withdrew the proposed rule change (SR–CboeEDGA–2019–011). [FR Doc. 2019–26730 Filed 12–11–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87674; File No. SR– CboeEDGA–2019–011] Self-Regulatory Organizations; Cboe EDGA Exchange, Inc; Notice of Withdrawal of a Proposed Rule Change To Amend the Fee Schedule Assessed on Members To Establish a Monthly Trading Rights Fee December 6, 2019. On May 2, 2019, Cboe EDGA Exchange, Inc. (‘‘EDGA’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the EDGA Fee Schedule to establish a monthly Trading Rights Fee to be assessed on Members. The proposed rule change was immediately effective upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Act.3 The proposed rule change was published for comment in the Federal Register on May 16, 2019.4 On June 28, 2019, the Commission temporarily suspended the proposed rule change and instituted proceedings to determine whether to approve or disapprove the proposed rule change.5 In response to the EDGA OIP, the Commission received three comment letters, including a response letter from the Exchange.6 On November 12, 2019, pursuant to Section 19(b)(2) of the Act,7 the Commission designated a longer period within which to approve or disapprove the proposed rule change.8 On November 22, 2019, the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 See Securities Exchange Act Release No. 85842 (May 10, 2019), 84 FR 22212. 5 See Securities Exchange Act Release No. 86236, 84 FR 32235 (July 05, 2019) (‘‘EDGA OIP’’). 6 See Letters from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated July 26, 2019; Tyler Gellasch, Executive Director, Healthy Markets, dated July 26, 2019; and Rebecca Tenuta, Counsel, Cboe Global Markets, dated August 9, 2019. 7 15 U.S.C. 78s(b)(2). 8 See Securities Exchange Act Release No. 87497, 84 FR 63688 (November 18, 2019). The Commission designated January 11, 2020, as the date by which the Commission would approve or disapprove the proposed rule change. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–26731 Filed 12–11–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87673; File No. SR–OCC– 2019–807] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Related to Proposed Changes to The Options Clearing Corporation’s Rules, Margin Policy, Margin Methodology, Clearing Fund Methodology Policy, and Clearing Fund and Stress Testing Methodology To Address Specific Wrong-Way Risk December 6, 2019. I. Introduction On October 10, 2019, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2019–807 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled Payment, Clearing and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 3 to revise OCC’s Rules, margin policy and methodology, Clearing Fund policy, and Clearing Fund and stress testing methodology to adopt new margin charges and other risk measures to address the specific wrong-way risk presented by certain cleared positions.4 The Advance Notice was published for public comment in the Federal Register on November 12, 2019,5 and the 2 17 PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 9 17 CFR 200.30–3(a)(12). U.S.C. 5465(e)(1). 2 17 CFR 240.19b–4(n)(1)(i). 3 15 U.S.C. 78a et seq. 4 See Notice of Filing infra note 5, at 84 FR 61114. 5 Securities Exchange Act Release No. 87476 (Nov. 6, 2019), 84 FR 61114 (Nov. 12, 2019) (File No. SR–OCC–2019–807) (‘‘Notice of Filing’’). On October 10, 2019, OCC also filed a related proposed rule change (SR–OCC–2019–010) with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b–4 thereunder (‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. In the Proposed Rule Change, which was published in the Federal Register on October 29, 2019, OCC seeks approval 1 12 E:\FR\FM\12DEN1.SGM Continued 12DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 239 (Thursday, December 12, 2019)]
[Notices]
[Pages 67977-67981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26730]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87672; File No. SR-OCC-2019-806]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection To Advance Notice Related To Proposed Changes to
The Options Clearing Corporation's Rules, Clearing Fund Methodology
Policy, and Clearing Fund and Stress Testing Methodology

December 6, 2019.

I. Introduction

On October 10, 2019, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2019-806 (``Advance Notice'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'') \3\ to make changes to OCC's Clearing Fund and
stress testing rules and methodology.\4\ The Advance Notice was
published for public comment in the Federal Register on November 12,
2019,\5\ and the Commission has received no comments regarding the
changes proposed in the Advance Notice.\6\ The Commission is hereby
providing notice of no objection to the Advance Notice.
---------------------------------------------------------------------------

\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing infra note 5, at 84 FR 61120.
\5\ Securities Exchange Act Release No. 87475 (Nov. 6, 2019), 84
FR 61120 (Nov. 12, 2019) (File No. SR-OCC-2019-806) (``Notice of
Filing''). On October 10, 2019, OCC also filed a related proposed
rule change (SR-OCC-2019-009) with the Commission pursuant to
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in
the Federal Register on October 29, 2019, OCC seeks approval of
proposed changes to its rules necessary to implement the Advance
Notice. Securities Exchange Act Release No. 87386 (Oct. 23, 2019),
84 FR 57911 (Oct. 29, 2019). The comment period for the related
Proposed Rule Change filing closed on November 19, 2019.
\6\ 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 7
---------------------------------------------------------------------------

\7\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

As noted above, OCC proposes to revise its Clearing Fund and stress
testing rules and methodology. Specifically, OCC proposes to: (1)
Incorporate a new set of stress test scenarios to be used in the
monthly sizing of OCC's Clearing Fund that are designed to capture the
risks of extreme moves in individual or small subsets of securities;
(2) revise OCC's stress testing methodology for modeling certain
volatility index futures; (3) modify OCC's methodology for allocating
Clearing Fund contribution requirements to standardize the margin risk
component of the allocation formula for all Clearing Members; and (4)
adopt an additional threshold for notifying senior management of intra-
day margin calls based on certain stress test results. OCC also
proposes to correct certain rules concerning OCC's cooling-off period
and replenishment/assessment powers.\8\
---------------------------------------------------------------------------

\8\ Additionally, OCC proposes clarifying and conforming changes
to its Rules, Clearing Fund Methodology Policy (``Policy''), and
Stress Testing and Clearing Fund Methodology Description
(``Methodology Description'').
---------------------------------------------------------------------------

A. Sizing Stress Test Scenarios

On a monthly basis, OCC establishes the size of its Clearing Fund
at the level it believes is necessary to maintain sufficient financial
resources to cover losses arising from the default of the two Clearing
Member Groups that would potentially cause the largest aggregate credit
exposure to OCC under certain stress scenarios.\9\ OCC determines the
size of its Clearing Fund each month through an approach based on
broad-based market and systemic shocks (``Systemic Scenarios'').\10\
OCC proposes to incorporate an additional set of stress test scenarios
to be used in the monthly sizing of OCC's Clearing Fund that are
designed to capture the risks of extreme moves in individual or small
subsets of securities (``Idiosyncratic Scenarios''). The Idiosyncratic
Scenarios would be in addition to the existing Systemic Scenarios.
Because OCC's monthly Clearing Fund sizing process is designed to cover
OCC's largest aggregate stress test exposures, the expansion of the set
of Clearing Fund sizing stress tests could not reduce the size of OCC's
Clearing Fund.
---------------------------------------------------------------------------

\9\ See Notice of Filing, 84 FR at 61121.
\10\ See Notice of Filing, 84 FR at 61122. See also, Securities
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37857
(Aug. 2, 2019) (SR-OCC-2018-008) (describing OCC's Clearing Fund
sizing stress test scenarios as an approach based on hypothetical
stress scenarios that assume shocks to the Cboe S&P 500 Index
(``SPX'') associated with a 1-in-80-year market event).
---------------------------------------------------------------------------

In constructing the Idiosyncratic Scenarios, OCC would shock each
single-name equity (i.e., excluding exchange-traded funds, exchange-
traded notes, indices, and non-equity products). OCC would evaluate the
effects of such shocks on every Clearing Member Group's portfolios.
Within each Clearing Member Group's portfolio, OCC would identify the
four single-name equities for which such shocks would result in the
largest losses. OCC would then identify the two Clearing Member Groups
with the largest aggregate losses. The combined losses of the two
identified Clearing Member Groups would represent the loss that OCC
would seek to cover in its monthly Clearing Fund sizing process. OCC
believes that implementing the proposed Idiosyncratic Scenarios would
enhance OCC's stress testing methodology and overall resiliency by
providing a more comprehensive suite of sizing stress tests to ensure
that OCC maintains an appropriate level of financial resources to cover
its credit exposures under scenarios addressing both systemic market
risks and idiosyncratic risks.\11\
---------------------------------------------------------------------------

\11\ See Notice of Filing, 84 FR at 61122.
---------------------------------------------------------------------------

B. Volatility Index Futures

Under OCC's current stress testing methodology, prices shocks for
futures based on the Cboe Volatility Index (``VIX'') \12\ are
equivalent to a price shock for the underlying. Because the VIX has no
term structure, this process produces a uniform shock across
expirations of the VIX futures contracts. Futures contracts for
different expirations, however, generally trade at different prices
reflecting the differing future price expectations of the underlying
asset.\13\ OCC believes that applying a uniform shock across
expirations is unrealistic, and that it would lead to an overestimation
of VIX futures price shocks, particularly in market decline
scenarios.\14\ As noted above, OCC proposes to revise its stress
testing methodology for modeling certain volatility index futures.

[[Page 67978]]

Specifically, the proposed change would produce differing price shocks
for VIX futures across the term structure. The proposed methodology
would be based on SPX volatility shocks across different expirations,
as opposed to the current methodology's reliance on a single shock to
the VIX. OCC believes that implementation of the proposed methodology
would improve pricing for VIX futures as well as VIX options.\15\
---------------------------------------------------------------------------

\12\ The VIX is an index designed to measure the 30-day expected
volatility of the SPX.
\13\ When there is a large shock to the VIX it has consistently
been observed that the change in price of near-term VIX future
contracts is much larger than for further out expirations. See
Notice of Filing, 84 FR at 61122, n. 11.
\14\ See Notice of Filing, 84 FR at 61122.
\15\ See Notice of Filing, 84 FR at 61123. OCC uses VIX futures
to calculate theoretical values for VIX options.
---------------------------------------------------------------------------

C. Clearing Fund Allocation

OCC allocates Clearing Fund contribution requirements to individual
Clearing Members, in part, based on each Clearing Member's
proportionate share of risk margin, which OCC refers to as ``total
risk.'' \16\ The majority of Clearing Member margin requirements are
based on OCC's System for Theoretical Analysis and Numerical
Simulations (``STANS''), which is OCC's proprietary risk management
system. The margin requirement for certain Clearing Members' accounts,
however, is calculated using the Standard Portfolio Analysis of Risk
Margin Calculation System (``SPAN''), which reflects customer gross
margining.\17\ OCC proposes to define ``total risk'' as based on the
same margin model for all Clearing Members.\18\ OCC believes it is more
appropriate to use the same margin risk measurement for all Clearing
Members when allocating Clearing Fund contribution requirements to
allow for a more equitable comparison across all accounts.\19\
---------------------------------------------------------------------------

\16\ Currently, OCC uses the following weighting in its
allocation of clearing fund requirements: 70 percent total risk; 15
percent open interest; and 15 percent volume. See Securities
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37863
(Aug. 2, 2019) (SR-OCC-2018-008).
\17\ See Notice of Filing, 84 FR at 61123, n. 16 (stating that
``OCC calculates margin requirements for segregated futures accounts
using both SPAN on a gross basis and STANS on a net basis, and if at
any time OCC staff observes a segregated futures account where
initial margin calculated pursuant to STANS on a net basis exceeds
the initial margin calculated pursuant to SPAN on a gross basis, OCC
collateralizes this risk exposure by applying an additional margin
charge in the amount of such difference to the account'' (citation
omitted)).
\18\ Specifically, OCC proposes to use STANS plus certain add-on
charges as the basis for determining each Clearing Member's
proportionate share of total risk.
\19\ See Notice of Filing, 84 FR at 61123.
---------------------------------------------------------------------------

D. Margin Call Notification

On a daily basis, OCC evaluates the sufficiency of its financial
resources based on OCC's potential exposure to Clearing Member Groups
under certain stress test scenarios (``Sufficiency Stress Tests'').
Based on the results of the Sufficiency Stress Tests, OCC may call for
additional collateral to ensure that it maintains sufficient financial
resources to guard against potential losses. For example, OCC is
authorized to make an intra-day margin call against a Clearing Member
Group whose Sufficiency Stress Test exposures breach a pre-determined
threshold. Currently, OCC's rules require that written notification of
such intra-day margin calls in excess of $500 million be provided to
OCC's Executive Chairman, Chief Executive Officer, and Chief Operating
Officer (``Office of the CEO''). OCC proposes to revise its rules to
require that written notification of stress test-related intra-day
margin calls also be sent to the Office of the CEO when a stress test-
related intra-day margin call would exceed 75 percent of the Clearing
Member's excess net capital. OCC believes that this additional
notification requirement is appropriate because it would allow OCC's
senior management to be informed as soon as practicable of, and to
subsequently monitor, circumstances where a margin call may strain a
particular Clearing Member's ability to meet such requirements based on
its financial condition or the amount of collateral it has available to
pledge when certain pre-identified thresholds have been exceeded.\20\
---------------------------------------------------------------------------

\20\ See Notice of Filing, 84 FR at 61123.
---------------------------------------------------------------------------

E. Cooling-Off Period

In 2018, OCC implemented a set of recovery tools, including
revisions to OCC's authority to assess its Clearing Members for funds
to replenish OCC's Clearing Fund.\21\ For example, OCC implemented a
``cooling-off period'' during which its authority to levy such
assessments is capped, which provides certainty to Clearing Members
regarding their potential obligations to OCC. In proposing such
revisions, OCC intended that the cooling-off period would be triggered
by any proportionate Clearing Fund charges to Clearing Members related
to the default of a Clearing Member.\22\ OCC's current rules, however,
do not provide for a cooling-off period based on proportionate Clearing
Fund charges arising out of two specific sets of circumstances: (1) In
connection with protective transactions effected for the account of OCC
pursuant to Chapter XI of OCC's Rules and (2) as a result of a failure
of any Clearing Member to make any other required payment or render any
other required performance (as provided in clauses (v) and (vi) of OCC
Rule 1006(a)). OCC proposes to revise its rules such that any
proportionate Clearing Fund charges to Clearing Members related to the
default of a Clearing Member, including the two listed above, would
trigger a cooling-off period.
---------------------------------------------------------------------------

\21\ See Securities Exchange Act Release No. 83916 (Aug. 23,
2018), 83 FR 44076 (Aug. 29, 2018) (SR-OCC-2017-020).
\22\ See Notice of Filing, 84 FR at 61124. Such triggers include
the assessments arising out of a Clearing Member's failure to meet
its obligations regarding confirmed trades, exercised or assigned
contracts, stock loan transactions, or the liquidation of a Clearing
Member's open positions. See id. at n. 22.
---------------------------------------------------------------------------

III. Commission Findings and Notice of No Objection

Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision 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 systemically
important financial market utilities (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\23\
---------------------------------------------------------------------------

\23\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

Section 805(a)(2) of the Clearing Supervision Act \24\ 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
Clearing Supervision Act \25\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
---------------------------------------------------------------------------

\24\ 12 U.S.C. 5464(a)(2).
\25\ 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 other areas.\26\
---------------------------------------------------------------------------

\26\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

The Commission has adopted risk-management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\27\

[[Page 67979]]

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 its operations and risk-management practices
on an ongoing basis.\28\ As such, it is appropriate for the Commission
to review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the changes proposed in the
Advance Notice are consistent with the objectives and principles
described in Section 805(b) of the Clearing Supervision Act,\29\ and in
the Clearing Agency Rules, in particular Rules 17Ad-22(e)(2) and
(4).\30\
---------------------------------------------------------------------------

\27\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (Nov. 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. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5). The Commission
established an effective date of December 12, 2016 and a compliance
date of April 11, 2017 for the Covered Clearing Agency Standards.
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
\28\ 17 CFR 240.17Ad-22.
\29\ 12 U.S.C. 5464(b).
\30\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision 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 Clearing Supervision 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, promoting safety and soundness, reducing
systemic risks, and supporting the stability of the broader financial
system.\31\
---------------------------------------------------------------------------

\31\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

The Commission believes that the proposed changes to OCC's stress
testing methodology are consistent with the promotion of robust risk
management as well as safety and soundness at OCC. As described above,
OCC proposes to expand the suite of stress tests it uses to size the
Clearing Fund each month, and to revise OCC's estimation of VIX futures
prices for stress testing. The introduction of the Idiosyncratic
Scenarios to the monthly sizing of OCC's Clearing Fund would be in
addition to the Systemic Scenarios OCC already uses to size its
Clearing Fund and would help OCC address risks not currently
contemplated by OCC's Systemic Scenarios. Additionally, OCC proposes to
revise its process for shocking VIX futures prices to reflect the
actual term structure dynamics of such futures. OCC's current use of a
uniform shock for VIX futures contracts, regardless of tenure, is
inconsistent with its observation that futures contracts with different
expirations generally trade at different prices reflecting the
differing future price expectations of the underlying asset. By
enhancing its methodology for modeling price shocks for VIX futures,
OCC should be able to produce more appropriate VIX futures price shocks
in its stress scenarios, which in turn should enhance OCC's ability to
accurately and appropriately size its Clearing Fund. The Commission
believes that these changes, taken together, are consistent with the
promotion of robust risk management as well as safety and soundness at
OCC.
The Commission also believes that the proposed changes to OCC's
stress testing methodology are generally consistent with reducing
systemic risk and supporting the broader financial system. The
introduction of the Idiosyncratic Scenarios and revision of stress test
shocks to VIX futures are designed to provide OCC with a more robust
and accurate stress testing methodology. OCC uses its stress testing
methodology to size and monitor its total financial resources. OCC
relies on such resources to manage the potential losses arising out of
the default of a Clearing Member under extreme but plausible market
conditions. Strengthening the methodology that OCC uses to manage its
financial resources, therefore, strengthens OCC's ability to manage
Clearing Member defaults, which, in turn, enhances OCC's ability to
manage systemic risk and to support the broader financial system.
The Commission believes that the proposed changes regarding notice
of intra-day margin requirements and allocation of Clearing Fund
requirements also are consistent with the promotion of robust risk
management at OCC. Currently, OCC notifies its Office of the CEO when
intra-day margin calls generated in response to OCC's daily stress
tests are large in absolute terms (i.e., in excess of $500 million).
OCC proposes to also notify its Office of the CEO when such margin
calls are large relative to the Clearing Member against which they are
made (i.e., in excess of 75 percent of the Clearing Member's excess net
capital). The Commission believes that such notification would provide
additional meaningful risk management information to OCC's senior
management, which in turn could be used to inform critical decisions.
Additionally, OCC proposes to revise its method of allocating Clearing
Fund contribution requirements across Clearing Members. OCC proposes to
redefine the ``total risk'' component of its Clearing Fund allocation
formula such that it would rely on the same underlying model for all
Clearing Members when calculating total risk (as opposed to using
different models for different Clearing Members depending on their
cleared positions). The proposed change would not alter the allocation
weighting, but, in the Commission's view, it would provide a more
consistent metric by which to assess risks across Clearing Members.\32\
The Commission believes that these changes as well are consistent with
the promotion of robust risk management as well as safety and soundness
at OCC.
---------------------------------------------------------------------------

\32\ While the proposed change would not affect the total size
of the Clearing Fund, it would result in changes to Clearing
Members' proportionate share of the Clearing Fund.
---------------------------------------------------------------------------

Finally, the Commission believes that the proposed expansion of
triggers for the cooling-off period is consistent with the promotion of
safety and soundness at OCC. The Commission continues to believe that
the cooling-off period provides certainty and predictability regarding
Clearing Members' maximum liability for Clearing Fund
contributions.\33\ Currently, however, the cooling-off period would be
triggered by some, but not all proportionate Clearing Fund charges to
Clearing Members arising out of a Clearing Member's failure to meet
certain obligations under OCC's rules. OCC proposes to expand the set
of events that would trigger the cooling-off period to include certain
protective transactions and the failure of a Clearing Member to meets
its obligations under certain of OCC's rules. The two events to be
added as cooling-off period triggers are similar to the current
triggers in that they pertain to proportionate Clearing Fund charges
designed to manage the failure of a Clearing Member to meet its
obligations to OCC. The Commission believes that including these two
additional events as cooling-off period triggers would provide Clearing
Members with additional certainty and predictability regarding their
potential maximum liability for Clearing Fund contributions, which in
turn is consistent with the promotion of safety and soundness at OCC.
---------------------------------------------------------------------------

\33\ See Securities Exchange Act Release No. 83916 (Aug. 23,
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
---------------------------------------------------------------------------

Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance

[[Page 67980]]

Notice are consistent with Section 805(b) of the Clearing Supervision
Act.\34\
---------------------------------------------------------------------------

\34\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that, among other things, specify clear and
direct lines of responsibility.\35\
---------------------------------------------------------------------------

\35\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

As described above, OCC proposes to add a new internal reporting
requirement regarding certain intra-day margin calls. OCC may call for
additional margin from Clearing Members based on the results of its
Sufficiency Stress Tests. In addition to notifying its Office of the
CEO when such margin calls are large in absolute terms (i.e., in excess
of $500 million), OCC now proposes to also notify to its Office of the
CEO when such margin calls are large relative to the Clearing Member
against which they are made (i.e., in excess of 75 percent of the
Clearing Member's excess net capital). The Commission agrees that such
notification would inform OCC's senior management, who could then
monitor circumstances as appropriate, when an intra-day margin call
could strain the resources of a particular Clearing Member based on its
financial condition. Accordingly, the Commission believes that the
adoption of such a notification requirement is consistent with Rule
17Ad-22(e)(2)(v) under the Exchange Act.\36\
---------------------------------------------------------------------------

\36\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(4) Under the Exchange Act

Rule 17Ad-22(e)(4) under the Exchange Act requires, in part, that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes.\37\
---------------------------------------------------------------------------

\37\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

1. Stress Testing
Rules 17Ad-22(e)(4)(i) and (iii) under the Exchange Act require
that a covered clearing agency's policies and procedures meet the
requirements of Rule 17Ad-22(e)(4) by maintaining financial resources
at the minimum to enable OCC to cover a wide range of foreseeable
stress scenarios that include, but are not limited to, the default of
the participant family that would potentially cause the largest
aggregate credit exposure for OCC in extreme but plausible market
conditions.\38\ Further, Rule 17Ad-22(e)(4)(vi) under the Exchange Act
requires that a covered clearing agency's policies and procedures meet
the requirements of Rule 17Ad-22(e)(4) by testing the sufficiency of a
covered clearing agency's total financial resources available to meet
the minimum financial resource requirements under Rules 17Ad-
22(e)(4)(i) through (iii).\39\
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\38\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
\39\ 17 CFR 240.17Ad-22(e)(4)(vi).
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As described above, OCC proposes to expand the set of stress tests
that it uses to size the Clearing Fund by adding the Idiosyncratic
Scenarios to its current suite of stress tests. The Idiosyncratic
Scenarios are designed to capture the risk of extreme moves in
individual securities or small subsets of securities while the current
Systemic Scenarios are based on broad-based market and systemic shocks.
Consistent with the general view that expanding the types of scenarios
that a clearing agency uses in its monthly sizing process makes the
clearing agency's risk management robust to a broader range of shocks,
the Commission believes that OCC's proposal to add the Idiosyncratic
Scenarios to its suite of stress tests would be a strengthening change
that is consistent with the requirements of Rules 17Ad-22(e)(4)(i) and
(iii) under the Exchange Act.\40\
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\40\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
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Additionally, OCC proposes to revise its stress testing methodology
to produce differing price shocks for VIX futures across the term
structure. The proposed methodology would be based on SPX volatility
shocks across different expirations, as opposed to the current
methodology's reliance on a single shock to the VIX. As discussed
above, these changes would help OCC produce more appropriate VIX
futures price shocks in its stress scenarios, which in turn should
enhance OCC's ability to accurately and appropriately size its Clearing
Fund, consistent with the requirements of Rule 17Ad-22(e)(4)(vi).
Accordingly, the Commission believes that, taken together, OCC's
proposed changes to its stress testing methodology would be consistent
with the requirements of Rules 17Ad-22(e)(4)(i), (iii), and (vi).\41\
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\41\ 17 CFR 240.17Ad-22(e)(4)(i); 17 CFR 240.17Ad-22(e)(4)(iii);
and 17 CFR 240.17Ad-22(e)(4) (vi).
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2. Clearing Fund Allocation
As noted above, Rule 17Ad-22(e)(4) under the Exchange Act generally
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
effectively identify, measure, monitor, and manage its credit exposures
to participants and those arising from its payment, clearing, and
settlement processes.\42\
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\42\ 17 CFR 240.17Ad-22(e)(4).
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OCC relies on the Clearing Fund as a source of mutualized resources
available to manage losses arising out of a Clearing Member's default.
OCC's method for allocating contributions to the Clearing Fund among
Clearing Members is aligned primarily with the credit risk posed by
each Clearing Member.\43\ OCC proposes to redefine the margin risk
component of its Clearing Fund allocation formula such that it would
rely on the same underlying model--STANS--for all Clearing Members (as
opposed to relying on STANS for most Clearing Members and SPAN for
certain Clearing Members with segregated futures accounts). The
proposed change would not change the overall allocation weighting
(i.e., margin risk would still account for 70 percent of Clearing
Members' Clearing Fund allocation), but the Commission believes it
would provide a more consistent metric by which to assess margin risk
across Clearing Members. Accordingly, the Commission believes that the
proposed change is reasonably designed to support the management of
OCC's credit exposures to its participants. OCC relies on the Clearing
Fund as a source of mutualized resources available to manage losses
arising out of a Clearing Member's default. OCC method for allocating
contributions to the Clearing Fund is aligned primarily with the credit
risk posed by each Clearing Member. The proposed change would not
change the allocation weighting but, the Commission believes, it would
provide a more consistent metric by which to assess risks across
Clearing Members. The Commission believes, therefore, that OCC's
proposed change to its Clearing Fund allocation methodology is
consistent with the requirements of Rule 17Ad-22(e)(4).\44\
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\43\ Clearing Fund allocations are based on a weighting of 70%
margin risk, what OCC refers to as the ``total risk'' component of
its Clearing Fund allocation formula, with open interest and cleared
volume weighted at 15% each.
\44\ 17 CFR 240.17Ad-22(e)(4).
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3. Cooling-Off Period
Rule 17Ad-22(e)(4)(ix) under the Exchange Act requires, in part,
that a

[[Page 67981]]

covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to describe its
process to replenish any financial resources it may use following a
default or other event in which use of resources is contemplated.\45\
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\45\ 17 CFR 240.17Ad-22(e)(4)(ix).
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As noted above, OCC's current recovery tools include a cooling-off
period, during which OCC's authority to assess Clearing Members for
funds to replenish OCC's Clearing Fund is limited. Recognizing the
limit that such a cooling-off period places on the financial resources
available to OCC, the Commission continues to believe that the cooling-
off period provides certainty and predictability regarding Clearing
Members' maximum liability for Clearing Fund contributions.\46\ OCC
proposes to expand the set of events that would start the cooling-off
period to include proportionate Clearing Fund charges to Clearing
Members triggered by certain protective transactions or the failure of
a Clearing Member to meet certain obligations under OCC's rules,
consistent with OCC's original intention with its prior filing. The two
events to be added as triggers for the cooling-off period are similar
to the current triggers in that they pertain to amounts paid out of the
Clearing Fund to manage the failure of a Clearing Member to meet its
obligations to OCC. Consistent with the Commission's statements
regarding the current formulation of the cooling-off period, the
Commission believes that the proposed expansion is consistent with
OCC's obligations to describe its process to replenish any financial
resources it may use following a default or other event in which use of
resources is contemplated as required under Rule 17Ad-22(e)(4)(ix).\47\
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\46\ See Securities Exchange Act Release No. 83916 (Aug. 23,
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
\47\ 17 CFR 240.17Ad-22(e)(4)(ix).
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Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance Notice are consistent with
Rule 17Ad-22(e)(4) under the Exchange Act.\48\
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\48\ 17 CFR 240.17Ad-22(e)(4).
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IV. Conclusion

It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-OCC-2019-806) and that OCC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-OCC-
2019-009 whichever is later.

By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26730 Filed 12-11-19; 8:45 am]
BILLING CODE 8011-01-P

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