Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change by The Options Clearing Corporation Concerning Enhancements to the System for Theoretical Analysis and Numerical Simulations (“STANS”) and OCC's Comprehensive Stress Testing (“CST”) Methodology, To Better Capture the Risks Associated With Short-Dated Options, 7720-7722 [2025-01414]
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7720
Federal Register / Vol. 90, No. 13 / Wednesday, January 22, 2025 / Notices
to comments and suggestions submitted
by March 24, 2025.
An agency may not conduct or
sponsor, and a person is not required to
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currently valid OMB control number.
Please direct your written comments
to: Austin Gerig, Director/Chief Data
Officer, Securities and Exchange
Commission, c/o Tanya Ruttenberg, 100
F Street NE Washington, DC 20549 or
send an email to: PRA_Mailbox@
sec.gov.
Dated: January 15, 2025.
Sherry R. Haywood,
Assistant Secretary.
[Release No. 34–102203; File Nos. SR–
OCC–2024–016]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Granting Approval of Proposed Rule
Change by The Options Clearing
Corporation Concerning
Enhancements to the System for
Theoretical Analysis and Numerical
Simulations (‘‘STANS’’) and OCC’s
Comprehensive Stress Testing (‘‘CST’’)
Methodology, To Better Capture the
Risks Associated With Short-Dated
Options
January 15, 2025.
[FR Doc. 2025–01417 Filed 1–21–25; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
FEDERAL REGISTER CITATION OF PREVIOUS
ANNOUNCEMENT: Publishing in the
Federal Register of January 21, 2025.
PREVIOUSLY ANNOUNCED TIME AND DATE OF
THE MEETING: Thursday, January 23,
2025, at 2 p.m.
The Closed
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January 23, 2025, at 2 p.m., has been
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at 1 p.m.
CHANGES IN THE MEETING:
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of the Secretary at (202) 551–5400.
Authority: 5 U.S.C. 552b.
Dated: January 17, 2025.
Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2025–01596 Filed 1–17–25; 4:15 pm]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
I. Introduction
On November 22, 2024, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2024–
016, pursuant to Section 19(b) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4 2
thereunder, to (i) align assumptions
across models and (ii) generate implied
volatility shocks for options with a tenor
of less than one month that are
consistent with observed market
dynamics.3 The proposed rule change
was published for public comment in
the Federal Register on December 6,
2024.4 The Commission has received no
comments regarding the proposed rule
change. For the reasons discussed
below, the Commission is approving the
proposed rule change (hereinafter
defined as ‘‘Proposed Rule Change’’).
II. Background
OCC is a central counterparty
(‘‘CCP’’), which means that as part of its
function as a clearing agency, it
interposes itself as the buyer to every
seller and the seller to every buyer for
financial transactions. As the CCP for
the listed options markets and for
certain futures in the United States,
OCC is exposed to the risk that one or
more of its Clearing Members may fail
to make a payment or to deliver
securities. OCC addresses such risk
exposure, in part, by requiring its
members to provide collateral,
including both margin collateral and
Clearing Fund collateral. Margin is the
collateral that CCPs collect to cover
potential changes in a member’s
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Notice of Filing infra note 4, at 89 FR 97131.
4 See Securities Exchange Act Release No. 101780
(Dec. 2, 2024), 89 FR 97131 (Dec. 6, 2024) (File No.
SR–OCC–2024–016) (‘‘Notice of Filing’’).
2 17
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positions over a set period of time
during normal market conditions. OCC’s
Clearing Fund is a mutualized pool of
financial resources to which each
Clearing Member is required to
contribute to ensure that OCC maintains
sufficient qualifying liquid resources to
manage its liquidity risk, and to address
the tail risk that the margin collateral
OCC collects from each Clearing
Member might be insufficient to cover
OCC’s credit exposure to a defaulting
member in extreme but plausible market
conditions.
OCC’s methodology for calculating
margin collateral requirements is called
the System for Theoretical Analysis and
Numerical Simulations (‘‘STANS’’).5
OCC’s methodology for sizing and
monitoring its Clearing Fund is called
the Comprehensive Stress Testing
(‘‘CST’’) methodology. OCC relies on
STANS and the CST methodology to set
collateral requirements to cover the
financial risk posed by the positions
OCC clears for its members. OCC states
that the proportion of such positions
that comprise short-dated options
(‘‘SDOs’’) 6 has increased over the past
several years.7 In response to this
observation, OCC examined the risks
posed by the increase in SDO trading
and identified opportunities to improve
the performance of the models
comprising STANS and the CST
methodology in covering the financial
risk posed by the increase in SDO
trading observed by OCC.8 As described
below, OCC proposes two changes to the
models comprising STANS and the CST
methodology: one set of changes related
to the day count conventions 9 and one
set of changes related to the application
of volatility shocks to theoretical option
prices.10
5 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.
6 SDOs are option contracts with a maturity of
less than or equal to one month to expiration. See
Notice of Filing, 89 FR at 97132.
7 See Notice of Filing, 89 FR 97132 (citing Cboe,
The Rise of SPX & 0DTE Options (July 27, 2023),
available at https://go.cboe.com/l/77532/2023-0727/ffc83k).
8 See Notice of Filing, 89 FR 97132 (stating that
‘‘opportunities exist to improve model performance
for Clearing Member portfolios dominated by
SDOs’’).
9 OCC uses the term ‘‘day count convention’’ to
refer to a standardized methodology for calculating
the number of days between two dates. See Notice
of Filing, 89 FR 97132, note 13. Both calendar and
business day conventions are used by OCC in
STANS and CST calculations. Id.
10 The implied volatility of an option is a measure
of the expected future volatility of the option’s
underlying security at expiration, which is reflected
in the current option premium in the market. See
Notice of Filing, 89 FR 97132, note 12.
E:\FR\FM\22JAN1.SGM
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Federal Register / Vol. 90, No. 13 / Wednesday, January 22, 2025 / Notices
Day count conventions. The models
supporting STANS and CST rely on two
different day count conventions.
Specifically, OCC’s option price
smoothing process uses calendar day
convention, and OCC’s implied
volatility simulation uses trading day
convention. OCC asserts that the usage
of two different day count conventions
results in differences in implied
volatility, especially when non-trading
days make up a large portion of the
time-to-expiration (e.g., on Fridays for
options that expire the following
Monday),11 which is more pronounced
in SDOs.12
OCC proposes to address the
misalignment of day count conventions
used in the models underlying both
STANS and the CST methodology by
processing data through a series of
conversions to ensure that the data
presented to the price smoothing and
volatility simulation models is
consistent with the assumptions of
those models. Specifically, OCC would
convert implied volatility data into a
trading day convention before feeding
that data into OCC’s implied volatility
simulation models. OCC would then
convert the output of its implied
volatility simulation models back into a
calendar day convention before feeding
those results into OCC’s price
smoothing process.
Volatility shocks. OCC’s model for
simulating theoretical prices assumes
that the implied volatility shocks of the
one-month tenor (‘‘1M’’) are sufficient to
cover the implied volatility changes for
SDO tenors.13 As constructed, the
models underlying both STANS and the
CST methodology impose the same
volatility shocks applied to 1M options
to all options with tenors of less than
one month. However, changes in
implied volatility for SDOs can be much
larger than the changes observed in 1M
options.14
OCC proposes to estimate implied
volatility shocks specific to options with
a shorter tenor than 1M options rather
than imposing the same shock on all
options with one month or less to
11 See
Notice of Filing, 89 FR 97132.
states that SDOs are more sensitive to daycount convention alignment than contracts with
longer expirations due to the proportionally larger
difference in time to expiry between the trading day
convention and calendar day convention for shorter
dated tenors. See Notice of Filing, 89 FR 97133.
13 The ‘‘tenor’’ of an option is the amount of time
remaining until its expiration or maturity. See
Notice of Filing, 89 FR 97132, note 14.
14 OCC has observed that the day-over-day at the
money implied volatility changes for the options
with a one-week tenor are approximately twice that
of the 1M tenor on certain risk factors such as SPX,
RUT, QQQ, AAPL, and TSLA. See Notice of Filing,
89 FR 97132, note 15.
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12 OCC
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maturity. Within STANS, OCC proposes
to derive the shocks for SDOs from the
shock applied to 1M options.
Specifically, OCC would derive the
shocks for such options through the
application of a square-root decay to the
1M option volality.15 Within the CST
methodology, OCC proposes to extend
its existing processes for establishing
implied volatility shocks to specific
maturities that are less than one month
(i.e., two weeks, one week) and to rely
on linear interpolation to establish
shocks for even shorter maturities (i.e.,
down to three days).
OCC summarized the potential
impacts of the proposed changes to both
margin and Clearing Fund requirements
based on data from July 2023 to
September 2024.16 For margin, OCC
observed that the proposed changes
would have caused an increase in
average daily margin requirements of
0.58 percent with the daily impacts
ranging from a 0.81 percent decrease to
a 3.21 percent increase.17 For the
Clearing Fund, OCC observed that the
proposed changes would have caused
the total Clearing Fund to decrease by
0.14 percent.18
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Exchange
Act directs the Commission to approve
a proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Exchange
Act and the rules and regulations
thereunder applicable to such
organization.19 Under the Commission’s
Rules of Practice, the ‘‘burden to
demonstrate that a proposed rule change
is consistent with the Exchange Act and
the rules and regulations issued
thereunder . . . is on the self-regulatory
organization [‘SRO’] that proposed the
rule change.’’ 20
The description of a proposed rule
change, its purpose and operation, its
effect, and a legal analysis of its
consistency with applicable
requirements must all be sufficiently
detailed and specific to support an
affirmative Commission finding,21 and
any failure of an SRO to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
7721
with the Exchange Act and the
applicable rules and regulations.22
Moreover, ‘‘unquestioning reliance’’ on
an SRO’s representations in a proposed
rule change is not sufficient to justify
Commission approval of a proposed rule
change.23
After carefully considering the
Proposed Rule Change, the Commission
finds that the Proposed Rule Change is
consistent with the requirements of the
Exchange Act and the rules and
regulations thereunder applicable to
OCC. More specifically, the Commission
finds that the Proposed Rule Change is
consistent with Exchange Act Rules
17Ad–22(e)(4) 24 and 17Ad–22(e)(6),25
and with Section 17A(b)(3)(F) of the
Exchange Act,26 as described in detail
below.
A. Consistency With Rules 17Ad–
22(e)(4) and (6) Under the Exchange Act
Rule 17Ad–22(e)(4) under the
Exchange Act 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 risk exposures to
participants and those arising from
payment clearing, and settlement
processes by, in part, testing the
sufficiency of its financial resources
available to meet the minimum
standards under Rules 17Ad–22(e)(4)(i)
through (iii), as applicable.27 Rule
17Ad–22(e)(6) under the Exchange Act
requires that a covered clearing agency
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to cover, if the
covered clearing agency provides
central counterparty services, its credit
exposures to its participants by
establishing a risk-based margin system
that, among other things, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market.28 Based on the review of the
record, and for the reasons described
below, OCC’s proposed update to
STANS and the CST methodology in the
manner described above is consistent
with Rules 17Ad–22(e)(4) and (6).
As described above, OCC proposes
changes to both its margin methodology
(STANS) and stress testing (CST)
methodology. The proposed changes
22 Id.
15 See
Notice of Filing, 89 FR 97135.
16 See Notice of Filing, 89 FR 97136.
17 Id.
18 Id.
19 15 U.S.C. 78s(b)(2)(C).
20 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
21 Id.
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23 Susquehanna Int’l Group, LLP v. Securities and
Exchange Commission, 866 F.3d 442, 447 (D.C. Cir.
2017).
24 17 CFR 240.17Ad–22(e)(4).
25 17 CFR 240.17Ad–22(e)(6).
26 15 U.S.C. 78q–1(b)(3)(F).
27 17 CFR 240.17Ad–22(e)(4)(vi).
28 17 CFR 240.17Ad–22(e)(6)(i).
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Federal Register / Vol. 90, No. 13 / Wednesday, January 22, 2025 / Notices
would resolve inconsistent model
assumptions by aligning the day count
convention across models. The
proposed changes would also provide
for implied volatility shocks to options
with tenors of less than one month that
are consistent with historical evidence,
rather than simply applying the shocks
generated for 1M options. Each of the
proposed changes is designed to more
accurately reflect the particular
attributes of the options OCC clears. In
the context of STANS, therefore, the
proposed changes would support the
production of margining requirements
consistent with such attributes. In the
context of OCC’s CST methodology, the
changes would provide a more accurate
basis on which to test the sufficiency of
OCC’s financial resources.
Accordingly, the Proposed Rule
Change is consistent with Rules 17Ad–
22(e)(4) and (6) under the Exchange
Act.29
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B. Consistency With Section
17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange
Act requires, among other things, that
the rules of a clearing agency be
designed to assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible.30 As
discussed above, the proposed changes
would improve the performance of the
models comprising STANS and the CST
methodology by, among other things,
supporting the production of margining
requirements consistent with the
particular attributes of the products that
OCC clears and providing a more
accurate basis on which to test the
sufficiency of OCC’s financial resources.
These changes will, in turn, help ensure
that OCC collects appropriate Clearing
Fund collateral and reduce the
likelihood that OCC would need to
utilitze Clearing Fund collateral of nondefaulting clearing members in the
event of a default. For these reasons,
OCC’s proposed update to its Margin
Policy in the manner described above is
consistent with the safeguarding of
securities and funds which are in OCC’s
custody or control or for which it is
responsible. Accordingly, the Proposed
Rule Change is consistent with the
requirements of Section 17A(b)(3)(F) of
the Exchange Act.31
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
29 17 CFR 240.17Ad–22(e)(4) and 17 CFR
240.17Ad–22(e)(6).
30 15 U.S.C. 78q–1(b)(3)(F).
31 15 U.S.C. 78q–1(b)(3)(F).
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Rule Change is consistent with the
requirements of the Exchange Act, and
in particular, the requirements of
Section 17A of the Exchange Act 32 and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,33
that the Proposed Rule Change (SR–
OCC–2024–016) be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025–01414 Filed 1–21–25; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–102202; File No. SR–OCC–
2024–010]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Amendment No. 3 to
Proposed Rule Change by The Options
Clearing Corporation To Establish a
Margin Add-On Charge That Would Be
Applied to All Clearing Member
Accounts To Help Mitigate the Risks
Arising From Intraday and Overnight
Trading Activity
January 15, 2025.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule
19b–4 thereunder,2 notice is hereby
given that on January 14, 2025, The
Options Clearing Corporation (‘‘OCC’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
This amendment (‘‘Amendment No. 3’’)
to the proposed rule change as
described in Items I, II, and III below,
which Items have been prepared
primarily by OCC. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
On July 25, 2024, OCC filed the
proposed rule change File No. SR–OCC–
32 In approving the Proposed Rule Change, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
33 15 U.S.C. 78s(b)(2).
34 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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Sfmt 4703
2024–010 (‘‘Initial Filing’’).3 On January
8, 2025, OCC filed Amendment No. 2 to
the Initial Filing (‘‘Amendment No. 2’’).
This Amendment No. 3 to the Initial
Filing is identical in substance to
Amendment No. 2 but includes changes
to references and table format to
facilitate publication of the notice of
filing in the Federal Register and
supersedes Amendment No. 2.
Amendment No. 3 would establish a
margin add-on charge that would be
applied to all Clearing Member accounts
to help mitigate the risks arising from
intraday and overnight trading activity.
Through this amendment OCC is
incorporating certain modifications to
its proposal to address comments from
industry participants. OCC also intends
to conform the proposed rule change to
the Commission’s final rule 4 amending
the Covered Clearing Agency (‘‘CCA’’)
Standards concerning intraday margin
calls, and to extend the implementation
timeframe to address industry concerns
and participants’ desire for additional
time to prepare for the proposed
changes. This Amendment No. 3 would
modify those aspects of the proposal as
further described below and amend and
restate the Initial Filing.
Proposed changes to OCC’s Rules are
contained in Exhibit 5A to Amendment
No. 3 to File No. SR–OCC–2024–010.
Proposed changes to OCC’s Margin
Policy are contained in confidential
Exhibit 5B to Amendment No. 3 to File
No. SR–OCC–2024–010. Material
proposed to be added is marked by
italicizing and material proposed to be
deleted is marked with strikethrough
text. All terms with initial capitalization
that are not otherwise defined herein
have the same meaning as set forth in
the OCC By-Laws and Rules.5
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
3 See Exchange Act Release No. 100664 (Aug.6,
2024), 89 FR 65695 (Aug. 12, 2024) (File No. SR–
OCC–2024–010).
4 See Exchange Act Release No. 101446 (Oct. 25,
2024), 89 FR 91000 (Nov 18, 2024) (File No. S7–
10–23).
5 OCC’s By-Laws and Rules can be found on
OCC’s public website: https://www.theocc.com/
Company-Information/Documents-and-Archives/
By-Laws-and-Rules.
E:\FR\FM\22JAN1.SGM
22JAN1
Agencies
[Federal Register Volume 90, Number 13 (Wednesday, January 22, 2025)]
[Notices]
[Pages 7720-7722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-01414]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102203; File Nos. SR-OCC-2024-016]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change by The Options Clearing
Corporation Concerning Enhancements to the System for Theoretical
Analysis and Numerical Simulations (``STANS'') and OCC's Comprehensive
Stress Testing (``CST'') Methodology, To Better Capture the Risks
Associated With Short-Dated Options
January 15, 2025.
I. Introduction
On November 22, 2024, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2024-016, pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder, to (i) align assumptions across models and (ii)
generate implied volatility shocks for options with a tenor of less
than one month that are consistent with observed market dynamics.\3\
The proposed rule change was published for public comment in the
Federal Register on December 6, 2024.\4\ The Commission has received no
comments regarding the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change
(hereinafter defined as ``Proposed Rule Change'').
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, at 89 FR 97131.
\4\ See Securities Exchange Act Release No. 101780 (Dec. 2,
2024), 89 FR 97131 (Dec. 6, 2024) (File No. SR-OCC-2024-016)
(``Notice of Filing'').
---------------------------------------------------------------------------
II. Background
OCC is a central counterparty (``CCP''), which means that as part
of its function as a clearing agency, it interposes itself as the buyer
to every seller and the seller to every buyer for financial
transactions. As the CCP for the listed options markets and for certain
futures in the United States, OCC is exposed to the risk that one or
more of its Clearing Members may fail to make a payment or to deliver
securities. OCC addresses such risk exposure, in part, by requiring its
members to provide collateral, including both margin collateral and
Clearing Fund collateral. Margin is the collateral that CCPs collect to
cover potential changes in a member's positions over a set period of
time during normal market conditions. OCC's Clearing Fund is a
mutualized pool of financial resources to which each Clearing Member is
required to contribute to ensure that OCC maintains sufficient
qualifying liquid resources to manage its liquidity risk, and to
address the tail risk that the margin collateral OCC collects from each
Clearing Member might be insufficient to cover OCC's credit exposure to
a defaulting member in extreme but plausible market conditions.
OCC's methodology for calculating margin collateral requirements is
called the System for Theoretical Analysis and Numerical Simulations
(``STANS'').\5\ OCC's methodology for sizing and monitoring its
Clearing Fund is called the Comprehensive Stress Testing (``CST'')
methodology. OCC relies on STANS and the CST methodology to set
collateral requirements to cover the financial risk posed by the
positions OCC clears for its members. OCC states that the proportion of
such positions that comprise short-dated options (``SDOs'') \6\ has
increased over the past several years.\7\ In response to this
observation, OCC examined the risks posed by the increase in SDO
trading and identified opportunities to improve the performance of the
models comprising STANS and the CST methodology in covering the
financial risk posed by the increase in SDO trading observed by OCC.\8\
As described below, OCC proposes two changes to the models comprising
STANS and the CST methodology: one set of changes related to the day
count conventions \9\ and one set of changes related to the application
of volatility shocks to theoretical option prices.\10\
---------------------------------------------------------------------------
\5\ 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.
\6\ SDOs are option contracts with a maturity of less than or
equal to one month to expiration. See Notice of Filing, 89 FR at
97132.
\7\ See Notice of Filing, 89 FR 97132 (citing Cboe, The Rise of
SPX & 0DTE Options (July 27, 2023), available at https://go.cboe.com/l/77532/2023-07-27/ffc83k).
\8\ See Notice of Filing, 89 FR 97132 (stating that
``opportunities exist to improve model performance for Clearing
Member portfolios dominated by SDOs'').
\9\ OCC uses the term ``day count convention'' to refer to a
standardized methodology for calculating the number of days between
two dates. See Notice of Filing, 89 FR 97132, note 13. Both calendar
and business day conventions are used by OCC in STANS and CST
calculations. Id.
\10\ The implied volatility of an option is a measure of the
expected future volatility of the option's underlying security at
expiration, which is reflected in the current option premium in the
market. See Notice of Filing, 89 FR 97132, note 12.
---------------------------------------------------------------------------
[[Page 7721]]
Day count conventions. The models supporting STANS and CST rely on
two different day count conventions. Specifically, OCC's option price
smoothing process uses calendar day convention, and OCC's implied
volatility simulation uses trading day convention. OCC asserts that the
usage of two different day count conventions results in differences in
implied volatility, especially when non-trading days make up a large
portion of the time-to-expiration (e.g., on Fridays for options that
expire the following Monday),\11\ which is more pronounced in SDOs.\12\
---------------------------------------------------------------------------
\11\ See Notice of Filing, 89 FR 97132.
\12\ OCC states that SDOs are more sensitive to day-count
convention alignment than contracts with longer expirations due to
the proportionally larger difference in time to expiry between the
trading day convention and calendar day convention for shorter dated
tenors. See Notice of Filing, 89 FR 97133.
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OCC proposes to address the misalignment of day count conventions
used in the models underlying both STANS and the CST methodology by
processing data through a series of conversions to ensure that the data
presented to the price smoothing and volatility simulation models is
consistent with the assumptions of those models. Specifically, OCC
would convert implied volatility data into a trading day convention
before feeding that data into OCC's implied volatility simulation
models. OCC would then convert the output of its implied volatility
simulation models back into a calendar day convention before feeding
those results into OCC's price smoothing process.
Volatility shocks. OCC's model for simulating theoretical prices
assumes that the implied volatility shocks of the one-month tenor
(``1M'') are sufficient to cover the implied volatility changes for SDO
tenors.\13\ As constructed, the models underlying both STANS and the
CST methodology impose the same volatility shocks applied to 1M options
to all options with tenors of less than one month. However, changes in
implied volatility for SDOs can be much larger than the changes
observed in 1M options.\14\
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\13\ The ``tenor'' of an option is the amount of time remaining
until its expiration or maturity. See Notice of Filing, 89 FR 97132,
note 14.
\14\ OCC has observed that the day-over-day at the money implied
volatility changes for the options with a one-week tenor are
approximately twice that of the 1M tenor on certain risk factors
such as SPX, RUT, QQQ, AAPL, and TSLA. See Notice of Filing, 89 FR
97132, note 15.
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OCC proposes to estimate implied volatility shocks specific to
options with a shorter tenor than 1M options rather than imposing the
same shock on all options with one month or less to maturity. Within
STANS, OCC proposes to derive the shocks for SDOs from the shock
applied to 1M options. Specifically, OCC would derive the shocks for
such options through the application of a square-root decay to the 1M
option volality.\15\ Within the CST methodology, OCC proposes to extend
its existing processes for establishing implied volatility shocks to
specific maturities that are less than one month (i.e., two weeks, one
week) and to rely on linear interpolation to establish shocks for even
shorter maturities (i.e., down to three days).
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\15\ See Notice of Filing, 89 FR 97135.
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OCC summarized the potential impacts of the proposed changes to
both margin and Clearing Fund requirements based on data from July 2023
to September 2024.\16\ For margin, OCC observed that the proposed
changes would have caused an increase in average daily margin
requirements of 0.58 percent with the daily impacts ranging from a 0.81
percent decrease to a 3.21 percent increase.\17\ For the Clearing Fund,
OCC observed that the proposed changes would have caused the total
Clearing Fund to decrease by 0.14 percent.\18\
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\16\ See Notice of Filing, 89 FR 97136.
\17\ Id.
\18\ Id.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\19\ Under the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \20\
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\19\ 15 U.S.C. 78s(b)(2)(C).
\20\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\21\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\22\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\23\
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\21\ Id.
\22\ Id.
\23\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to OCC. More specifically, the Commission finds
that the Proposed Rule Change is consistent with Exchange Act Rules
17Ad-22(e)(4) \24\ and 17Ad-22(e)(6),\25\ and with Section 17A(b)(3)(F)
of the Exchange Act,\26\ as described in detail below.
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\24\ 17 CFR 240.17Ad-22(e)(4).
\25\ 17 CFR 240.17Ad-22(e)(6).
\26\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency With Rules 17Ad-22(e)(4) and (6) Under the Exchange Act
Rule 17Ad-22(e)(4) under the Exchange Act 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 risk exposures to participants
and those arising from payment clearing, and settlement processes by,
in part, testing the sufficiency of its financial resources available
to meet the minimum standards under Rules 17Ad-22(e)(4)(i) through
(iii), as applicable.\27\ Rule 17Ad-22(e)(6) under the Exchange Act
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
cover, if the covered clearing agency provides central counterparty
services, its credit exposures to its participants by establishing a
risk-based margin system that, among other things, considers, and
produces margin levels commensurate with, the risks and particular
attributes of each relevant product, portfolio, and market.\28\ Based
on the review of the record, and for the reasons described below, OCC's
proposed update to STANS and the CST methodology in the manner
described above is consistent with Rules 17Ad-22(e)(4) and (6).
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\27\ 17 CFR 240.17Ad-22(e)(4)(vi).
\28\ 17 CFR 240.17Ad-22(e)(6)(i).
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As described above, OCC proposes changes to both its margin
methodology (STANS) and stress testing (CST) methodology. The proposed
changes
[[Page 7722]]
would resolve inconsistent model assumptions by aligning the day count
convention across models. The proposed changes would also provide for
implied volatility shocks to options with tenors of less than one month
that are consistent with historical evidence, rather than simply
applying the shocks generated for 1M options. Each of the proposed
changes is designed to more accurately reflect the particular
attributes of the options OCC clears. In the context of STANS,
therefore, the proposed changes would support the production of
margining requirements consistent with such attributes. In the context
of OCC's CST methodology, the changes would provide a more accurate
basis on which to test the sufficiency of OCC's financial resources.
Accordingly, the Proposed Rule Change is consistent with Rules
17Ad-22(e)(4) and (6) under the Exchange Act.\29\
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\29\ 17 CFR 240.17Ad-22(e)(4) and 17 CFR 240.17Ad-22(e)(6).
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B. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\30\ As
discussed above, the proposed changes would improve the performance of
the models comprising STANS and the CST methodology by, among other
things, supporting the production of margining requirements consistent
with the particular attributes of the products that OCC clears and
providing a more accurate basis on which to test the sufficiency of
OCC's financial resources. These changes will, in turn, help ensure
that OCC collects appropriate Clearing Fund collateral and reduce the
likelihood that OCC would need to utilitze Clearing Fund collateral of
non-defaulting clearing members in the event of a default. For these
reasons, OCC's proposed update to its Margin Policy in the manner
described above is consistent with the safeguarding of securities and
funds which are in OCC's custody or control or for which it is
responsible. Accordingly, the Proposed Rule Change is consistent with
the requirements of Section 17A(b)(3)(F) of the Exchange Act.\31\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \32\ and the rules and regulations thereunder.
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\32\ In approving the Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\33\ that the Proposed Rule Change (SR-OCC-2024-016) be,
and hereby is, approved.
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\33\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-01414 Filed 1-21-25; 8:45 am]
BILLING CODE 8011-01-P