[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51087-51089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65119; File No. SR-OCC-2011-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise Its By-Laws and 
Rules To Establish a Clearing Fund Amount Intended To Support Losses 
Under a Defined Set of Default Scenarios

August 12, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 3, 2011, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared primarily by OCC. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would change the method by which the size 
of OCC's clearing fund is determined.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This proposed rule change would revise OCC's By-Laws and Rules to 
establish the size of OCC's clearing fund as the amount that is 
required within a confidence level selected by OCC to sustain possible 
loss under a defined set of scenarios as determined by OCC. The 
proposed rule change replaces a previously proposed rule change which 
was withdrawn by OCC.\4\ Currently the size of the clearing fund is 
calculated each month and is equal to a fixed percentage of the average 
total daily margin requirement for the preceding month provided that 
this calculation results in a clearing fund of $1 billion or more.\5\
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    \4\ Securities Exchange Act Release 34-62371 (June 24, 2010), 75 
FR 37864 (June 30, 2010) (SR-OCC-2010-04). OCC withdrew its proposed 
rule change regarding clearing fund sizing in order to submit this 
proposed rule change which: Incorporates the amendments that were 
proposed to the previous proposed rule change; discusses the 
adaptation of the methodology underlying the formula change made to 
incorporate the effects of implementing the rule changes described 
in Securities Exchange Act Release No. 34-58158 (July 15, 2008), 73 
FR 42646 (July 22, 2008) (SR-OCC-2007-20) (``Collateral in Margins 
Filing''); provides updated comparative data about the impact of the 
proposed clearing fund sizing formula; and makes additional changes 
to improve the overall readability of certain proposed rule text.
    \5\ If the calculation does not result in a clearing fund of $1 
billion or more, the percentage that results in a fund level of at 
least $1 billion is applied provided that in no event will the 
percentage exceed 7%.
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    Under the proposed formula for determining the size of the clearing 
fund, the amount of the fund would be equal to the larger of the amount 
of the charge to the fund that would result from (i) A default by the 
single ``clearing member group'' whose default would be likely to 
result in the largest draw against the clearing fund or (ii) an event 
involving the near-simultaneous default of two randomly-selected 
``clearing member groups,'' in each case as calculated by OCC with a 
specified confidence level. Initially, the confidence levels employed 
by OCC in calculating the charge likely to result from a default by 
OCC's largest ``clearing member group'' and the default of two 
randomly-selected ``clearing member groups'' would be 99% and 99.9%, 
respectively.\6\ However, OCC would have the discretion to employ 
different confidence levels in these calculations in the future 
provided that OCC would not employ confidence levels of less than 99% 
without filing a rule change with the Commission.\7\ The size of the 
clearing fund would continue to be recalculated monthly based on a 
monthly averaging of daily calculations for the previous month and 
subject to a

[[Page 51088]]

requirement that the total clearing fund be not less than $1 
billion.\8\
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    \6\ ``Clearing member group'' will be defined in Article I 
(``Definitions'') of OCC's By-Laws to mean ``a Clearing Member and 
any Member Affiliates of such Clearing Member.''
    \7\ Proposed Interpretation and Policy .02 to OCC Rule 1001.
    \8\ Proposed Interpretation and Policy .01 to OCC Rule 1001.
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    The new formula is designed to more directly take into account 
anticipated losses resulting from the clearing member default scenarios 
described above and thereby establish the clearing fund at a size that 
is sufficient to cover such losses without relying on any rights of OCC 
to require clearing members to replenish the clearing fund. The formula 
is generally consistent with the current ``Recommendations for Central 
Counterparties'' published by the Bank for International Settlements 
and the International Organization of Securities Commissioners. Among 
the recommendations in the publication are that a clearing organization 
``maintain sufficient financial resources to withstand, at a minimum, a 
default by the clearing member to which it has the largest exposure in 
extreme but plausible market conditions.'' The publication further 
advises clearing organizations to plan for the possibility of a default 
by two or more clearing members in a short time frame.\9\
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    \9\ See Bank for International Settlements and International 
Organization of Securities Commissions, Recommendations for Central 
Counterparties (November 2004), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD176.pdf (the``2004 Recommendations''). 
OCC notes that in December 2009 the Committee on Payment and 
Settlement Systems of the Bank for International Settlements 
(``CPSS'') and the Technical Committee of the International 
Organization of Securities Commissions (``IOSCO'') began a 
comprehensive review of the 2004 Recommendations in order to 
strengthen and clarify such recommendations based on experience and 
lessons learned from the recent financial crisis. In March 2011, the 
CPSS and IOSCO published for comment the results of such review with 
comments requested by July 29, 2011. See Bank for International 
Settlements and International Organization of Securities 
Commissions, Principles for financial market infrastructures (March 
2011), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD350.pdf.
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    In considering whether to revise the formula for determining the 
size of the clearing fund, OCC compared the size of the clearing fund 
that would have resulted from application of the revised formula to the 
actual size of the clearing fund for each month from February 2008 
through September 2009. This analysis revealed that for this time 
period the size of the clearing fund under the revised formula would 
have been on average 10% larger than under the current formula. In 
September and October 2008, which were two months of extreme volatility 
in the U.S. securities markets, the revised formula would have resulted 
in a clearing fund size of approximately 31% and 27% greater than under 
the current formula. The average monthly change in the size of the 
clearing fund and the standard deviation of clearing fund size from 
month to month for this time period under the two formulas were broadly 
similar.\10\
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    \10\ Note the comparative data described in this paragraph was 
obtained using confidence levels set at 99% and above. OCC estimates 
that using only a 99% confidence level for the months referenced 
would have lowered by an average of approximately \1/2\% the total 
size of the clearing fund as determined by the proposed methodology.
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    Since deciding in September 2009 that it wished to adopt the 
revised formula, OCC has continued to compare the size of the clearing 
fund under the revised formula with the size under the current formula. 
During 2010 the methodology underlying the revised formula was adapted 
to incorporate the effects of the implementation of the rule changes 
described in the Collateral in Margins Filing.\11\ Under those changes, 
certain types of securities accepted as collateral are analyzed for 
margin purposes together with positions in cleared products as a single 
portfolio, affording a more accurate measurement of risk. During the 
period February 2008 through January 2010 (i.e., prior to the 
implementation of the Collateral in Margins Filing) for which 
comparative data is available, the size of the clearing fund under the 
revised formula would have been on average 3% larger than under the 
current formula. Including also the further months of July, 2010 
through June, 2011 (i.e., since the implementation of the Collateral in 
Margins Filing) for which comparative data is available, the 
corresponding percentage increase is 2%.
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    \11\ Securities Exchange Act Release No. 34-58158 (July 15, 
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20). See supra note 
4.
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    The existing formula for determining the size of the clearing fund 
was intended to establish the fund at a level reasonably designed to 
cover losses resulting from one or more clearing member defaults, and 
OCC believes that it has served that purpose adequately. Nevertheless, 
OCC believes that the proposed amended formula is a better predictor of 
the actual losses that would be likely to result from such defaults. 
The existing formula takes potential losses into account only 
indirectly by setting the size of the clearing fund as a percentage of 
average margin requirements. The revised formula would directly take 
into account various types of default scenarios and therefore in OCC's 
view would be more likely to result in a level for the clearing fund 
that is adequate in the event such scenarios occur. The new formula 
would therefore more closely align the size of the clearing fund with 
its intended purpose of absorbing losses resulting from clearing member 
defaults and would thereby avoid a disruption of the clearance process 
even during extreme market conditions.
    Article VIII, Section 6 of OCC's By-Laws, which obligates clearing 
members to make good deficiencies in their clearing fund deposits 
resulting from pro rata charges or otherwise (subject to a cap equal to 
100% of a clearing member's then required deposit if it promptly 
withdraws from membership and closes out or transfers its open 
positions) would remain unchanged.
    The specific amendments proposed to OCC's By-Laws and Rules to 
facilitate the proposed changes to its clearing fund calculation can be 
found at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_11_10.pdf.
    If approved by the Commission, OCC would implement the revised 
formula for determining the size of its clearing fund sixty days after 
notice to its clearing members.
2. Statutory Basis
    OCC believes the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \12\ and the rules and 
regulations thereunder because the proposed rule changes would 
facilitate prompt and accurate clearance and settlement of securities 
transactions by creating a more direct correlation between the clearing 
fund size and estimated losses from a defined set of default scenarios.
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    \12\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. OCC will notify the Commission of any written 
comments received by OCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) As the 
Commission may designate if it finds such longer period to be 
appropriate and publishes

[[Page 51089]]

its reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will: (A) By order approve or 
disapprove the proposed rule change or (B) institute proceedings to 
determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or send an e-mail to [email protected]. Please include File Number SR-OCC-2011-10 on the 
subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2011-10. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings will also be available for 
inspection and copying at the principal office of OCC and on OCC's Web 
site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_11_03.pdf. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-OCC-2011-10 and should be submitted on or before 
September 7, 2011.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary .
[FR Doc. 2011-20955 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P