[Federal Register Volume 79, Number 106 (Tuesday, June 3, 2014)]
[Notices]
[Pages 32009-32011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12769]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72266; File No. SR-OCC-2014-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Require That Intraday Margin Be Collected and Margin Assets Not Be 
Withdrawn When a Clearing Member's Reasonably Anticipated Settlement 
Obligations to OCC Would Exceed the Liquidity Resources Available to 
OCC To Satisfy Such Settlement Obligations

May 28, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 19, 2014, The Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II and III below, which Items have 
been prepared by OCC. OCC filed the proposal pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(1) thereunder \4\ so that 
the proposal was effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by OCC would amend OCC's Rules to require 
(rather than continue to permit as a discretionary determination) that 
intraday margin be collected and margin assets not be withdrawn when a 
clearing member's reasonably anticipated settlement obligations to OCC 
would exceed the liquidity resources available to OCC to satisfy such 
settlement obligations.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to modify existing OCC 
Rules 608 and 609 (collectively, the ``Rules''), which address the 
withdrawal of margin and deposit of intra-day margin, respectively. 
More specifically, OCC is proposing to modify these Rules to require 
that intraday margin be collected and to preclude margin assets from 
being withdrawn, to the extent that a clearing member's reasonably 
anticipated settlement obligations to OCC would exceed the liquidity 
resources available to OCC to satisfy such settlement obligations (a 
``Liquidity Situation'').
    OCC Rule 608 (``Rule 608'') already permits OCC to prohibit margin 
withdrawals in a Liquidity Situation, and OCC Rule 609 (``Rule 609'') 
already permits OCC to require the collection of intraday margin in a 
Liquidity Situation. In 2012,\5\ OCC adopted an interpretation under 
each of the Rules to put clearing members on notice that OCC may refuse 
a margin withdrawal request or request additional intra-day margin 
where a clearing member's future settlement obligations could result in 
a need for liquidity in excess of liquidity resources available to OCC. 
In adopting the interpretations, OCC made it clear that such action 
might be taken even though OCC has made no adverse determination as to 
the financial condition of the clearing member,\6\ the market risk of 
the clearing member's positions, or the adequacy of the clearing 
member's total overall margin deposit in the accounts in question.
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    \5\ See Securities Exchange Act Release No. 68308 (November 28, 
2012), 77 FR 71848 (December 4, 2012) (SR-OCC-2012-21).
    \6\ Id at 71849.
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    OCC further identified that a circumstance in which OCC might 
desire to reject a margin withdrawal request or make an intra-day 
margin call to ensure it had sufficient liquidity concerned the 
``unwinding'' of a ``box spread'' position. A box spread position 
involves a combination of two long and two short options on the same 
underlying interest with the same expiration date that results in an 
amount to be paid or received upon settlement that is fixed regardless 
of fluctuations in the price of the underlying interest. Box spreads 
can be used as financing transactions, and they may require very large 
fixed payments upon expiration. In this situation, if much of the 
margin deposited by the relevant clearing member is in the form of 
common stock and if the clearing member failed to make the settlement 
payment, the available liquidity resources might be insufficient to 
cover the settlement obligation. In anticipation of this settlement, 
OCC might therefore require the clearing member to deposit intra-day 
margin in the form of cash, or reject a requested withdrawal of cash or 
U.S. Government securities, so that liquidity resources would be 
sufficient to cover the clearing member's obligations. Under the 
adopted interpretations, OCC would always include margin assets of the 
relevant clearing member in the form of cash in determining available 
liquidity resources and could, in its discretion, consider the amount 
of margin assets in the form of highly liquid U.S. Government 
securities and/or the amount that OCC would be able to borrow on short 
order.
    Since the adoption of these interpretations, OCC has effected 
margin calls and precluded clearing members from withdrawing liquid 
forms of margin assets in three instances, each of which involved the 
``unwind'' of a box

[[Page 32010]]

spread.\7\ In two instances, the affected clearing member had 
sufficient ``liquid'' forms of margin (i.e., cash and cash equivalents) 
already on deposit with OCC to meet the applicable intraday margin 
calls.\8\ However, in the third instance, the affected clearing member 
did not have a sufficient amount of liquid forms of margin on deposit 
with OCC and was required to make a margin deposit in the form of 
cash.\9\ In all of the instances, the amount of margin that OCC 
prohibited from being withdrawn was less than thirty percent of the 
affected clearing member's total margin deposit at OCC.
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    \7\ With respect to each of the three instances, there were 
several different dates on which OCC made an intraday margin call 
and prohibited the withdrawal of margin assets. Moreover, and with 
respect to the intraday margin calls, OCC required the clearing 
member to deposit additional cash, or cash equivalents, so that the 
clearing member's anticipated settlement obligation less OCC's 
liquid financial resources equaled the amount of the clearing 
member's cash, or cash equivalent, margin on deposit at OCC on the 
day the intraday margin call was made. In this context, OCC only 
considers letters of credit to be cash equivalents.
    \8\ It is not uncommon for clearing members to deposit with OCC 
amounts in excess of their margin requirement.
    \9\ With respect to the one instance, there were several 
different dates when OCC required the deposit of additional intra-
day margin.
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    While the current rule authority has achieved its intended purpose, 
going forward, and for the protection of its clearing members and the 
public, OCC believes it should make the margin withdrawal prohibition 
and the intra-day collection of margin mandatory, not discretionary, in 
a Liquidity Situation. Moreover, making these actions mandatory in a 
Liquidity Situation would create greater certainty that OCC's liquidity 
resources, under such circumstances, would be sufficient to cover the 
clearing member's settlement obligations.
    Accordingly, the proposed changes to Rules 608 and 609 would make 
OCC's application of the withdrawal restriction and intraday margin 
collection requirement non-discretionary in a Liquidity Situation. 
Additional amendments to Interpretation & Policy .02 to Rule 608 and 
Interpretation & Policy .01 to Rule 609 are designed to remove any 
references suggesting that the margin withdrawal restriction or 
intraday margin collection requirement, respectively, is discretionary.
    OCC has already provided its clearing members with notification 
concerning the proposed rule change. In addition, OCC individually 
contacted the clearing members that OCC identified to be most affected 
by the proposed rule change. No concerns were raised.
2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act,\10\ and the rules and regulations thereunder, 
including Rule 17Ad-22(b)(3),\11\ because the proposed rule change 
provides for the safeguarding of securities and funds in the custody 
and control of OCC for which it is responsible as well as ensuring that 
OCC maintains sufficient liquid financial resources to withstand the 
default of a clearing member to which it has the largest exposure in 
extreme, but plausible, market conditions. The proposed change will 
enhance OCC's margin policies by making certain intra-day margin calls 
and certain prohibitions of margin withdrawals mandatory rather than 
discretionary, thereby strengthening OCC's risk management process as 
its relates to OCC's access to financial resources with minimal delay 
in the event of clearing member default (including the default of the 
clearing member to which OCC has the largest exposure) in extreme, but 
plausible, market conditions. Improving OCC's available liquid 
financial resources enhances OCC's financial stability and, 
consequently, reduces systemic risk within the financial system as a 
whole. Additionally, making the margin withdrawal restriction and 
intraday margin collection requirements mandatory, rather than applied 
only at OCC's discretion, furthers the goal of Rule 17Ad-22(d)(1) \12\ 
by ensuring that OCC will maintain written policies and procedures that 
provide for a well-founded, transparent, and enforceable legal 
framework for its activities. The proposed rule change is not 
inconsistent with the existing rules of OCC, including any other rules 
proposed to be amended.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(b)(3).
    \12\ 17 CFR 240.17Ad-22(d)(1).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose a 
burden on competition.\13\ This proposed rule change affects OCC 
clearing members and OCC believes that the proposed rule change would 
not disadvantage or favor any particular clearing member in 
relationship to another clearing member because the non-discretionary 
margin collection requirements and margin withdrawal restrictions will 
be applied equally to every clearing member in a Liquidity Situation. 
Accordingly, the proposed rule change will not impose any burden on 
competition.
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    \13\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and paragraph (f)(1) of Rule 19b-4 
thereunder.\15\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.\16\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(1).
    \16\ Notwithstanding the foregoing, implementation of this rule 
change will be delayed until this rule change is deemed certified 
under CFTC Regulation Sec.  40.6.
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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 email to [email protected]. Please include 
File Number SR-OCC-2014-10 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2014-10. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements

[[Page 32011]]

with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's Web site 
(http://www.theocc.com/about/publications/bylaws.jsp). 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-2014-10 and should be 
submitted on or before June 24, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12769 Filed 6-2-14; 8:45 am]
BILLING CODE 8011-01-P