[Federal Register Volume 79, Number 112 (Wednesday, June 11, 2014)]
[Notices]
[Pages 33607-33610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-13561]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72331; File No. SR-OCC-2014-13]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Provide for the Calculation of Initial Margin Requirements for 
Segregated Futures Accounts Through the Use of the Standard Portfolio 
Analysis of Risk Margin Calculation System

June 5, 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 28, 2014, The Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by OCC. OCC filed the proposed rule change pursuant to Section 
19(b)(3)(A) \3\ of the Act and Rule 19b-4(f)(6) \4\ thereunder.
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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)(6). As required under Rule 19b-
4(f)(6)(iii), OCC provided the Commission with written notice of its 
intent to file the proposed rule change, along with a brief 
description and the text of the proposed rule change, at least five 
business days prior to the date of filing the proposed rule change, 
or such shorter time as designated by the Commission.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by The Options Clearing Corporation 
(``OCC'') would provide for the calculation of initial margin 
requirements for segregated futures accounts through the use of the 
Standard Portfolio Analysis of Risk (``SPAN'') margin calculation 
system in place of OCC's System for Theoretical Analysis and Numerical 
Simulations (``STANS'') margin calculation system.

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
    OCC is proposing to modify its rules to provide for the calculation 
of margin requirements for segregated futures accounts through the use 
of the SPAN margin calculation system in place of OCC's STANS margin 
calculation system, subject to OCC's collection of enhanced margin to 
be deposited in the segregated futures account in the event that the 
margin requirement as calculated under STANS would exceed the 
requirement calculated under SPAN.

Compliance With CFTC Rule 39.13(g)(8)

    On April 25, 2012, and November 2, 2012, OCC implemented Rule 
602(a) and Rule 601(c), respectively, in compliance with Commodity 
Futures Trading Commission (``CFTC'') Rule 39.13(g)(8),\5\ which, in 
relevant part, requires registered derivatives clearing organizations 
(``DCOs'') such as OCC to (i) collect initial margin for customer 
segregated futures accounts on a gross basis and (ii) have rules 
requiring clearing members to collect initial margin from their 
customers in an amount that is greater than the amount the DCO collects 
from clearing members.\6\ Together, Rules 601(c) and 602(a) resulted in 
customer level margin requirements for segregated futures accounts that 
are calculated by clearing members using SPAN, but subject to a 
``floor'' established by the clearing level margin requirements 
calculated by OCC using STANS.
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    \5\ 17 CFR 39.13(g)(8).
    \6\ See Securities Exchange Act Release No. 66841 (April 20, 
2012), 77 FR 24999 (April 26, 2012) (SR-OCC-2012-06) and Securities 
Exchange Act Release No. 68148 (November 2, 2012), 77 FR 67036 
(November 8, 2012) (SR-OCC-2012-17).
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Use of STANS Inputs in Calculation of Customer Level Margin 
Requirements

    In addition to implementing the above described changes to its 
systems to margin segregated futures accounts on a gross basis, OCC 
sought to bring customer level margin requirements into conformity with 
STANS risk parameters by changing the initial risk parameter inputs for 
particular cleared contracts in segregated futures accounts.\7\ 
Previously, OCC used SPAN risk parameters received from the futures 
exchange listing a particular cleared contract when preparing 
theoretical output files that clearing members used in SPAN 
calculations to calculate

[[Page 33608]]

customer margin requirements.\8\ In order to more closely align 
clearing level and customer level margin requirements, OCC replaced the 
SPAN risk parameters with STANS risk parameters in preparing these 
theoretical output files.\9\ This alignment of clearing level and 
customer level margin requirements through the use of STANS risk 
parameters resulted in customers of clearing members being directly 
exposed to margin requirements based on STANS for the first time.
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    \7\ Id.
    \8\ Securities Exchange Act Release No. 68148 (November 2, 
2012), 77 FR 67036 (November 8, 2012) (SR-OCC-2012-17).
    \9\ Id.
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    STANS is a data driven system using market data to model risk 
correlations and distributions in order to calculate appropriate margin 
coverage for each cleared contract. STANS was designed to have risk 
parameters adjusted on a monthly basis, when new data is made 
available, and on a daily basis, to take into account changes in market 
volatility. OCC believes that these frequent recalibrations are 
critical to its risk management capabilities with respect to clearing 
member accounts. However, as a result of the changes to OCC's rules 
described above, these recalibrations result in frequent changes to the 
margin requirements applicable to customers of clearing members. 
Clearing members are well capitalized entities with significant access 
to financing and are able to absorb frequent changes to margin 
requirements caused by STANS risk parameter recalibration.\10\ However, 
certain customers of clearing members may not have the same capital 
requirements or access to financing as clearing members, and frequent 
changes to their margin requirements are more disruptive, causing 
uncertainty and adding unforeseen financing costs to their 
operations.\11\
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    \10\ OCC's By-Laws and Rules require clearing members to 
maintain minimum net capital of $2 million. See, OCC By-Laws, 
Article V, Section 1, Interpretation and Policy .01, OCC Rule 301 
and OCC Rule 302. Notwithstanding the minimum net capital 
requirement, most OCC clearing members maintain net capital (and 
margin) in excess of the minimum and are able to readily satisfy 
margin increases that may occur from day-to-day.
    \11\ Clearing members' customers include individual retail 
customers who do not have the same financial resources as clearing 
members and, unlike clearing members, will not be able to easily 
satisfy margin increases that occur from day-to-day.
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SPAN System for Calculating Initial Margin

    SPAN is used universally by all the major domestic futures clearing 
houses, other than OCC, to calculate clearing and customer level margin 
requirements, as well as by the major domestic futures exchanges. SPAN 
is a market simulation-based methodology that calculates initial margin 
requirements for a wide variety of financial instruments including 
futures, options, physical commodities, equities, or any combination of 
these instruments. SPAN assesses the risk of a portfolio by calculating 
the maximum likely loss that could be suffered by the portfolio based 
on SPAN risk parameters set by an exchange or DCO. These risk 
parameters, known as ``scan ranges,'' include ranges of prices, 
volatility and other variables. Using these scan ranges, SPAN simulates 
a certain number of market scenarios, known as ``risk scenarios,'' as 
determined by the exchange or DCO, and calculates a ``SPAN risk 
array,'' which is a set of numerical values that indicate how a 
particular contract is expected to gain or lose value under the various 
risk scenarios. The risk array representing the maximum likely loss to 
a portfolio is then used to set margin requirements by the exchange or 
DCO.

Proposed By-Law and Rule Changes

    OCC proposes to amend Rule 601 by adding new paragraph (1) to Rule 
601(e) to provide for the calculation of initial margin for segregated 
futures customer accounts pursuant to SPAN.\12\ Proposed Rule 601(e)(1) 
will retain the requirement that initial margin for segregated futures 
accounts be calculated on a gross basis, but will calculate the initial 
margin requirement pursuant to the SPAN methodology in order to reduce 
the disruption experienced by customers of clearing members due to the 
frequent recalibration of STANS risk parameters. OCC believes this 
change will provide market participants with greater certainty 
regarding the funding costs associated with their futures positions. 
Additionally, calculating initial margin requirements for segregated 
futures accounts pursuant to SPAN will conform OCC's margin calculation 
methodology for futures and options on futures with the methodology 
primarily used by other DCOs, futures exchanges and participants in the 
futures and options on futures markets.
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    \12\ OCC has previous experience operating OCC's Theoretical 
Intermarket Margining System (TIMS), a margin calculation system 
that similar to SPAN, and does not anticipate any operational issues 
in implementing SPAN.
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    OCC intends to set the SPAN scan ranges for cleared contracts held 
in segregated futures accounts based on two years of daily returns that 
will be analyzed for each tenor of cleared contract. In the event that 
two years of daily returns are unavailable, OCC will use the model two-
year daily returns produced by STANS to set the SPAN scan ranges. Scan 
ranges will be initially set to provide coverage for a minimum 99% 
confidence level. OCC intends to use the price history from the futures 
exchange that lists a particular contract to establish the minimum 
margin threshold. In the event that a contract is listed by a futures 
exchange that is economically equivalent to another futures exchange's 
contract, OCC intends to use the SPAN parameters from the primary 
market to establish the minimum margin threshold.
    OCC will reset minimum SPAN scan ranges on a quarterly basis. 
Margin rates, including any changes, will be posted on OCC's public Web 
site and implemented within five business days of the quarterly rate 
setting date. This schedule will be provided to all market participants 
via a posting on OCC's public Web site. OCC believes these measures 
will promote transparency and provide clearing members and their 
futures customers adequate time to prepare for any changes in margin 
rates.
    OCC staff will continuously assess the current SPAN scan ranges by 
comparing changes in settlement values to the established SPAN scan 
ranges on a daily basis. If there is a change in settlement values that 
exceeds the established SPAN scan ranges, OCC will reset the SPAN scan 
ranges in between the scheduled quarterly reset no later than five 
business days after the observed change in settlement values that 
exceeded the established SPAN scan ranges and the revised ranges will 
be left in place for a minimum of ten business days and, if no further 
breaches have been observed, OCC will reset the margin rates based on 
its standard approach. OCC believes that this adjustment process 
promotes safety and soundness in its risk management practices by 
implementing an ongoing monitoring process to ensure that margin levels 
are maintained at appropriate levels.
    Proposed Rule 601(e)(1) will apply to all segregated futures 
accounts, including segregated futures professional accounts, internal 
non-proprietary cross-margining accounts and non-proprietary cross-
margining accounts. For cross-margining accounts with other DCOs, OCC 
will use the SPAN scan ranges set by the participating DCO. For OCC 
internal cross-margining accounts, OCC will calculate the SPAN scan 
ranges as described above.
    Although proposed Rule 601(e)(1) proposes to use SPAN to calculate 
initial margin requirements for segregated futures accounts on a gross 
basis, OCC believes that margin

[[Page 33609]]

requirements calculated on a net basis, i.e., permitting offsets 
between different customers' positions held by a clearing member in a 
segregated futures account, using STANS affords OCC additional 
protections at the clearinghouse level against risks associated with 
liquidating a clearing member's segregated futures account. 
Accordingly, OCC proposes in new Interpretation and Policy .07 to Rule 
601 to also calculate on a net basis initial margin requirements for 
each segregated futures accounts using STANS. 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 will collateralize this risk 
exposure by applying an enhanced margin requirement in the amount of 
such difference to the account. Proposed Interpretation and Policy .07 
to Rule 601 therefore would ensure that STANS, which produces the best 
estimate of OCC's liquidation risk, continues to be utilized in 
connection with the risk management process for segregated futures 
accounts.

Impact of Change

    OCC performed an evaluation of the impact of using SPAN in place of 
STANS to calculate initial margin requirements for segregated futures 
accounts and has concluded that the impact will be minimal.\13\ For 78 
business days between January 15, 2014 and May 7, 2014, OCC used SPAN 
to calculate initial margin requirements on a gross basis for all 68 
segregated futures accounts carried at OCC. The change to initial 
margin requirements across all individual accounts ranged between an 
increase of $557.5 million and a decrease of $180.4 million. The 
average individual account increase was $18.8 million and the average 
account decrease was $15.4 million. When reviewing the aggregated daily 
impact, the change across all accounts ranged between an increase of 
$390.1 million and a decrease of $764.7 million. The average aggregate 
increase across the 50 activity dates when an overall increase in 
margin was observed was $150.7 million while the average aggregate on 
the 28 activity dates when an overall margin decrease was observed was 
$267.7 million.
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    \13\ The only futures products sets that OCC expects to clear 
following the adoption of SPAN margining will be: Volatility 
Futures, Variance Futures, Eurodollar Futures and Security Futures. 
NYSE Liffe U.S. precious metal futures and MSCI broad based index 
futures products will also be subject to SPAN margining as long as 
they are cleared by OCC. However, such NYSE Liffe U.S. futures 
products are scheduled to transfer to another derivatives clearing 
organization in the second quarter of 2014.
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    During the above 78 business day period, 29 of the segregated 
futures accounts would have been subject to the enhanced margin 
requirement pursuant to proposed Interpretation and Policy .07 to Rule 
601 because the initial margin calculated pursuant to STANS on a net 
basis exceeded the initial margin calculated pursuant to SPAN on a 
gross basis on at least one activity date.\14\ The majority of the days 
on which the enhanced margin would have been required of a large number 
of accounts were during the last week of January and the first week of 
February when emerging markets experienced substantial volatility.
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    \14\ Of these 29 accounts, 18 accounts incurred an enhanced 
margin charge on fewer than 10 activity dates during the 78 day 
period, while 6 accounts incurred an enhanced margin charge between 
10 and 40 activity dates, and 5 accounts incurred an enhanced margin 
charge on greater than 40 activity dates. OCC staff noted that 
accounts incurring the enhanced margin charge on a large number of 
activity dates are accounts comprised of a small number of positions 
or positions concentrated in a small number of product types. 
Specifically, more than half of all observed enhanced margin charges 
were in accounts comprised of only NYSE Liffe Metals or NYSE Liffe 
MSCI products. Of the 78 activity dates, on 47 activity dates fewer 
than 5 accounts incurred an enhanced margin charge, on 26 activity 
dates between 6 and 10 clearing member accounts incurred an enhanced 
margin charge, and on 5 activity dates 11 to 15 clearing member 
accounts incurred an enhanced margin charge.
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2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act,\15\ and the rules and regulations thereunder, because 
the proposed modifications would help ensure that OCC is able to 
perform clearing services for products that are subject to either the 
exclusive or joint jurisdiction of the CFTC \16\ and is designed to 
promote ``the prompt and accurate clearing and settlement of securities 
transactions'' \17\ and will ``require participants to have sufficient 
financial resources and robust operational capacity to meet obligations 
arising from participation'' \18\ in OCC. The proposed rule change 
would provide greater certainty to clearing members' customers 
regarding funding costs associated with their futures positions and 
align OCC's margin methodology for segregated futures accounts with 
other DCOs while allowing OCC to continue to use margin requirements to 
limit its credit exposures to clearing members under normal market 
conditions and use risk-based models and parameters to set margin 
requirements.\19\ The proposed rule change is not inconsistent with the 
existing rules of OCC, including any other rules proposed to be amended 
or any advance notice filings pending with the Commission.
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    \15\ 15 U.S.C. 78q-1.
    \16\ Securities futures are subject to the joint jurisdiction of 
the Commission and the CFTC.
    \17\ 15 U.S.C. 78q-1(b)(3)(A).
    \18\ 17 CFR 240.17Ad-22(d)(2).
    \19\ 17 CFR 240.17Ad-22(b)(2).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition. Changes to the rules of a clearing agency may 
have an impact on the participants in a clearing agency and their 
customers and the markets that the clearing agency serves. This 
proposed rule change primarily affects clearing members and their 
customers by changing the margin calculation system used to compute 
initial margin requirements for segregated futures accounts from STANS 
to SPAN. OCC believes that the proposed change would facilitate 
competition among clearing members, their customers and market 
participants because the rule change would affect all clearing members 
with segregated futures accounts equally, and bring OCC's margin system 
for futures in line with other DCOs. Specifically, all clearing members 
with segregated futures accounts would be subject to having the initial 
margin calculation for such accounts computed under SPAN, and all 
affected customers would be subject to having their customer level 
margin requirements calculated on the basis of SPAN. With respect to 
any burden on competition among clearing agencies, OCC is one of 
several clearing agencies that perform central counterparty services 
for the futures markets and all such clearing agencies, except for OCC, 
currently use SPAN to calculate customer level margin requirements. The 
proposed rule change would not impede other clearing agencies from 
clearing futures contracts.
    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest and would not impose any burden on 
competition among clearing members, among market participants or among 
clearing agencies.

(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.

[[Page 33610]]

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors and the public 
interest;
    (ii) impose any burden on competition; and
    (iii) become operative for 30 days from the day on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(a) of the Act and Rule 
19b-4(f)(6) thereunder.\20\
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    \20\ 17 CFR 240.19b-4(f)(6)(iii). Notwithstanding the foregoing, 
OCC has represented that 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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    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.

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 for (http://www.sec.gov/rules/sro.shtml);

or

     Send an email to [email protected]. Please include 
File Number SR-OCC-2014-13 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-2014-13. 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 of submission. 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 10:00 a.m. and 3:00 p.m. Copies of such filing also will 
be available for inspection and copying at the principal office of OCC 
and on OCC's Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_13.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-2014-13 
and should be submitted on or before July 2, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13561 Filed 6-10-14; 8:45 am]
BILLING CODE 8011-01-P