[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45527-45529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18432]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-32718; File No. SR-OCC-2014-16]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Apply Enhanced Post-Trade 
Price Reasonableness Checks on Confirmed Trades in Standardized Options 
and Futures Options To Increase the Likelihood That Erroneous Trades 
Will Be Identified and Voided

July 30, 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 July 21, 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. 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change will implement price reasonableness 
checks in connection with the reporting of confirmed trades in 
standardized options and futures options to OCC by an Exchange. The 
proposed rule change will promote OCC's ability to protect itself and 
clearing members from the negative effects of clearing trades in 
standardized options and futures options that may contain erroneous 
premium information.

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 add an interpretation and policy concerning its 
administration of existing Article VI, Section 7(c) of the By-Laws and 
to implement price reasonableness checks in connection with the 
reporting of confirmed trades in standardized options and futures 
options to OCC by an Exchange under Article VI, Section 7 and Rule 401. 
Article VI, Section 7(c) provides that an Exchange may instruct OCC to 
disregard a confirmed trade previously reported to OCC for clearance 
and settlement under certain circumstances.\3\ One such circumstance is 
a determination that ``new or revised trade information was required to 
properly clear the transaction.'' To promote OCC's ability to protect 
itself and clearing members from the negative effects of clearing 
trades in standardized options and futures options that may contain 
erroneous premium information, OCC would apply to accepted trades a 
premium price threshold triggering further scrutiny of trades that 
exceed it.
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    \3\ See Article VI, Section 7(c); see also Exchange Act Release 
No. 46734 (October 28, 2002), 67 FR 67229 (November 4, 2002)(SR-OCC-
2002-18) (approving amendments to OCC's By-Laws and Rules supporting 
the transition to near real-time reporting of matched trade 
information, including amendments to Article VI, Section 7 to allow 
instructions to OCC under certain conditions to disregard a matched 
trade).
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Background
    The Board of Directors and Risk Committee have been evaluating risk 
controls with respect to trades priced significantly away from current 
market prices and the risks they present to OCC.\4\ OCC anticipates the 
proposed price reasonableness review process would be put in place 
while it also develops other post-trade risk controls for potential 
implementation.
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    \4\ See e.g., OCC Press Release, OCC and The U.S. Options 
Exchanges Adopt New Pre- and Post-Trade Risk Control Principles (May 
21, 2014), http://www.theocc.com/about/press/releases/2014/05_21.jsp. OCC intends that these principles will be the subject of 
additional proposed rule changes.
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Post-Trade Price Validation Process
    Earlier this year, a trade data entry parameter in OCC's systems 
that does not allow OCC to accept a trade having a premium price of 
more than $9,999.99 per contract prevented OCC from accepting erroneous 
trades that resulted from a trading algorithm error of a customer of a 
clearing member. If the systems parameter had not prevented OCC from 
accepting the trades, the settlement obligation for the clearing member 
for these trades alone could have exceeded $800 million. This amount 
would have been in addition to any other settlement obligation of the 
clearing member.
    In light of the incident, and to promote the protection of OCC and 
clearing members from erroneous trades, OCC's Risk Committee directed 
OCC to perform an analysis of whether OCC should implement procedures 
regarding a reasonableness review for premium prices at some threshold 
level less than the current systems parameter of $9,999.99 per 
contract. The parameter will also remain in place, however. OCC 
reviewed standardized option and futures option trade submissions from 
all Exchanges for a period of 141 business days from December 2, 2013 
through June 24, 2014. Based on analysis of the data, OCC determined 
that it is appropriate to set a premium price limit of $2,000 per 
contract because that premium threshold protects OCC and clearing 
members from erroneous trades that have the potential to cause 
significant settlement obligations while simultaneously not applying 
the post-trade price reasonableness check review to a material number 
of trades that may be valid. Of the nearly 179 million trades that OCC 
analyzed, only 30 would have triggered a price reasonableness check for 
exceeding the proposed $2000 threshold.
    Under the proposed process, receipt of a trade that exceeds the 
premium price limit would generate an automatic notice to alert OCC 
staff. After being accepted, the trade would be referred by OCC to the 
reporting Exchange for evaluation under the obvious error or other 
applicable rules of the Exchange. OCC estimates the trade 
identification and referral process should take less than an hour from 
initiation by OCC to full resolution by a reporting Exchange. While a 
trade is involved in the post-trade reasonableness check process, OCC 
would not report the position to clearing members or further process 
the trade. In the event the Exchange determines that the trade is good, 
it would notify OCC and the trade would continue through OCC's clearing 
and reporting processes using the originally reported price. If the 
Exchange determines that the trade was in error or erroneously priced 
such that, as provided in Article VI, Section 7(c), new or revised 
trade information is required to properly clear the transaction, OCC 
expects the Exchange would instruct OCC to disregard or ``bust'' the 
trade. However, in the event the Exchange does not exercise its 
authority under its

[[Page 45528]]

own rules to instruct OCC to disregard the trade pursuant to Article 
VI, Section 7(c), the trade would continue through OCC's clearing and 
reporting process using the originally reported price.
    OCC will provide notice to market participants of the post-trade 
price reasonableness check process, and the process would be 
implemented upon regulatory approval. OCC believes this implementation 
timing is appropriate because OCC's Board instructed OCC to implement 
the post-trade risk control as quickly as practicable. OCC's decision 
to implement the process for price reasonableness checks and to set the 
premium price limit at the $2,000 level also necessitates related 
systems changes and conforming changes to certain policies and 
procedures. Conforming changes to affected policies and procedures 
would include amendment of OCC's trade and position processing policy. 
Certain policies and procedures would also be updated to reflect 
aspects of the process for price reasonableness checks related to 
governance processes at OCC that are described in more detail below.
Ongoing Oversight of the Proposed Post-Trade Price Validation Process
    The premium level at which the price reasonableness review process 
is triggered would be subject to adjustment or suspension under certain 
conditions. OCC would review the level on a quarterly basis for 
continued adequacy. In the event the maximum premium price traded over 
the prior quarter declines by a predetermined dollar amount or the 
average number of valid trades referred to reporting Exchanges exceeds 
a predetermined number of occurrences per quarter, OCC would be 
authorized to adjust the applicable premium level.\5\ Establishment of 
such level and any modification thereof that may be made from time to 
time would be required to be reported to the Risk Committee. In 
addition, the Executive Chairman, President or Chief Operating Officer 
would be authorized to temporarily summarily suspend the then-
applicable premium limit in the event that in excess of a predetermined 
number of valid trades are being referred to the reporting Exchanges 
for review; provided, however, that when the causes responsible for the 
temporary suspension are resolved the approved premium threshold would 
be reinstated. The Risk Committee, along with the Chief Risk and 
Compliance Officers, would be advised of any such suspension. OCC 
believes these processes help ensure an appropriate level of management 
and Risk Committee oversight for the continued effectiveness of the 
proposed price reasonableness review process.
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    \5\ Any such action by OCC regarding the premium level would 
also be subject to the regulatory process of filing a proposed rule 
change with the Commission.
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2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended (the 
``Exchange Act''),\6\ and the rules and regulations thereunder, 
including Rule 17Ad-22(d)(4),\7\ because, by helping OCC protect itself 
and clearing members from confirmed trades in standardized options and 
futures options for which new or revised trade information may be 
required to properly clear the transaction, the proposed modifications 
would promote the prompt and accurate clearance and settlement of 
securities transactions, protect investors and the public interest and 
ensure that OCC has policies and procedures designed to ``identify 
sources of operational risk and minimize those risks through the 
development of appropriate systems, controls, and procedures.'' The 
proposed rule change is not inconsistent with the existing rules of 
OCC, including any other rules proposed to be amended. OCC is notifying 
clearing members of the proposed rule change via an Information Memo.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 17 CFR 240.17Ad-22(d)(4).
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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.\8\ The proposed post-trade price reasonableness 
review process that OCC would administer pursuant to Article VI, 
Section 7(c) would help identify erroneous trades reported to OCC by an 
Exchange for which clearing members would otherwise be responsible. OCC 
believes the proposed rule change would not unfairly inhibit access to 
OCC's services or disadvantage or favor any particular user in 
relationship to another user because the proposed premium price limit 
per contract and process for identifying standardized option and 
futures option transactions for review by reporting Exchanges would be 
applied uniformly to such transactions, regardless of the identity of 
the submitting Exchange or the clearing member for whose account the 
trade was reported.
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    \8\ 15 U.S.C. 78q-1(b)(3)(I).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Exchange Act applicable to clearing agencies, and 
would not impose a burden on competition.

(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

    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 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 email to [email protected]. Please include 
File Number SR-OCC-2014-16 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-2014-16. 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

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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 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 at 
http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_16.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-
2014-16 and should be submitted on or before August 26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18432 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P