[Federal Register Volume 79, Number 185 (Wednesday, September 24, 2014)]
[Notices]
[Pages 57158-57160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22673]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73143; File No. SR-OCC-2014-16]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Amendment No. 1, and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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

September 18, 2014.
    On July 21, 2014, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2014-16 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on August 5, 2014.\3\ The Commission received one 
comment on the proposal.\4\ On August 20, 2014, OCC filed Amendment No. 
1 to the proposal.\5\ The Commission is publishing this notice to 
solicit comments on Amendment No. 1 and is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 32718 (July 30, 2014), 
79 FR 45527 (August 5, 2014) (SR-OCC-2014-16) (``Notice'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Ellen Greene, Vice President, Securities Industry and Financial 
Markets Association, dated August 21, 2014. The commenter strongly 
agreed with OCC's proposal and believed that it is appropriate that 
the Commission approve the proposal. OCC did not respond to the 
comment.
    \5\ In Amendment No. 1, OCC amended the proposal to further 
clarify the criteria OCC will use to identify trades for referral to 
exchanges for evaluation under the obvious error or other applicable 
exchange rules. Specifically, OCC clarified that it would include a 
``5% intrinsic value threshold,'' as described more fully below, to 
identify trades for referral to exchanges. OCC stated that it would 
review this threshold on a quarterly basis for continued adequacy 
and any adjustments to the threshold will be the subject of rule 
filing with the Commission.
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I. Description of the Proposal

    OCC proposed 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.\6\ 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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    \6\ 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

    According to OCC, 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.\7\ OCC stated that it 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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    \7\ 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 stated that it intends that these principles 
will be the subject of additional proposed rule changes.
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Post-Trade Price Validation Process

    According to OCC, 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

[[Page 57159]]

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. Based on its internal analysis, 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.
    Under the proposed process, receipt of a trade that exceeds the 
premium price limit of $2,000 per contract will generate an automatic 
notice to alert OCC staff.\8\ After being accepted into OCC's systems 
for clearing, certain trades will be referred by OCC to the reporting 
exchange for evaluation under the obvious error or other applicable 
rules of the exchange. To identify trades for referral, OCC staff will 
compare the trade price to the approximate intrinsic value of the 
option. (Intrinsic value reflects the amount, if any, by which the 
option is in the money.) If the difference between such values exceeds 
five percent (5%), the trade will be referred. OCC believes that 
applying this preliminary reasonableness check will enhance the 
effectiveness of its proposed review process by reducing the likelihood 
that valid trades are referred to the reporting 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 will not report the position to clearing members or 
further process the trade. In the event the exchange determines that 
the trade is valid, the exchange will notify OCC and the trade will 
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 will instruct 
OCC to disregard or ``bust'' the trade. However, in the event the 
exchange does not exercise its authority under its own rules to 
instruct OCC to disregard the trade pursuant to Article VI, Section 
7(c), the trade will continue through OCC's clearing and reporting 
process using the originally reported price.
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    \8\ OCC also intends to retain its current system parameter of 
$9,999.99 per contract as well.
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    OCC will provide notice to market participants of the post-trade 
price reasonableness check process, and the process will 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 
include amending OCC's trade and position processing policy. Certain 
policies and procedures will 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 will be subject to adjustment or suspension under certain 
conditions. OCC states that it will review the level on a quarterly 
basis for continued adequacy.\9\ 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 will be 
authorized to adjust the applicable premium level.\10\ Establishment of 
such level and any modification thereof that may be made from time to 
time must be reported to the Risk Committee. In addition, the Executive 
Chairman, President or Chief Operating Officer will 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 will be reinstated. The Risk 
Committee, along with the Chief Risk and Compliance Officers, will 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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    \9\ OCC states that it will also review the 5% intrinsic value 
threshold on a quarterly basis for continued adequacy. Any changes 
to this threshold will be the subject of a subsequent rule filing 
with the Commission.
    \10\ 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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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) of the Act,\12\ and Rule 17Ad-22(d)(4) of the 
Act.\13\ Section 17A(b)(3)(F) of the Act \14\ requires, in part, that 
the rules of a registered clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency for which it responsible, to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions, and to protect 
investors and the public interest. OCC's proposed rule is consistent 
with these requirements because it is designed to increase the 
likelihood that erroneous trades in standardized options and futures 
options will be identified and voided by reporting options exchanges by 
OCC identifying and referring to the exchanges certain confirmed trades 
in standardized options and futures options for which new or revised 
trade information may be required to properly clear the transaction.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(4).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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    In so doing, OCC's proposal is designed to protect investors from 
the costs of erroneous trades that have the potential to cause 
significant settlement obligations while, at the same time, balancing 
the need to protect investors from the likelihood that valid trades 
will be referred back to the exchanges.
    Rule 17Ad-22(d)(4) of the Act \15\ requires, in part, for 
registered clearing agencies to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to identify 
sources of operational risk and

[[Page 57160]]

minimize them through the development of appropriate systems, controls, 
and procedures. OCC's proposed rule is consistent with Rule 17Ad-
22(d)(4) of the Act \16\ because OCC's proposal establishes policies 
and procedures designed to identify potential erroneous trades in 
standardized options and futures options as a source of operational 
risk and minimize those risks by implementing a process by which 
potentially erroneous trades may be voided by an options exchange. For 
the reasons set forth above, the Commission finds that OCC's proposal 
is consistent with Section 17A(b)(3)(F) of the Act,\17\ and Rule 17Ad-
22(d)(4) of the Act.\18\
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    \15\ 17 CFR 240.17Ad-22(d)(4).
    \16\ Id.
    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(d)(4).
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III. Accelerated Approval of the Proposed Rule Change as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act,\19\ for approving the proposed rule 
change, as modified by Amendment No. 1, earlier than 30 days after the 
date of publication of notice in the Federal Register.
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    \19\ 15 U.S.C. 78s(b)(2)(C)(iii).
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    As discussed above, OCC filed Amendment No. 1 to clarify that OCC 
staff would include the 5% intrinsic value threshold in its review to 
identify which trades should be referred to exchanges for review. OCC 
also stated that it would review this threshold on a quarterly basis 
for continued adequacy and any adjustments to the threshold will be the 
subject of rule filing with the Commission. The 5% intrinsic value 
threshold should enhance the effectiveness of OCC's review process by 
reducing the likelihood that valid trades will be referred to the 
exchanges. Accordingly, given that OCC's proposal should decrease the 
likelihood that erroneous trades will be submitted to OCC by the 
exchanges, thereby reducing the risk presented to OCC and further 
facilitating the accurate clearance and settlement of securities 
transactions, the Commission finds good cause to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.

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 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 October 15, 2014.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \20\ and the 
rules and regulations thereunder.
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    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's 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 
Act,\21\ that the proposed rule change (SR-OCC-2014-16), as modified by 
Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22673 Filed 9-23-14; 8:45 am]
BILLING CODE 8011-01-P