[Federal Register Volume 83, Number 31 (Wednesday, February 14, 2018)]
[Notices]
[Pages 6646-6650]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02973]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82658; File No. SR-OCC-2017-007]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Approving Proposed Rule Change Related to the Options Clearing 
Corporation's Margin Policy

February 7, 2018.

I. Introduction

    On December 11, 2017, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
OCC-2017-007. On December 18, 2017, OCC filed Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
December 26, 2017.\4\ The Commission did not receive any comments on 
the proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, OCC modified a portion of its Margin 
Policy to: (i) State that OCC's Board of Directors (``Board'') is 
ultimately responsible for annual review and approval of the Policy, 
and (ii) correctly cite provisions in OCC's Rules governing its 
stock loan program. OCC did not propose any other changes in 
Amendment No. 1.
    \4\ Securities Exchange Act Release No. 82355 (Dec. 19, 2017), 
82 FR 61060 (Dec. 26, 2017) (SR-OCC-2017-007) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Background

    As stated in the Notice, OCC filed the proposed rule change to 
formalize and update its Margin Policy, which describes OCC's approach 
for collecting margin and managing the credit exposure presented by its 
Clearing Members to ensure that the manner in which its margin 
methodologies are governed and implemented complies with Section 17A of 
the Act \5\ and Rule 17Ad-22(e)(6) thereunder.\6\ OCC stated that the 
Margin Policy is part of a broader framework used by OCC to promote 
compliance with Rule 17Ad-22(e)(6), including OCC's By-Laws, Rules, and 
other policies that are designed to support the resiliency of

[[Page 6647]]

OCC by ensuring that it appropriately sizes margin to market risks.\7\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1.
    \6\ See Notice at 61061 (citing 17 CFR 240.17Ad-22(e)(6)).
    \7\ See id. at 61061 (citing CCA Adopting Release, 81 FR 70786, 
70812 (Oct. 13, 2016)), (explaining that the requirements of Rule 
17Ad-22(e)(6) ``further support the resiliency of a covered clearing 
agency by requiring the covered clearing agency to have policies and 
procedures that are designed to appropriately size . . . margin to 
market risks'').
---------------------------------------------------------------------------

    The Margin Policy describes: (1) The treatment of the various types 
of positions held by Clearing Members in connection with margin 
calculations, (2) OCC's cross-margin programs with other clearing 
agencies, (3) the treatment of collateral included in margin 
calculations, (4) the model assumptions and market data OCC uses as 
inputs for its margin calculation methodologies, (5) OCC's margin 
calculation methodologies, (6) protocols surrounding OCC's exercise of 
margin calls and adjustments, and (7) daily backtesting and model 
validation that OCC conducts to measure performance of its margin 
methodologies. Each aspect of the Margin Policy is summarized below.

B. The Proposed Change to OCC's Margin Policy

1. Treatment of Various Types of Positions
    The Margin Policy describes how OCC treats the various types of 
positions it accepts from different types of market participants. OCC 
utilizes multiple types of Clearing Member accounts in order to comply 
with the relevant customer protection and segregation requirements of 
the Commission and the Commodity Futures Trading Commission. For 
example, OCC segregates and excludes long securities options positions 
from its margin requirement calculation under the assumption that such 
positions are fully paid and pose no additional risk to OCC. According 
to OCC, accounting for different types of products in different types 
of accounts allows OCC to set margin requirements commensurate with the 
actual risks presented by these positions.
2. Cross-Margining
    OCC maintains cross-margin programs with other clearinghouses and 
treats positions in index options, options on centrally cleared fund 
shares, and futures and options on futures held as part of one of the 
programs as if they were held within a single account at OCC.\8\ 
According to OCC, its Margin Policy allows OCC to take these cross-
margining agreements into consideration to establish a risk-based 
margin system that appropriately measures its credit exposure and 
portfolio effects across products.
---------------------------------------------------------------------------

    \8\ See id.
---------------------------------------------------------------------------

3. Collateral
    To mitigate its credit risk exposure, OCC generally requires 
Clearing Members to deposit collateral as margin with respect to each 
account type on the morning following the trade date. The Margin Policy 
provides a general description of how the use of deposits in lieu of 
margin and collateral in margins may affect margin calculations.\9\ For 
example, the Margin Policy states that OCC permits Clearing Members to 
make deposits in lieu of margin, which enables them to meet their 
margin requirements for securities options by posting escrow deposits 
of acceptable collateral or specific deposits of the underlying 
security.\10\
---------------------------------------------------------------------------

    \9\ See id. at 61061-62.
    \10\ See Notice at 61061-62.
---------------------------------------------------------------------------

    OCC's Margin Policy also describes OCC's ``collateral in margins'' 
program.\11\ Under this program, OCC computes margin requirements based 
on a combination of a Clearing Member's open positions in cleared 
contracts and any deposits of eligible collateral, while also 
incorporating scenarios that could exacerbate or mitigate risk exposure 
based upon the collateral type deposited. OCC states that the Margin 
Policy's recognition of risk interactions between open positions and 
clearing member collateral takes into account portfolio effects across 
products for the measurement of credit risk.\12\
---------------------------------------------------------------------------

    \11\ See id. at 61062.
    \12\ See id.
---------------------------------------------------------------------------

4. Model Assumptions, Sensitivity Analyses and Market Data
    The Margin Policy states that all of OCC's critical margin model 
assumptions should be consistent with OCC's default management 
assumptions. To ensure that OCC complies with this requirement, the 
Margin Policy provides for a monthly sensitivity analysis and review of 
its parameters and assumptions for business backtesting, the results of 
which are reported to OCC's Model Risk Working Group, and may be 
escalated to OCC's Management Committee.
    The Margin Policy also requires OCC to take measures to ensure the 
quality and completeness of its market data, including the use of 
redundant sources for market data and pricing system infrastructure. 
The Margin Policy requires OCC to prioritize the quality and 
reliability of data when selecting vendors, and to protect its ability 
to obtain data in a variety of market conditions. OCC states that it 
protects the integrity of the data it receives by monitoring for 
delays, errors, or interruptions in the receipt or availability of 
price data. Further, the Margin Policy prescribes procedures for using 
alternative data, including settlement prices provided by a primary 
exchange or other data sources where final settlement values are not 
available from the listing exchange. The Margin Policy also states that 
OCC utilizes sound valuation models, system edit checks, and automated 
and manual controls with any price data it obtains.\13\ Where OCC does 
not receive pricing information on a daily basis for a product, the 
Margin Policy states that OCC relies on modeled prices as a substitute 
for the daily price.\14\
---------------------------------------------------------------------------

    \13\ See Notice at 61062.
    \14\ See id. at 61062-63.
---------------------------------------------------------------------------

5. Margin Methodology
    OCC's Margin Policy includes a description of OCC's System for 
Theoretical Analysis and Numerical Simulations (``STANS''), which is 
its margin methodology for all positions it margins on a net basis.\15\ 
STANS is a risk-based methodology that is designed to produce a margin 
requirement that exceeds OCC's minimum regulatory obligations through 
the use of an Expected Shortfall methodology (``ES''), which is 
effectively a weighted average of tail losses beyond the 99% Value-at-
Risk (``VaR'') level. OCC states that STANS may produce significant 
variations in the ES in Clearing Member Accounts. Under its current 
approach, OCC relies upon the expert judgment of its staff to identify 
whether the variation demonstrates that STANS is not functioning as 
expected, but has no set variance level which would trigger further 
review. Under the proposed change, OCC would implement a new 5% 
tolerance for standard error in STANS, such that if the five percent 
threshold is reached, OCC must investigate further whether STANS is 
appropriately measuring the risk presented by a Clearing Member's 
account.
---------------------------------------------------------------------------

    \15\ See id. at 61063.
---------------------------------------------------------------------------

    The Margin Policy also explains how STANS calculates margin by 
utilizing Monte Carlo simulations of portfolio values at a two-day risk 
horizon based on the behavior of various risk factors affecting: (i) 
Values at a two-day risk horizon, and (ii) values of Clearing Member 
accounts, including implied volatility surfaces of options for all 
equity and index risk factors.\16\ OCC states that this two-day risk 
horizon is consistent with the STANS assumption

[[Page 6648]]

of a two-day liquidation period for all positions margined on a net 
basis and is based on a thorough analysis of market conditions and the 
risks associated with the products OCC clears.\17\
---------------------------------------------------------------------------

    \16\ See Notice at 61063.
    \17\ See id.
---------------------------------------------------------------------------

    The Margin Policy also provides for the daily evaluation of the 
market data that supports STANS and a monthly recalibration to ensure 
that it accounts for market conditions over the past month. This 
includes the use of ``scale factors'' to account for daily changes in 
market volatility between monthly recalibrations. Further, the Margin 
Policy has the ability to use alternatives to STANS for certain product 
accounts, including the ability to apply add-on charges and surcharges 
for certain Clearing Members who present higher risk levels, as well as 
the use of Standard Portfolio Analysis of Risk margin methodology 
(``SPAN'') for certain segregated futures accounts. According to OCC, 
these procedures are designed to ensure that OCC complies with the 
requirement that its risk based margin system calculates margin on a 
portfolio level and sets initial margin requirements that meet ``an 
established single-tail confidence level of at least 99 percent'' with 
respect to each portfolio's distribution of future exposure.
6. Margin Calls and Adjustments
    The Margin Policy describes OCC's process for daily calculation and 
collection of margin requirements, as well as making intraday margin 
calls and adjustments. Pursuant to the Margin Policy, OCC issues margin 
calls during standard trading hours when unrealized losses exceeding 
50% of an account's total risk charges are observed for that account 
based on start-of-day positions. The Margin Policy specifies the timing 
of such calls, price minimums, exceptions, and the necessary approvals 
that must be obtained. The Margin Policy also states that additional 
margin adjustments may be performed as the need arises following 
approval by an officer of OCC.\18\
---------------------------------------------------------------------------

    \18\ See Notice at 61064.
---------------------------------------------------------------------------

7. Backtesting and Model Validation
    The Margin Policy requires OCC to conduct daily backtesting for 
each margin account and to analyze in detail all accounts exhibiting 
losses in excess of calculated margin requirements. OCC states that any 
exceedances under the Margin Policy are required to be reported at 
least monthly and evaluated through OCC's governance process for model 
risk management, as well as an annual evaluation by OCC's independent 
Model Validation Group (``MVG'') of the overall performance of STANS 
and its associated models. The results of this annual MVG evaluation 
and any recommendations would then be presented to the OCC Board's Risk 
Committee.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \19\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. The Commission finds that the proposal is 
consistent with Section 17A(b)(3)(F) of the Act \20\ and Rule 17Ad-
22(e)(6) \21\ thereunder, as described in detail below.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \22\ requires, among other things, 
that the rules of a clearing agency be designed to assure the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible, and, in general, to protect 
investors and the public interest. As described above, the Margin 
Policy provides a framework for managing the credit exposure presented 
to OCC by its Clearing Members through the calculation and collection 
of margin. That framework includes: (1) The treatment of the various 
types of positions held by Clearing Members in connection with margin 
calculations, (2) OCC's cross-margin programs with other clearing 
agencies, (3) the treatment of collateral included in margin 
calculations, (4) the model assumptions and market data OCC uses as 
inputs for its margin calculation methodologies, (5) OCC's margin 
calculation methodologies, (6) protocols surrounding OCC's exercise of 
margin calls and adjustments, and (7) daily backtesting and model 
validation that OCC conducts to measure performance of its margin 
methodologies. These matters, in turn, directly relate to OCC's ability 
to accurately risk manage Clearing Member portfolios by calculating and 
collecting an appropriate amount of collateral. The Commission believes 
that the proposed Margin Policy is designed to help ensure that OCC's 
margin methodology calculates and collects margin sufficient to 
mitigate OCC's credit exposure to a Clearing Member default. The 
Commission also believes that accurate calculation of margin is 
necessary to help ensure that OCC is able to risk manage the default of 
a Clearing Member without recourse to the assets of non-defaulting 
Clearing Members, which supports the safeguarding of securities and 
funds in OCC's custody or control. The Commission further believes that 
calculating and collecting sufficient margin would permit OCC to 
continue to perform its duties as a clearing agency after a default 
without disruption to non-defaulting market participants, thereby 
protecting investors and the public interest. Accordingly, the 
Commission finds that the proposed Margin Policy is designed to promote 
the accurate clearance and settlement of securities transactions, and 
is therefore consistent with Section 17A(b)(3)(F) of the Act.\23\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(6)

    Rule 17Ad-22(e)(6) generally requires each covered clearing agency 
that provides central counterparty services to establish, implement, 
maintain, and enforce policies and procedures reasonably designed to, 
among other things, cover its credit exposures to its participants 
through the establishment of a risk-based margin system that meets 
certain standards.\24\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

1. Rule 17Ad-22(e)(6)(i)
    Rule 17Ad-22(e)(6)(i) generally requires a covered clearing agency 
to establish a risk-based margin system that considers and produces 
margin levels commensurate with the risks and particular attributes of 
each relevant product, portfolio, and market.\25\ The Commission 
believes that the Margin Policy describes and formalizes OCC's approach 
for collecting margin and managing the credit exposures of each of its 
Clearing Members to set margin requirements commensurate with the 
actual risks presented. The Margin Policy allows OCC to take into 
account the different types of products across different types of 
accounts, including the use of its existing STANS methodology to 
address the particular attributes and risk factors of the products 
being margined, using cross-margining agreements with other 
clearinghouses, excluding fully collateralized positions from its 
margin requirement, and permitting the use of deposits in lieu of 
margin and collateral in margins to incentivize Clearing Members to 
post collateral that reduces

[[Page 6649]]

OCC's exposures in cleared contracts. Therefore, the Commission 
believes that the Margin Policy is consistent with Rule 17Ad-
22(e)(6)(i).
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

2. Rule 17Ad-22(e)(6)(ii)
    Rule 17Ad-22(e)(6)(ii) generally requires a covered clearing agency 
to establish a risk-based margin system that collects margin at least 
daily and have the operational capacity to make intraday margin 
calls.\26\ The Margin Policy describes the process for calculating and 
collecting margin on a daily basis, and for making intraday margin 
calls and adjustments, as needed. The Margin Policy further specifies 
the timing of such calls, price minimums that must be collected, the 
process for allowing exceptions, and the necessary approvals that must 
be obtained. Therefore, the Commission believes that the Margin Policy 
establishes a process to collect margin daily and make intraday margin 
calls, and finds, therefore, that it is consistent with Rule 17Ad-
22(e)(6)(ii).
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(6)(ii).
---------------------------------------------------------------------------

3. Rule 17Ad-22(e)(6)(iii)
    Rule 17Ad-22(e)(6)(iii) generally requires a covered clearing 
agency to establish a risk-based margin system that calculates margin 
sufficient to cover its potential future exposure to participants,\27\ 
which the Commission defines as the maximum exposure estimated to occur 
at a future point in time with an established single-tailed confidence 
level of at least 99%.\28\ The Margin Policy states that OCC uses STANS 
to estimate ES, the weighted average of tail losses beyond the 99% VaR 
level, with a 5% tolerance to calculate margin with respect to each 
portfolio's distribution of future exposure. The Margin Policy further 
describes OCC's assumptions with respect to a two-day liquidation 
period that covers potential future exposure between the last margin 
collection and close-out of a position should there be Clearing Member 
default. Therefore, the Commission believes that the Margin Policy is 
intended to facilitate OCC's calculation of margin amounts sufficient 
to cover potential future exposure to participants, and, therefore, 
that the Margin Policy is consistent with Rule 17Ad-22(e)(6)(iii).
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22(e)(6)(iii).
    \28\ See Standards for Covered Clearing Agencies, 81 FR 70786, 
70817 (Oct. 13, 2016) (citing 17 CFR 240.17Ad-22(a)(14)).
---------------------------------------------------------------------------

4. Rule 17Ad-22(e)(6)(iv)
    Rule 17Ad-22(e)(6)(iv) generally requires a covered clearing agency 
to establish a risk-based margin system that uses ``reliable sources of 
timely price data'' and use ``procedures and sound valuation models for 
addressing circumstances in which pricing data are not readily 
available or reliable.'' \29\ The Margin Policy describes the measures 
OCC is required to take to ensure the quality and completeness of 
market data it acquires, including the use of redundant sources of 
market data, prioritizing the quality and reliability of data, and to 
prioritize the ability of vendors to provide data during market stress. 
The Margin Policy also requires OCC to use sound valuation models, 
system checks, and automated and manual controls for data it obtains, 
and to use primary exchange prices and alternatives, including 
modeling, in instances when data is not available or reliable. The 
Commission finds that the Margin Policy requires OCC to use reliable 
sources of timely price data, and describes procedures to address 
circumstances where such data is not readily available or reliable. 
Therefore, the Commission finds that the Margin Policy is consistent 
with Rule 17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

5. Rule 17Ad-22(e)(6)(v)
    Rule 17Ad-22(e)(6)(v) generally requires a covered clearing agency 
to establish a risk-based margin system that uses an appropriate method 
for measuring credit exposure that accounts for relevant product risk 
factors and portfolio effects across products.\30\ The Commission 
believes that the Margin Policy takes into account the risks and 
particular attributes of different products in different accounts and 
portfolios to permit OCC to set margin commensurate with the actual 
risks that the product presents to OCC. The Commission also believes 
that the use of cross-margining agreements, as described in the Margin 
Policy, allows OCC to set margins based upon the particular credit 
exposure and portfolio effects across products. The Commission further 
believes that the Margin Policy's allowance for offsets and exclusions 
for deposits in lieu of margin and collateral in margins permits OCC to 
set margin based upon the actual credit exposure to its Clearing 
Members. Accordingly, the Commission finds that the Margin Policy 
allows OCC to measure credit exposure in a manner that accounts for 
product risk factors and portfolio effects across products, and finds, 
therefore, that it is consistent with Rule 17Ad-22(e)(6)(v).
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------

6. Rule 17Ad-22(e)(6)(vi)
    Rule 17Ad-22(e)(6)(vi) generally requires a covered clearing agency 
to establish a risk-based margin system that is monitored by management 
on an ongoing basis and is regularly reviewed, tested, and 
verified.\31\ The Commission finds that the Margin Policy requires the 
MVG to perform an independent evaluation of the overall performance of 
OCC's margin model, and present its findings and recommendations to 
OCC's Board on at least an annual basis. The Margin Policy further 
requires OCC to conduct daily backtesting for each margin account and 
to analyze in detail all accounts that exhibit losses in excess of 
calculated margin. The Margin Policy also requires that any such 
exceedances be reported at least monthly and be evaluated through OCC's 
governance processes. The Commission believes that the Margin Policy 
establishes a process for ongoing monitoring, review, testing, and 
verification, and finds, therefore, that it is consistent with Rule 
17Ad-22(e)(6)(vi).
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17Ad-22(e)(6)(vi).
---------------------------------------------------------------------------

7. Rule 17Ad-22(e)(6)(vii)
    Rule 17Ad-22(e)(6)(vii) generally requires a covered clearing 
agency to establish policies and procedures designed to perform model 
validation for its credit risk models not less than annually or more 
frequently as may be contemplated by the covered clearing agency's risk 
management framework.\32\ The Commission finds that the Margin Policy 
requires an independent review of OCC's risk model be conducted at 
least annually by MVG, who then presents its findings and 
recommendations to the Risk Committee of OCC's Board. The Commission 
believes that the Margin Policy establishes policies and procedures to 
perform model validation not less than annually, and finds, therefore, 
that it is consistent with Rule 17Ad-22(e)(6)(vii).
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(6)(vii).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the Margin 
Policy is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A of the Act \33\ and 
Rule 17Ad-22(e)(6) thereunder.
---------------------------------------------------------------------------

    \33\ 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).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the

[[Page 6650]]

proposed rule change (SR-OCC-2017-007) be, and it hereby is, approved.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated Authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02973 Filed 2-13-18; 8:45 am]
 BILLING CODE 8011-01-P