[Federal Register Volume 83, Number 157 (Tuesday, August 14, 2018)]
[Notices]
[Pages 40379-40381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17395]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83799; File No. SR-OCC-2018-011]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Make Clarifying and Conforming Changes to The Options Clearing 
Corporation's Margins Methodology and Margin Policy

August 8, 2018.
    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 24, 2018, 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 proposed rule change pursuant 
to

[[Page 40380]]

Section 19(b)(3)(A) \3\ of the Act and Rule 19b-4(f)(1) \4\ thereunder 
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.
---------------------------------------------------------------------------

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

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to make clarifying and conforming changes to its 
Margin Policy and Margins Methodology related to enhancements to OCC's 
margin methodology that were recently approved by the Commission. The 
proposed changes to the Margin Policy and Margins Methodology are 
included as confidential Exhibits 5A and 5B, respectively. Material 
proposed to be added to the Margin Policy and Margins Methodology as 
currently in effect is underlined and material proposed to be deleted 
is marked in strikethrough text. All capitalized terms not defined 
herein have the same meaning as set forth in the OCC By-Laws and 
Rules.\5\
---------------------------------------------------------------------------

    \5\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

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

Background

    OCC's margin methodology, the System for Theoretical Analysis and 
Numerical Simulations (``STANS''), is OCC's proprietary risk management 
system that calculates Clearing Member margin requirements.\6\ STANS 
utilizes large-scale Monte Carlo simulations to forecast price and 
volatility movements in determining a Clearing Member's margin 
requirement.\7\ The STANS margin requirement is calculated at the 
portfolio level of Clearing Member accounts with positions in 
marginable securities and consists of an estimate of a 99% expected 
shortfall \8\ over a two-day time horizon and an add-on margin charge 
for model risk (the concentration/dependence stress test charge).\9\ 
The STANS methodology is used to measure the exposure of portfolios of 
options and futures cleared by OCC and cash instruments in margin 
collateral.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 53322 (February 15, 
2006), 71 FR 9403 (February 23, 2006) (SR-OCC-2004-20).
    \7\ See OCC Rule 601.
    \8\ The expected shortfall component is established as the 
estimated average of potential losses higher than the 99% value at 
risk threshold. The term ``value at risk'' or ``VaR'' refers to a 
statistical technique that, generally speaking, is used in risk 
management to measure the potential risk of loss for a given set of 
assets over a particular time horizon.
    \9\ A detailed description of the STANS methodology is available 
at http://optionsclearing.com/risk-management/margins/.
---------------------------------------------------------------------------

    On May 23, 2018, the Commission issued a Notice of No Objection to 
OCC's advance notice filing concerning a number of enhancements to 
OCC's margin methodology.\10\ The proposed changes were designed to 
enable OCC to: (1) Obtain daily price data for equity products for use 
in the daily estimation of econometric model parameters; (2) enhance 
OCC's econometric model for updating statistical parameters for all 
risk factors that reflect the most recent data obtained; (3) improve 
the sensitivity and stability of correlation estimates across risk 
factors by using de-volatized returns; and (4) improve OCC's 
methodology related to the treatment of defaulting securities. On May 
24, 2018, the Commission approved a proposed rule changed by OCC 
concerning these same enhancements (collectively with the advance 
notice filing, the ``Initial Filings'').\11\ The purpose of this 
proposed rule change is to make clarifying and conforming changes to 
OCC's Margin Policy and Margins Methodology related to the 
implementation of the methodology enhancements in the Initial Filings. 
The proposed changes are described in detail below.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 83305 (May 23, 
2018), 83 FR 24536 (May 29, 2018) (SR-OCC-2017-811).
    \11\ See Securities Exchange Act Release No. 83326 (May 24, 
2018), 83 FR 25081 (May 31, 2018) (SR-OCC-2017-022).
---------------------------------------------------------------------------

Proposed Changes

    OCC proposes to revise its Margin Policy to reflect the use of 
daily price data in its margin models. Under the Initial Filings, the 
statistical parameters for OCC's econometric model would be updated on 
a daily basis using the new daily price data obtained by OCC.\12\ As a 
result, OCC would no longer need to rely on scale factors to 
approximate day-to-day market volatility for equity-based products.\13\ 
Instead, statistical parameters would be calibrated on a daily basis, 
allowing OCC to calculate more accurate margin requirements that are 
representative of the most recent market data. OCC therefore proposes 
to make conforming changes to its Margin Policy to remove references to 
scale factors and to provide that market data would be recalibrated on 
an at least weekly-basis with a daily recalibration performed where 
possible (as opposed to recalibrating on a monthly-basis).
---------------------------------------------------------------------------

    \12\ See supra notes 10 and 11.
    \13\ Prior to the implementation of daily updates, OCC would 
continue to employ an approach where one or many identified market 
proxies (or ``scale-factors'') are used to incorporate day-to-day 
market volatility across all associated asset classes throughout. In 
2017, the Commission approved a proposed rule change and issued a 
Notice of No Objection to an advance notice filing by OCC which, 
among other things: (1) Expanded the number of scale factors used 
for equity-based products to more accurately measure the 
relationship between current and long-run market volatility with 
proxies that correlate more closely to certain products carried 
within the equity asset class, and (2) applied relevant scale 
factors to the greater of (i) the estimated variance of 1-day return 
scenarios or (ii) the historical variance of the daily return 
scenarios of a particular instrument, as a floor to mitigate 
procyclicality. See Securities Exchange Act Release No. 80147 (March 
3, 2017), 82 FR 13163 (March 9, 2017) (SR-OCC-2017-001) and 
Securities Exchange Act Release No. 80143 (March 2, 2017), 82 FR 
13036 (March 8, 2017) (SR-OCC-2017-801).
---------------------------------------------------------------------------

    OCC also proposes to revise its Margins Methodology to clarify 
certain constraints on first and second day conditional variance 
estimates that would be imposed as part of the implementation of the 
methodology enhancements in the Initial Filings. As part of the Initial 
Filings, OCC introduced a second-day forecast for volatility into the 
model to estimate the two-day scenario distributions for risk 
factors.\14\ OCC proposes to clarify in its Margins Methodology that 
OCC would impose an upper-bound limitation on the second-day 
conditional variance estimate in order to ensure that the expected 
shortfall is finite. Specifically, in the implementation of the new 
methodology, OCC would floor the day ahead and second day conditional 
variance for STANS at 100% every day.
---------------------------------------------------------------------------

    \14\ See supra notes 10 and 11.
---------------------------------------------------------------------------

    Finally, OCC proposes to revise its Margins Methodology to clarify 
that the proposed changes from the Initial Filings and the proposed 
changes described herein would not be implemented until October 1, 
2018.
(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act, requires, among other things, that 
the rules of a clearing agency be designed,

[[Page 40381]]

in general, to protect investors and the public interest.\15\ The 
proposed rule change would make a number of clarifying and conforming 
changes to OCC's Margin Policy and Margins Methodology related to 
enhancements to OCC's margin methodology that were recently approved by 
the Commission.\16\ Specifically, the proposed rule change is designed 
to improve OCC's policy and methodology documentation by clarifying 
certain implementation details of the methodology changes in the 
Initial Filings, ensuring that OCC's Margin Policy is properly aligned 
with the methodology enhancements upon their implementation, and 
clarifying the implementation date for these changes. OCC believes that 
the proposed rule change is therefore designed, in general, to protect 
investors and the public interest in accordance with Section 
17A(b)(3)(F) of the Act.\17\
---------------------------------------------------------------------------

    \15\ 17 U.S.C. 78q-1(b)(3)(F).
    \16\ See supra notes 10 and 11 and associated text.
    \17\ 17 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \18\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would have any impact or impose a 
burden on competition. The proposed rule change is intended to make 
clarifying and conforming changes to OCC's Margin Policy and Margins 
Methodology in connection with the implementation of a proposed rule 
change that was previously approved by the Commission. Accordingly, OCC 
does not believe that the proposed rule change would have any impact or 
impose a burden on competition.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(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 \19\ and Rule 19b-4(f)(1) \20\ thereunder 
because it constitutes a stated policy, practice, or interpretation 
with respect to the meaning, administration, or enforcement of an 
existing rule.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

    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.\21\
---------------------------------------------------------------------------

    \21\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until (1) this change is deemed 
certified under CFTC Regulation 40.6 and (2) the implementation of 
the related methodology enhancements on October 1, 2018.
---------------------------------------------------------------------------

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-2018-011 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2018-011. 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 website (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 website 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 such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_18_011.pdf.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2018-011 and 
should be submitted on or before September 4, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17395 Filed 8-13-18; 8:45 am]
 BILLING CODE 8011-01-P