[Federal Register Volume 84, Number 78 (Tuesday, April 23, 2019)]
[Notices]
[Pages 16915-16920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08083]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85670; File No. SR-OCC-2019-801]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice Related to the Options Clearing
Corporation's Margin Methodology for Volatility Index Futures
April 17, 2019.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'' or ``Act''),\3\ notice is hereby given that on
March 18, 2019, the Options Clearing Corporation (``OCC'') filed with
the Securities and Exchange Commission (``Commission'') an advance
notice (``Advance Notice'') 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 advance notice from interested
persons.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice is in connection with proposed changes to OCC's
margin methodology for futures on indexes designed to measure
volatilities implied by prices of options on a particular underlying
interest (such indexes being ``Volatility Indexes,'' and futures
contracts on such Volatility Indexes being ``Volatility Index
Futures''). The proposed methodology enhancements for Volatility Index
Futures would include: (1) Introducing ``synthetic'' futures (discussed
below) into the daily re-estimation of prices and correlations for
Volatility Index Futures; (2) an enhanced statistical distribution for
modeling price returns of the ``synthetic'' futures; and (3) a new
anti-procyclical floor for variance estimates. The proposed changes are
discussed in detail in Section II below.
The proposed changes to OCC's Margins Methodology document are
contained in confidential Exhibit 5 of the filing. Material proposed to
be added is marked by underlining and material proposed to be deleted
is marked by strikethrough text. OCC also has included backtesting and
impact analysis of the proposed model changes in confidential Exhibit
3.
The advance notice is available on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp. All terms with initial
capitalization that are not otherwise defined herein have the same
meaning as set forth in the OCC By-Laws and Rules.\4\
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\4\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the advance notice and
discussed any comments it received on the advance notice. 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 and B below,
of the most significant aspects of these statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received from Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received. OCC
will notify the Commission of any written comments received by OCC.
(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act
Description of the Proposed Change
The purpose of the proposed changes is to introduce enhancements to
OCC's margin methodology for Volatility Index Futures so that OCC's
margin model reflects more current market information for Volatility
Index Futures and allows for more appropriate modeling of the risk
attributes of such products. Specifically, the proposed methodology
enhancements for Volatility Index Futures would include: (1)
Introducing ``synthetic'' futures into the process for daily re-
estimation of prices and correlations for Volatility Index Futures; (2)
an enhanced statistical distribution for modeling price returns for
``synthetic'' futures; and (3) a new anti-procyclical floor for
variance estimates. OCC's current model for Volatility Index Futures
and the proposed changes thereto are described in further detail below.
Background
OCC's margin methodology, the System for Theoretical Analysis and
Numerical Simulations (``STANS''),\5\ is OCC's proprietary risk
management system that calculates Clearing Member margin requirements.
STANS utilizes large-scale Monte Carlo simulations to forecast price
and volatility movements in determining a Clearing Member's margin
requirement.\6\ The STANS
[[Page 16916]]
margin requirement is calculated at the portfolio level of Clearing
Member accounts with positions in marginable securities. The STANS
margin requirement consists of an estimate of a 99% expected shortfall
\7\ over a two-day time horizon and an add-on margin charge for model
risk (the concentration/dependence stress test charge).\8\ The STANS
methodology is used to measure the exposure of portfolios of options,
futures and cash instruments, including the Volatility Index Futures
cleared by OCC.\9\
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\5\ See Securities Exchange Act Release No. 53322 (February 15,
2006), 71 FR 9403 (February 23, 2006) (SR-OCC-2004-20).
\6\ See OCC Rule 601.
\7\ 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.
\8\ A detailed description of the STANS methodology is available
at http://optionsclearing.com/risk-management/margins/.
\9\ Pursuant to OCC Rule 601(e)(1), OCC also calculates initial
margin requirements for segregated futures accounts on a gross basis
using the Standard Portfolio Analysis of Risk Margin Calculation
System (``SPAN''). Commodity Futures Trading Commission (``CFTC'')
Rule 39.13(g)(8), requires, in relevant part, that derivatives
clearing organizations (``DCOs'') collect initial margin for
customer segregated futures accounts on a gross basis. While OCC
uses SPAN to calculate initial margin requirements for segregated
futures accounts on a gross basis, OCC believes that margin
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. As a
result, OCC calculates margin requirements for segregated futures
accounts using both SPAN on a gross basis and STANS on a net basis,
and 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 collateralizes this risk exposure by applying an
additional margin charge in the amount of such difference to the
account. See Securities Exchange Act Release No. 72331 (June 5,
2014), 79 FR 33607 (June 11, 2014) (SR-OCC-2014-13).
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Volatility Indexes are indexes designed to measure the volatility
that is implied by the prices of options on a particular reference
index or asset. For example, the Cboe Volatility Index (``VIX'') is an
index designed to measure the 30-day expected volatility of the
Standard & Poor's 500 index (``SPX'').\10\ OCC currently clears futures
contracts on such Volatility Indexes. These Volatility Index Futures
contracts can consequently be viewed as an indication of the market's
future expectations of the volatility of a given Volatility Index's
underlying reference index (e.g., in the case of the VIX, providing a
snapshot of the expected market volatility of the underlying over the
term of the options making up the index).
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\10\ Generally speaking, the implied volatility of an option is
a measure of the expected future volatility of the value of the
option's annualized standard deviation of the price of the
underlying security, index, or future at exercise, which is
reflected in the current option premium in the market. Using the
Black-Scholes options pricing model, the implied volatility is the
standard deviation of the underlying asset price necessary to arrive
at the market price of an option of a given strike, time to
maturity, underlying asset price and given the current risk-free
rate. In effect, the implied volatility is responsible for that
portion of the premium that cannot be explained by the then-current
intrinsic value (i.e., the difference between the price of the
underlying and the exercise price of the option) of the option,
discounted to reflect its time value.
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Current Model for Volatility Index Futures
Under OCC's existing margin methodology, OCC models the potential
final settlement prices of Volatility Index Futures using the
underlying index as the risk factor.\11\ Final settlement prices are
simulated under the assumption that the logarithm of the values of the
risk factor (i.e., the underlying spot Volatility Index) follows a
mean-reverting \12\ random walk \13\ with normally-distributed
steps.\14\ The model is designed to calibrate the distribution that
defines this mean-reversion behavior so that the expected final
settlement prices of the futures match their currently-observed market
prices to ensure that margin coverage is sufficient to limit credit
exposures to OCC's participants under normal market conditions. OCC
recalculates the Monte Carlo scenarios of the returns of each futures
series over its remaining life so that the standard deviation of the
scenarios matches two days' worth of the implied volatility of near-
the-money and contemporaneously expiring options on the Volatility
Index, where available, in order to align with OCC's two-day
liquidation period assumption. Currently, the calibration for the
distribution is performed on a daily basis.
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\11\ A ``risk factor'' within OCC's margin system may be defined
as a product or attribute whose historical data is used to estimate
and simulate the risk for an associated product.
\12\ In finance, the term ``mean reversion'' describes a
financial time series in which returns can be very unstable in the
short run but very stable in the long run.
\13\ A random walk is a continuous process with random
increments drawn independently from a particular distribution.
\14\ This is known as a Gaussian Ornstein-Uhlenbeck process. See
Uhlenbeck, G.E. and L.S. Ornstein, ``On the Theory of Brownian
Motion,'' Physical Review, 36, 823-841 (1930) (explaining the
Gaussian Ornstein-Uhlenbeck process).
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OCC's current model for Volatility Index Futures, which utilizes
the underlying Volatility Index as the sole risk factor, is subject to
certain limitations, which would be addressed by the proposed changes
described herein. Volatility Indexes, unlike futures contracts, are not
investible (i.e., they cannot be replicated by static portfolios of
traded contracts). In addition, the futures market has a term structure
that cannot be modeled using just the underlying index. Finally,
futures on a Volatility Index are less volatile and less fat-tailed
\15\ than the index itself, and these features are term-dependent. The
current model was developed before sufficient data on the futures was
available, so a model based on ``synthetic'' futures,\16\ as proposed
herein, was not an option at the time. Also, the current model does not
account for certain strategies Clearing Members might employ involving
spreads between delivery dates, which may result in under-margining of
those positions.
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\15\ A data set with a ``fat tail'' is one in which extreme
price returns have a higher probability of occurrence than would be
the case in a normal distribution.
\16\ As discussed in further detail below, a ``synthetic''
futures time series, for the intended purposes of OCC, relates to a
uniform substitute for a time series of daily settlement prices for
actual futures contracts, which persists over many expiration cycles
and thus can be used as a basis for econometric analysis.
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In recent years, OCC has seen significant growth in trading volume
for Volatility Index Futures. As a result, OCC is proposing a number of
enhancements to its margin methodology designed to provide for more
accurate and responsive margin requirements for Volatility Index
Futures.
Proposed Changes
The purpose of the proposed changes is to introduce enhancements to
OCC's margin methodology so that OCC's margin models reflect more
current market information for Volatility Index Futures, introduce
asymmetry into the statistical distribution used to model price returns
of the ``synthetic'' futures, and reduce procyclicality \17\ in the
model.
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\17\ A quality that is positively correlated with the overall
state of the market is deemed to be ``procyclical.'' For example,
procyclicality may be evidenced by increasing margin or Clearing
Fund requirements in times of stressed market conditions and low
margin or Clearing Fund requirements when markets are calm. Hence,
anti-procyclical features in a model are measures intended to
prevent risk-based models from fluctuating too drastically in
response to changing market conditions.
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The proposed changes would specifically include: (1) The daily re-
estimation of prices and correlations using ``synthetic'' futures; (2)
an enhanced statistical distribution for modeling price returns for
``synthetic'' futures; and (3) a new anti-procyclical
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floor for variance estimates.\18\ The main feature of the proposed
model, relative to the current model, is the replacement of the
underlying Volatility Index itself as a risk factor by risk factors
that are based on observed futures prices (i.e., the ``synthetic''
futures contracts). The proposed change would introduce a new set of
risk factors and method for generating scenarios for those risk
factors, and hence Volatility Index Futures settlement prices, to be
incorporated into the STANS margin calculations. OCC believes its
proposed methodology would provide for more accurate and responsive
margin requirements and that the imposition of a floor for variance
estimates would mitigate procyclicality in OCC's margin methodology for
Volatility Index Futures. The proposed changes are described in further
detail below.
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\18\ OCC would also make a number of conforming changes
throughout it Margins Methodology so that the document arcuately
reflects the adoption of the new model.
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1. Daily Re-Estimations Using Synthetic Futures
As noted above, OCC currently models the potential final settlement
prices of Volatility Index Futures based on the underlying index
itself. OCC proposes to modify its modeling approach for Volatility
Index Futures by modeling the price distributions of ``synthetic''
futures on a daily basis based on the historical returns of futures
contracts with approximately the same tenor (as opposed to OCC's
current approach of calibrating the distribution based on the
Volatility Index itself). A ``synthetic'' futures time series for the
intended purposes of OCC relates to a uniform substitute for a time
series of daily settlement prices for actual futures contracts, which
persists over many expiration cycles and thus can be used as a basis
for econometric analysis. One feature of futures contracts is that each
contract may have a different expiration date, and at any one point in
time there may be a variety of futures contracts on the same underlying
interest, all with varying dates of expiry, so that there is no one
continuous time series for those futures. ``Synthetic'' futures can be
used to generate a continuous time series of futures contract prices
across multiple expirations. These ``synthetic'' futures price return
histories would be inputted into the existing Copula simulation process
in STANS alongside the underlying interests of OCC's other cleared and
cross-margin products and collateral. The purpose of this use of
``synthetic'' futures is to allow the margin system to better
approximate correlations between futures contracts of different tenors
by creating more price data points and their margin offsets.
Under the proposal, the historical ``synthetic'' time series for
these Volatility Indexes would be updated daily and mapped to their
corresponding futures contracts. By construction, the first
``synthetic'' time series would always contain returns of the front
contract (i.e., the contract closest to maturity, on any given day),
the second, which would correspond to the next month out, and the
remaining series would follow the same pattern. Following the
expiration date of the front contract, each contract within a time
series would be replaced with a contract maturing one month later.
While ``synthetic'' time series contain returns from different
contracts, a return on any given date is constructed from prices of the
same contract (e.g., as the front month futures contract ``rolls'' from
the current month to the subsequent month, returns on the roll date
would be constructed by using the same contract and not by calculating
returns across months). The marginal probability distribution
parameters for the ``synthetic'' time series (i.e., marginal
probabilities of various values of the variables in the distribution
without reference to the values of the other variables) would be
estimated daily using recent historical observations.\19\ In cases in
which the GARCH variance \20\ forecast falls below the sample variance,
in addition to being floored by the sample variance, the ``synthetic''
time series would additionally be ``scaled up'' through the
introduction of a new floor on variance estimates based on the
corresponding underlying index in order to reduce procyclicality in the
model (as discussed in further detail below).
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\19\ However, for any tenor extension or new contract that does
not have enough historical data for the associated ``synthetic''
security, the scenarios for the longest tenor ``synthetic'' with
enough history would be used as a proxy for generating futures
theoretical price scenarios. In this case, the long run floor
(discussed below) would be borrowed from the proxy ``synthetic.''
\20\ See generally Tim Bollerslev, ``Generalized Autoregressive
Conditional Heteroskedasticity,'' Journal of Econometrics, 31(3),
307-327 (1986). The acronym ``GARCH'' refers to an econometric model
that can be used to estimate volatility based on historical data.
The general distinction between the ``GARCH variance'' and the
``sample variance'' for a given time series is that the GARCH
variance uses the underlying time series data to forecast
volatility.
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OCC believes that using synthetic futures in its daily re-
estimation process would allow OCC's econometric model for Volatility
Index Futures to reflect more current market information and achieve
better coverage across the term curve.\21\ As a result, OCC believes
the proposed changes would result more accurate margin requirements for
Clearing Members under the current market conditions.
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\21\ In 2018, the Commission approved, and issued a Notice of
No-Objection to, proposed changes to OCC's margin methodology
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. See Securities Exchange Act Release No.
83326 (May 24, 2018), 83 FR 25081 (May 31, 2018) (SR-OCC-2017-022)
and Securities Exchange Act Release No. 83305 (May 23, 2018), 83 FR
24536 (May 29, 2018) (SR-OCC-2017-811). Under the proposal,
correlation updates for ``synthetic'' futures would be done daily
with a one-day lag.
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2. Enhancements to Statistical Distribution for Volatility Index
Futures
In addition to using a ``synthetic'' futures price return history
in the process for daily re-estimation of model parameters, OCC is
proposing additional enhancements to its margin methodology for
Volatility Index Futures to introduce asymmetry into the statistical
distribution used to model price returns of the ``synthetic'' futures.
The econometric model currently used in STANS for all price risk
factors is an asymmetric GARCH(1,1) with symmetric Standardized Normal
Reciprocal Inverse Gaussian (or ``NRIG'')-distributed logarithmic
returns.\22\ OCC proposes to move to an asymmetric NRIG distribution
for purposes of modeling proportionate returns of the ``synthetic''
futures. OCC believes the asymmetric NRIG distribution has a better
``goodness of fit'' \23\ to the historical data and allows for more
appropriate modeling of observed asymmetry of the distribution. As a
result, OCC believes that the proposed change would lead to more
consistent treatment of returns both on the upside as well as downside
of the distribution. Accordingly, OCC believes that the proposed
changes would result in margin requirements for Volatility Index
Futures that respond more appropriately to changes in market volatility
and therefore are more accurate.
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\22\ See id.
\23\ The goodness of fit of a statistical model describes the
extent to which observed data match the values generated by the
model.
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3. Introduction of Anti-Procyclical Floor for Variance Estimates
OCC also proposes to introduce a new floor for variance estimates
of the Volatility Index Futures that would be
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modeled under the newly proposed approach to mitigate procyclicality in
OCC's margin model. In order to incorporate a variance level implied by
a longer time series of data, OCC would calculate a floor for variance
estimates based on the underlying index (e.g., VIX) which is expected
to have a longer history that is more reflective of the long-run
variance level that cannot be otherwise captured using the
``synthetic'' futures data. The floor would therefore reduce the impact
of a sudden increase in margin requirements from a low level and
therefore mitigate procyclicality in the model.
Clearing Member Outreach
In order to inform Clearing Members of the proposed change, OCC has
provided updates to members at OCC Roundtable \24\ and Financial Risk
Advisory Council (or ``FRAC'') \25\ meetings and will provide
additional reminders about the proposed changes at its next FRAC
meeting. In addition, OCC will publish an Information Memo to all
Clearing Members describing the proposed changes and will provide
additional periodic Information Memo updates prior to the
implementation date. Additionally, OCC will perform targeted and direct
outreach with Clearing Members that would be most impacted by the
proposed change, and OCC would work closely with such Clearing Members
to coordinate the implementation and to discuss the impact and timing
of any required collateral deposits that may result from the proposed
change.\26\
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\24\ The OCC Roundtable was established to bring Clearing
Members, exchanges and OCC together to discuss industry and
operational issues. It is comprised of representatives of senior OCC
staff, participant exchanges and Clearing Members, representing the
diversity of OCC's membership in industry segments, OCC-cleared
volume, business type, operational structure and geography.
\25\ The Financial Risk Advisory Council is a working group
comprised of exchanges, Clearing Members and indirect participants
of OCC.
\26\ Specifically, OCC will discuss with those Clearing Members
how they plan to satisfy any increase in their margin requirements
associated with the proposed change.
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Implementation Timeframe
OCC plans to implement the proposed changes on May 20, 2019,
provided that all necessary regulatory approvals are received by that
date. If all regulatory approvals are not received by May 20, 2019, or
if implementation on that date becomes otherwise impractical, OCC will
implement the proposed changes within thirty (30) days after the date
that OCC receives all necessary regulatory approvals for the proposed
changes. OCC will announce any alternative implementation date of the
proposed changes by an Information Memo posted to its public website at
least one week prior to implementation.
Anticipated Effect on and Management of Risk
OCC believes that the proposed changes would reduce the nature and
level of risk presented by OCC because it would introduce enhancements
to OCC's margin methodology so that OCC's margin models reflect more
current market information for Volatility Index Futures; use a
statistical distribution for modeling proportionate returns of the
``synthetic'' futures, which OCC believes has a better ``goodness of
fit'' to the historical data and allows for more appropriate modeling
of observed asymmetry of the distribution; and reduce procyclicality in
the model.
The main feature of the proposed model, relative to the current
model, is the replacement of the underlying Volatility Index itself as
a risk factor by risk factors that are based on observed futures prices
(i.e., the ``synthetic'' futures contracts). OCC believes that using
``synthetic'' futures in its daily re-estimation process would allow
OCC's econometric model for Volatility Index Futures to reflect more
current market information and achieve better coverage across the term
curve. As a result, OCC believes the proposed changes would result more
accurate margin requirements for Clearing Members under the current
market conditions that respond more appropriately to changes in market
volatility. In addition, OCC believes that the proposed change to an
asymmetrical NRIG statistical distribution would lead to more
consistent treatment of returns both on the upside as well as downside
of the distribution and therefore result in margin requirements for
Volatility Index Futures that respond more appropriately to changes in
market volatility and therefore are more accurate. Finally, the
proposed changes would enhance OCC's approach for modeling Volatility
Index Futures by introducing a floor on variance estimates in the model
to mitigate procyclicality.
The proposed model would be used by OCC to calculate margin
requirements designed to limit its credit exposures to participants,
and OCC uses the margin it collects from a defaulting Clearing Member
to protect other Clearing Members from losses as a result of the
default and ensure that OCC is able to continue the prompt and accurate
clearance and settlement of its cleared products. Accordingly, OCC
believes the proposed changes would promote robust risk management for
Volatility Index futures and promote safety and soundness consistent
with the objectives and principles of Section 805(b) of the Clearing
Supervision Act.\27\
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\27\ 12 U.S.C. 5464(b).
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For the foregoing reasons, OCC believes that the proposed change
would enhance OCC's management of risk and reduce the nature or level
of risk presented to OCC.
Consistency With the Payment, Clearing and Settlement Supervision Act
The stated purpose of the Clearing Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other things, promoting uniform risk management standards for
systemically important financial market utilities and strengthening the
liquidity of systemically important financial market utilities.\28\
Section 805(a)(2) of the Clearing Supervision Act \29\ also authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like OCC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \30\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
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\28\ 12 U.S.C. 5461(b).
\29\ 12 U.S.C. 5464(a)(2).
\30\ 12 U.S.C. 5464(b).
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Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and the Act, which include
Commission Rules 17Ad-22(b)(1), (b)(2) and (e)(6).\31\
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\31\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016,
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies''). The Standards for Covered Clearing Agencies
became effective on December 12, 2016. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5) and therefore OCC must
comply with new section (e) of Rule 17Ad-22.
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Rule 17Ad-22(b)(1) \32\ requires that a registered clearing agency
that performs central counterparty services establish, implement,
maintain and enforce written policies and procedures reasonably
designed to measure its credit exposures to its participants at least
once a day and limit its exposures
[[Page 16919]]
to potential losses from defaults by its participants under normal
market conditions so that the operations of the clearing agency would
not be disrupted and non-defaulting participants would not be exposed
to losses that they cannot anticipate or control. As described above,
the proposed changes would introduce new model enhancements for OCC's
cleared Volatility Index Futures. OCC would use the risk-based model
enhancements described herein to measure its credit exposures to its
participants on a daily basis and determine margin requirements based
on such calculations. OCC believes that the proposed enhancements would
result in more accurate and responsive margin requirements by ensuring
that OCC's margin models reflect more current market information for
Volatility Index Futures and using an asymmetric distribution in its
model that has a better ``goodness of fit'' to the historical data and
allows for more appropriate modeling of observed asymmetry of the
distribution. The proposed changes would also introduce a new floor on
variance estimates in the model to mitigate procyclicality. OCC
believes the proposed changes are therefore designed to ensure that OCC
sets margin requirements that would serve to limit OCC's exposures to
potential losses from defaults by its participants under normal market
conditions so that the operations of OCC would not be disrupted, and
non-defaulting participants would not be exposed to losses that they
cannot anticipate or control. Accordingly, OCC believes the proposed
changes are consistent with Rule 17Ad-22(b)(1).\33\
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\32\ 17 CFR 240.17Ad-22(b)(1).
\33\ Id.
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Rule 17Ad-22(b)(2) \34\ further requires, in part, that a
registered clearing agency that performs central counterparty services
establish, implement, maintain and enforce written policies and
procedures reasonably designed use margin requirements to limit its
credit exposures to participants under normal market conditions and use
risk-based models and parameters to set margin requirements. As noted
above, OCC would use the proposed model enhancements to calculate
margin requirements for Volatility Index Futures in a manner designed
to limit its credit exposures to participants under normal market
conditions. Moreover, OCC believes that the proposed risk-based model
enhancements for Volatility Index Futures would result in more accurate
and responsive margin requirements for OCC's Clearing Members and would
introduce an asymmetric distribution into its model that has a better
``goodness of fit'' to the historical data and allows for more
appropriate modeling of observed asymmetry of the distribution. The
proposed floor on variance estimates would also help to reduce
procyclicality in margin requirements for Volatility Index Futures. The
risk-based model would therefore be used to calculate margin
requirements designed to limit OCC's credit exposures to participants
under normal market conditions in a manner consistent with Rule 17Ad-
22(b)(2).\35\
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\34\ 17 CFR 240.17Ad-22(b)(2).
\35\ Id.
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Rules 17Ad-22(e)(6)(i), (iii), and (v) \36\ further require that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, among other things: (1) Considers, and produces margin
levels commensurate with, the risks and particular attributes of each
relevant product, portfolio, and market; (2) calculates margin
sufficient to cover its potential future exposure to participants in
the interval between the last margin collection and the close out of
positions following a participant default; and (3) uses an appropriate
method for measuring credit exposure that accounts for relevant product
risk factors and portfolio effects across products.
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\36\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
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As described in detail above, OCC believes that the proposed model
enhancements would result in more accurate, more responsive, and less
procyclical margin requirements for OCC's Clearing Members clearing
Volatility Index Futures, with such margin serving to protect other
Clearing Members from losses arising as a result of a Clearing Member
default. The proposed changes are intended to ensure that OCC's margin
models reflect more current market information for Volatility Index
Futures and would introduce an asymmetric distribution into its model
that has a better ``goodness of fit'' to the historical data and allows
for more appropriate modeling of the observed asymmetry of the
distribution. Additionally, OCC would introduce a floor on variance
estimates in the model to limit procyclicality. OCC therefore believes
the proposed changes are reasonably designed to consider and produce
margin levels commensurate with the risks and particular attributes of
OCC's cleared Volatility Index Futures, calculate margin sufficient to
cover its potential future exposure to participants in the interval
between the last margin collection and the close out of positions
following a participant default, and apply an appropriate method for
measuring credit exposure that accounts for risk factors and portfolio
effects of Volatility Index Futures in a manner consistent with Rules
17Ad-22(e)(6)(i), (iii), and (v).\37\
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\37\ Id.
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The changes are not inconsistent with the existing rules of OCC,
including any other rules proposed to be amended.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date the proposed change was filed with the Commission or (ii) the date
any additional information requested by the Commission is received. OCC
shall not implement the proposed change if the Commission has any
objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
OCC shall post notice on its website of proposed changes that are
implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the advance
notice is consistent with the Clearing Supervision Act. Comments may be
submitted by any of the following methods:
[[Page 16920]]
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-2019-801 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-OCC-2019-801. 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 advance notice that are filed with the
Commission, and all written communications relating to the advance
notice 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 the filing also will be available for inspection
and copying at the principal office of the self-regulatory
organization.
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-2019-801 and
should be submitted on or before May 7, 2019.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08083 Filed 4-22-19; 8:45 am]
BILLING CODE 8011-01-P