[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57911-57920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23550]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87386; File No. SR-OCC-2019-009]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Related to Proposed Changes to
The Options Clearing Corporation's Rules, Clearing Fund Methodology
Policy, and Clearing Fund and Stress Testing Methodology
October 23, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on October 10, 2019, 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 primarily by OCC. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change is filed in connection with proposed
enhancements to OCC's Clearing Fund and stress testing rules and
methodology designed to: (1)
[[Page 57912]]
Incorporate a new set of stress test scenarios to be used in the
monthly sizing of OCC's Clearing Fund that are designed to capture the
risks of extreme moves in individual or small subsets of securities;
(2) enhance OCC's stress testing methodology for modeling certain
volatility index futures; (3) modify OCC's methodology for allocating
Clearing Fund contribution requirements to standardize the margin risk
component of the allocation formula for all Clearing Members; (4) adopt
an additional threshold for notifying senior management of intra-day
margin calls based on certain stress test results; (5) correct certain
rules concerning OCC's cooling-off period and replenishment/assessment
powers; and (6) make other clarifying and conforming changes to OCC's
Rules, Clearing Fund Methodology Policy (``Policy''), and Stress
Testing and Clearing Fund Methodology Description (``Methodology
Description'')
The proposed amendments to OCC's Rules can be found in Exhibit
5A.\3\ Proposed changes to the Policy can be found in Exhibit 5B.
Proposed changes to the Methodology Description can be found in Exhibit
5C. Material proposed to be added to the Rules, Policy, and Methodology
Description as currently in effect is marked by underlining, and
material proposed to be deleted is marked in strikethrough text.\4\ The
proposed changes are described in detail in Item II below.
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\3\ The Commission notes that exhibits referenced herein are
included in the filing submitted by OCC to the Commission, but are
not included in this Notice.
\4\ OCC also has filed an advance notice with the Commission in
connection with the proposed changes. See SR-OCC-2019-806.
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The proposed rule change 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.\5\
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\5\ 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 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
In September 2018, OCC implemented new rules for sizing and
monitoring its Clearing Fund and overall Pre-Funded Financial
Resources,\6\ which included the adoption of a new Policy and
Methodology Description.\7\ Under the requirements of the Policy, OCC
bases its determination of the Clearing Fund size on the results of
stress tests conducted daily using standard predetermined parameters
and assumptions. These daily stress tests consider a range of relevant
stress scenarios and possible price changes in liquidation periods,
including but not limited to: (1) Relevant peak historic price
volatilities; (2) shifts in other market factors including, as
appropriate, price determinants and yield curves; and (3) the default
of one or multiple Clearing Members. OCC also conducts reverse stress
tests for informational purposes aimed at identifying extreme default
scenarios and extreme market conditions for which the OCC's financial
resources may be insufficient.
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\6\ The Policy defines OCC's ``Pre-Funded Financial Resources''
to mean margin of the defaulted Clearing Member and the required
Clearing Fund less any deficits, exclusive of OCC's assessment
powers.
\7\ On July 26, 2018, the Commission issued a Notice of No
Objection to an advance notice by OCC concerning the adoption of a
new stress testing and Clearing Fund methodology. See Securities
Exchange Act Release No. 83714 (July 26, 2018), 83 FR 37570 (August
1, 2018) (SR-OCC-2018-803). On July 27, 2018, the Commission
approved a proposed rule change by OCC concerning the same proposal.
See Securities Exchange Act Release No. 83735 (July 27, 2018), 83 FR
37855 (August 2, 2018) (SR-OCC-2018-008).
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As described in the Methodology Description, the newly adopted
methodology includes two types of scenarios: ``Historical Scenarios''
and ``Hypothetical Scenarios.'' Historical Scenarios intend to
replicate historical events in current market conditions, which
includes the set of currently existing securities, their prices, and
volatility levels. These scenarios provide OCC with information
regarding pre-defined reference points determined to be relevant
benchmarks for assessing OCC's exposure to Clearing Members and the
adequacy of its financial resources. Hypothetical Scenarios represent
events in which market conditions change in ways that have not yet been
observed. The Hypothetical Scenarios are derived using statistical
methods (e.g., draws from estimated multivariate distributions) or
created based on a mix of statistical techniques and expert judgment
(e.g., a 15% decline in market prices and 50% increase in volatility).
These scenarios give OCC the ability to change the distribution and
level of stress in ways necessary to produce an effective forward-
looking stress testing methodology. OCC uses these pre-determined
stress scenarios in stress tests, conducted on a daily basis, to
determine OCC's risk exposure to each Clearing Member Group by
simulating the profits and losses of the positions in their respective
account portfolios under each such stress scenario.
Under the Policy and Methodology Description, OCC performs daily
stress testing using a wide range of scenarios, both Hypothetical and
Historical, designed to serve multiple purposes. OCC's proposed stress
testing inventory contains scenarios designed to: (1) Determine whether
the financial resources collected from all Clearing Members
collectively are adequate to cover OCC's risk tolerance (``Adequacy
Scenarios,'' and such scenarios collectively constituting ``Adequacy
Stress Tests''); (2) establish the monthly size of the Clearing Fund
necessary for OCC to maintain sufficient Pre-Funded Financial Resources
to cover losses arising from the default of the two Clearing Member
Groups that would potentially cause the largest aggregate credit
exposure to OCC as a result of a 1-in-80 year hypothetical market event
(``Sizing Scenarios,'' and such scenarios collectively constituting
``Sizing Stress Tests''); (3) measure the exposure of the Clearing Fund
to the portfolios of individual Clearing Member Groups, and determine
whether any such exposure is sufficiently large as to necessitate OCC
calling for additional resources so that OCC continues to maintain
sufficient financial resources to guard against potential losses under
a wide range of stress scenarios, including extreme but plausible
market conditions (``Sufficiency Scenarios,'' and such scenarios
collectively constituting ``Sufficiency Stress Tests''); \8\ and (4)
monitor and assess the
[[Page 57913]]
size of OCC's Pre-Funded Financial Resources against a wide range of
stress scenarios that may include extreme but implausible and reverse
stress testing scenarios (``Informational Scenarios,'' and such
scenarios collectively constituting ``Informational Stress Tests'').\9\
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\8\ Under OCC Rule 609, the Policy, and the Methodology
Description, if a Sufficiency Stress Test identifies exposures that
exceed 75% of the current Clearing Fund requirement less deficits
(the ``75% threshold'' or ``Sufficiency Stress Test Threshold 1''),
OCC may require additional margin deposits from the Clearing Member
Group(s) driving the breach. All such margin calls must be approved
by a Vice President (or higher) of OCC's Financial Risk Management
department (``FRM''); however, if the margin call imposed on an
individual Clearing Member exceeds $500 million, OCC's Stress
Testing and Liquidity Risk Management group (``STLRM'') must provide
written notification to OCC's Executive Chairman, Chief Executive
Officer, and Chief Operating Officer (collectively referred to as
the ``Office of the Chief Executive Officer'' or ``OCEO'').
Additionally, under Rule 1001(c) (and as described in the Policy and
Methodology Description), if a Sufficiency Stress Test were to
identify a Clearing Fund Draw for any one or two Clearing Member
Groups that exceed 90% of the current Clearing Fund size (after
subtracting any monies deposited as a result of a margin call in
accordance with a breach of Sufficiency Stress Test Threshold 1),
OCC has the authority to effect an intra-month resizing of the
Clearing Fund to ensure that it continues to maintain sufficient
prefunded financial resources. See supra note 7.
\9\ OCC notes that its Adequacy and Informational Stress Tests
are not used to size the Clearing Fund or drive calls for additional
financial resources.
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In addition, under the Rules, Policy, and Methodology Description,
individual Clearing Members' Clearing Fund contribution requirements
are determined using a risk-based allocation methodology of 70% ``total
risk,'' 15% volume, and 15% open interest using a one-month look-back
period. For purposes of allocating Clearing Fund contributions, ``total
risk'' is defined to mean the margin requirement calculated and
reported by OCC with respect to all accounts of a Clearing Member less
the net asset value of the positions in such accounts aggregated across
all such accounts.
Proposed Changes
OCC proposes to enhance its Clearing Fund and stress testing
framework by: (1) Adopting a new set of stress scenarios to be used in
the monthly sizing of OCC's Clearing Fund that are designed to capture
the risks of extreme moves in individual or small subsets of securities
(``Idiosyncratic Scenarios''); (2) improving its model for determining
price shocks for futures on the Cboe Volatility Index (``VIX'') \10\
(such futures contracts hereinafter referred to as ``VIX futures'');
(3) modifying the methodology for allocating Clearing Fund contribution
requirements to standardize the margin risk component of the allocation
formula for all Clearing Members; (4) adopting an additional threshold
for notifying senior management of certain intra-day margin calls based
on Sufficiency Stress Test results; (5) correcting certain rules
concerning OCC's cooling-off period and replenishment/assessment
powers; and (6) making certain other clarifying and conforming changes
to OCC's Rules, Policy, and Methodology Description. The proposed
changes are described in detail below.
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\10\ The VIX is an index designed to measure the 30-day expected
volatility of the Standard & Poor's 500 index (``SPX'').
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1. Introduction of Idiosyncratic Scenarios in Sizing Stress Tests
OCC proposes to revise its Policy and Methodology Description to
incorporate into its inventory of Sizing Stress Tests a new set of
Idiosyncratic Scenarios that are designed to capture the risks of
extreme moves in individual or small subsets of securities. As noted
above, OCC's Sizing Stress Tests are used to establish the monthly size
of the Clearing Fund necessary for OCC to maintain sufficient Pre-
Funded Financial Resources to cover losses arising from the default of
the two Clearing Member Groups that would potentially cause the largest
aggregate credit exposure to OCC in extreme but plausible market
conditions. The proposed Idiosyncratic Scenarios would supplement OCC's
current set of Sizing Scenarios (which are generally designed to
estimate risk exposures arising from more broad-based market and
systemic shocks (``Systemic Scenarios'') and would allow OCC to
identify forward-looking, non-systemic market events that may impact
its Pre-Funded Financial Resource requirements. Like other Sizing
Scenarios, the proposed Idiosyncratic Scenarios may be used to
determine the monthly size of Clearing Fund when projected exposures
from the Idiosyncratic Scenarios are greater than OCC's other Sizing
Scenarios.
The proposed Idiosyncratic Scenarios are designed to capture the
risk of extreme non-systemic market moves on single-name securities
through individual rally and decline shocks. Under the proposed
methodology for Idiosyncratic Scenarios, every single-name equity
(i.e., excluding exchange-traded funds, exchange-traded notes, indices,
and non-equity products) in a portfolio is shocked by a fixed extreme
idiosyncratic up and down move. In order to determine these fixed
shocks, single-name equities would be classified as either large or
small capitalization (referred to herein as ``large cap'' and ``small
cap,'' respectively) and the shocks would be constructed based on the
market capitalization classification and direction of the price (e.g.,
the four potential idiosyncratic moves would be large cap up, large cap
down, small cap up, and small cap down. The fixed price shocks would be
calibrated from historical price return data such that the probability
of the idiosyncratic moves is comparable to OCC's Systemic Sizing
Scenarios and the probability in all four scenarios would be
approximately equal. The profit and loss (P/L) contribution for each
name is then calculated for the portfolio using both up and down moves,
and the worst loss from the two P/L moves is chosen as the direction of
the idiosyncratic move for each name. Next, the four names with the
worst P/L (along with the direction of extreme move) are chosen for the
portfolio, providing the four names for every portfolio within a
Clearing Member Group. Then the risk exposure (P/L) is aggregated at
the Clearing Member Group-level using each set of four names. The worst
shortfall generated is the idiosyncratic risk of the Clearing Member
Group, and the largest two Clearing Member Group exposures are used to
determine the Cover 2 Idiosyncratic Scenario Clearing Fund size.
OCC believes that implementing the proposed Idiosyncratic Scenarios
would enhance OCC's stress testing methodology and overall resiliency
by providing a more comprehensive suite of Sizing Stress Tests to
ensure that OCC maintains an appropriate level of Pre-Funded Financial
Resources to cover its credit exposures under scenarios addressing both
systemic market risks and idiosyncratic risks.
2. Enhancements for Modeling Shocks on VIX Futures
OCC also proposes to enhance its methodology for modeling price
shocks for VIX futures. Under OCC's current stress testing methodology,
prices shocks for VIX futures are equivalent to the price shock for the
underlying VIX index. OCC believes that this approach is unrealistic in
that it produces a uniform shock across expirations of the VIX futures
contract, which leads to an overestimation of VIX futures price shocks,
particularly in market decline scenarios. Futures contracts for
different expirations generally trade at different prices reflecting
the differing future price expectations of the underlying asset.\11\
Accordingly, OCC believes that the size of the price shocks produced by
its stress testing methodology should
[[Page 57914]]
vary based on the expiration of each contract as is more realistically
observed in the market.
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\11\ When there is a large shock to the VIX it has consistently
been observed that the change in price of near-term VIX future
contracts is much larger than for further out expirations. For
instance, on 2/5/2018 when the near-term VIX future contract
expiring on 2/16/2018 increased by 113% the following standard
expirations increased by less: 87% for 3/21/2018; 64% for 4/18/2018;
37% for 5/16/2018; and less than 30% for all further expirations.
For all other days within the past 5 years with one-day VIX
increases of over 45%, similar patterns were observed of a
decreasing VIX future term structure of shocks (8/21/2015, 8/24/
2015, 6/24/2016 and 5/17/2017).
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OCC proposes to enhance its stress testing methodology (and
specifically, Section 3.4 of the Methodology Description) by using SPX
at-the-money implied volatility shocks across different expirations to
model forward volatility to generate shocks for VIX futures contracts
for the corresponding expirations. OCC believes the proposed model
enhancements would produce more appropriate VIX futures price shocks in
its stress scenarios because it would produce differing price shocks
across the term structure as is generally observed in the market.\12\
For example, OCC has observed that VIX futures price shocks obtained
from the enhanced model for varying expirations is similar to the
actual VIX futures market prices when tested on historical stress
periods. Additionally, because VIX futures are used to calculate
theoretical values for VIX options, OCC believes the proposed
enhancement would improve the pricing of both VIX futures and VIX
options in OCC's stress testing methodology.
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\12\ Id.
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3. Modifications to Clearing Fund Allocation Weighting Methodology
OCC proposes to modify its allocation methodology for determining
individual Clearing Members' Clearing Fund requirements. As part of
OCC's recently adopted stress testing and Clearing Fund methodology,
OCC moved to a more risk-based method for allocating Clearing Fund
requirements.\13\ Clearing Fund allocations are currently based on a
weighting of 70% margin risk, 15% open interest, and 15% cleared
volume. The margin risk component of the allocation formula, known as
``total risk,'' is based on the total margin requirement calculated and
reported by OCC with respect to all accounts of a Clearing Member less
the net asset value of the positions in such accounts aggregated across
all such accounts over a one-month look-back period compared to the
aggregate of total risk across all Clearing Members.\14\ While the
majority of margin requirements used in the allocation formula are
STANS-based margin requirements,\15\ certain Clearing Members' accounts
(and thus their allocations) are more heavily impacted by margin
requirements calculated using the Standard Portfolio Analysis of Risk
Margin Calculation System (``SPAN'') that reflects customer gross
margining, which may result in higher risk charges than net margining
with STANS for the same account.\16\
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\13\ See supra note 7.
\14\ See OCC Rule 1003(b)(i). OCC removes net asset value from
the ``total risk'' component of the allocation formula because it
does not reflect a risk measure but rather represents the value of
contracts and collateral held in a Clearing Member's accounts.
\15\ The System for Theoretical Analysis and Numerical
Simulations (or ``STANS'') is OCC's proprietary risk management
system for calculating Clearing Member margin requirements. See
Securities Exchange Act Release No. 53322 (February 15, 2006), 71 FR
9403 (February 23, 2006) (SR-OCC-2004-20). A detailed description of
the STANS methodology is available at http://optionsclearing.com/risk-management/margins/.
\16\ Pursuant to OCC Rule 601(e)(1), in additions to STANS-based
requirements, OCC calculates initial margin requirements for
segregated futures accounts on a gross basis using 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). SPAN is a methodology developed by the Chicago Mercantile
Exchange and used by many clearinghouses and exchanges around the
world to calculate margin requirements on futures and options on
futures.
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OCC proposes to standardize the margin or ``total risk'' component
of its Clearing Fund allocation formula for all members by using only
the STANS base amount, plus certain add-on charges \17\ as may be
determined by OCC pursuant to its policies and procedures. OCC believes
it is more appropriate to use the same margin risk measurement for all
Clearing Members/accounts when determining Clearing Fund allocations
since this allows for a more equitable comparison across all accounts
through the utilization of a consistent margin methodology.
Accordingly, OCC proposes to modify the definition of ``total risk'' in
Rule 1003(b)(i) to mean ``a risk measure aggregated across all accounts
of a Clearing Member determined using the Corporation's margin
methodology and such add-on charges as may be determined pursuant to
the Corporation's policies and procedures.'' OCC also proposes to make
conforming to changes to its Policy and Methodology Description to
reflect the new definition of ``total risk.''
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\17\ Under OCC's Margin Policy, OCC may collateralize certain
exposures that may be modeled outside of STANS using add-on charges.
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4. New Sufficiency Stress Test Notification Threshold
OCC also proposes to adopt a new internal notification threshold
for intra-day margin calls resulting from its Sufficiency Stress Tests.
Under existing Rule 609, the Policy, and the Methodology Description,
if a Sufficiency Stress Test identifies a Clearing Fund Draw \18\ for
any one or two Clearing Member Groups that exceeds Sufficiency Stress
Test Threshold 1, OCC is authorized to issue a margin call against the
Clearing Member Group(s) and/or Clearing Member(s) causing the
breach.\19\ All Sufficiency Stress Test margin calls are required to be
approved by a Vice President (or higher) of FRM; however, if the margin
call imposed on an individual Clearing Member exceeds $500 million, the
STLRM group must provide written notification to the Office of the CEO.
If the margin call imposed on an individual Clearing Member would
exceed 100% an individual Clearing Member's net capital, the issue is
then escalated to the Office of the CEO, and each of the Executive
Chairman, Chief Executive Officer, and Chief Operating Officer have the
authority to determine whether OCC should continue calling for
additional margin in excess of this amount.
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\18\ The term ``Clearing Fund Draw'' refers to an estimated
stress loss exposure in excess of margin requirements.
\19\ See supra notes 7 and 8.
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OCC proposes to revise the Policy to require that STLRM provide
written notification to the Office of the CEO whenever a Sufficiency
Stress Test margin call imposed on an individual Clearing Member
exceeds 75% of the Clearing Member's excess net capital (in addition to
the current requirement to provide notification for any margin call
exceeding $500 million). OCC believes that this additional notification
requirement is appropriate because it will allow OCC's senior
management to be informed as soon as practicable of, and to
subsequently monitor, circumstances where a margin call may strain a
particular Clearing Member's ability to meet such requirements based on
its financial condition or the amount of collateral it has available to
pledge when certain pre-identified thresholds have been exceeded.\20\
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\20\ For example, if a Sufficiency Stress Test margin call
imposed on an individual Clearing Member exceeds 75% of the Clearing
Member's excess net capital, and such Sufficiency Stress Test also
results in Clearing Fund draws for any one or two Clearing Member
Groups that exceed 90% of the current Clearing Fund size, OCC may
choose to resize the Clearing Fund on an intra-month basis rather
than continuing to call for additional margin from a Clearing Member
whose ability to meet such a call may be strained. See supra notes 7
and 8.
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[[Page 57915]]
5. Correction of Cooling-Off Period and Replenishment/Assessment Power
Rules
OCC proposes several corrections to its Rules and Policy concerning
its cooling-off period and Clearing Fund replenishment/assessment
powers. As part of OCC's recently approved filings to implement
enhanced and new recovery tools (``Recovery Tools Filings''), OCC
adopted a minimum 15-day ``cooling-off period'' with a cap on Clearing
Fund assessments.\21\ OCC Rule 1006(h) currently provides that the
cooling-off period is triggered when any amount is paid out of the
Clearing Fund as a result of a proportionate charge resulting from any
of the events described in clauses (i) through (iv) of Rule
1006(a).\22\ The actual intention of the Recovery Tools Filings,
however, was to capture any proportionate charges related to the
default of a Clearing Member,\23\ which would also include any use of
the Clearing Fund to make good losses or expenses suffered by OCC or as
a result of a borrowing by OCC: (1) In connection with protective
transactions effected for the account of OCC pursuant to Chapter XI of
the Rules and (2) as a result of a failure of any Clearing Member to
make any other required payment or render any other required
performance (as provided in clauses (v) and (vi) of Rule 1006(a)). OCC
therefore proposes to revise its Rules and Policy to more correctly
reflect that the cooling-off period and associated assessment caps
apply for any proportionate charge resulting from any of the events
described in clauses (i) through (vi) of Rule 1006(a). The proposed
rule change would ensure that all proportionate charges associated with
a Clearing Member default are treated consistently as was originally
intended with the adoption of the cooling-off period and modification
of OCC's replenishment/assessment powers in the Recovery Tools Filings.
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\21\ On August 23, 2018, the Commission issued a Notice of No
Objection to an advance notice by OCC concerning changes to OCC's
Rules and By-Laws to enhance OCC's existing tools to address the
risks of liquidity shortfalls and credit losses and to establish new
tools by which OCC could re-establish a matched book and, if
necessary, allocate uncovered losses following the default of a
Clearing Member as well as provide for additional financial
resources. See Securities Exchange Act Release No. 83927 (August 23,
2018), 83 FR 44083 (August 29, 2018) (SR-OCC-2017-809). On August
23, 2018, the Commission approved a proposed rule change by OCC
concerning the same proposal. See Securities Exchange Act Release
No. 83916 (August 23, 2018), 83 FR 44076 (August 29, 2018) (SR-OCC-
2017-020).
\22\ These clauses include the following events: (i) Failure of
any Clearing Member to discharge duly any obligation on or arising
from any confirmed trade accepted by the Corporation; (ii) failure
of any Clearing Member (including any Appointed Clearing Member) or
of CDS to perform its obligations (including its obligations to the
correspondent clearing corporation) under or arising from any
exercised or assigned option contract or matured future or any other
contract or obligation issued, undertaken, or guaranteed by the
Corporation or in respect of which the Corporation is otherwise
liable; (iii) failure of any Clearing Member to perform any of its
obligations to the Corporation in respect of the stock loan and
borrow positions of such Clearing Member; and (iv) any liquidation
of a Clearing Member's open positions.
\23\ See e.g., Securities Exchange Act Release No. 83927 (August
23, 2018), 83 FR 44083, 44077 (August 29, 2018) (SR-OCC-2017-809)
(providing that ``[t]he proposal would introduce a minimum fifteen
calendar day `cooling-off' period that automatically begins when OCC
imposes a proportionate charge related to the default of a Clearing
Member against non-defaulting Clearing Members' Clearing Fund
contributions.'').
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6. Other Clarifying and Conforming Changes
Finally, OCC proposes a number of clarifying, streamlining, and
organizational changes to the Methodology Description that are not
intended to change the substance of OCC's stress testing and Clearing
Fund methodology, but that OCC believes would improve the clarity and
readability of the document. The proposed changes to the Methodology
Description are described below.
Proposed Changes to the Executive Summary
OCC proposes to revise the model scope discussion of the executive
summary to provide a summary of the netting rules and positions sets
used for stress testing and to break out different sections for the
discussion of Systemic Scenarios and Idiosyncratic Scenarios. The
executive summary would also be revised to provide additional
information regarding the key assumptions of OCC's stress testing and
Clearing Fund methodology. In addition, the Model Performance section
of the executive summary would be revised to provide further
information on supporting documentation for OCC's stress testing.
Proposed Changes to the Description of Stress Test Portfolio
Construction
OCC also proposes to revise its Methodology Description to provide
additional details regarding the construction of stress testing
portfolios. For example, the proposed revisions would discuss OCC's
process for creating the ``Synthetic Accounts'' used in stress testing.
Clearing Member positions are initially held in ``Tier Accounts'' that
have the same business type (e.g., omnibus customer accounts, combined
market maker accounts, firm accounts) and cross-margining relationship
with other clearinghouses (if applicable). For the purpose of stress
testing, OCC considers liquidation positions, where Tier Account level
positions are further aggregated into Synthetic Accounts. The rules
that govern the netting process and permissible offsets are based on
account structures outlined in OCC's By-Laws and Rules.\24\ The
proposed revisions would also remove the discussion of ``marginable
positions,'' which are used to calculate margin requirements, since
marginable positions are not relevant to OCC's Clearing Fund and stress
testing methodology requirements and OCC's various account structures
and the manner in which such accounts are margined is covered in OCC's
By-Laws, Rules, and Margin Policy. In addition, the proposed revisions
would restate in descriptive terms the calculation for determining
total credit loss shortfalls.
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\24\ See e.g., OCC Rules 601, 602, 611.
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The proposed revisions would also provide further clarity and
detail concerning the aggregation of account-level stress test results.
A key aspect of the aggregation of business type accounts is that some
accounts have a restricted lien, in which assets in that account can
only be used to offset losses in that business type account, while
other accounts have a general lien, in which assets or gains in that
account can be used to offset losses in any business type account of
the same Clearing Member. The Methodology Description would be revised
to summarize OCC's process for determining if an account is a general
lien account or restricted lien account and for ensuring that such
accounts receive proper netting treatment.
Proposed Changes to the Description of OCC's Stress Testing Model
In addition, OCC proposes a number of changes to its Methodology
Description to improve the description of the models used in OCC's
stress testing and Clearing Fund methodology. For example, the
Methodology Description would be revised to provide additional context
around the types of scenarios (e.g., Systemic Scenarios and
Idiosyncratic Scenarios) that stress testing models are used to create.
The proposed changes would also provide a more straightforward
discussion around the use and selection of risk drivers used to
represent risk factors in OCC's
[[Page 57916]]
one-factor stress testing model.\25\ OCC notes that under the current
Methodology Description, risk drivers and their mappings are subject to
periodic review and change by OCC's Stress Test Working Group
(``STWG''). The Methodology Description currently contains a non-
exhaustive, sample set of risk drivers as of March 2018. OCC is
proposing to replace the sample set of risk drivers with a more general
list of risk drivers that may be used per risk factor type to ensure
the ongoing accuracy and clarity of OCC's methodology documentation as
the risk drivers change through the STWG governance process. The
proposed revisions would also provide additional details around STWG's
process for approving the addition, change or retiring of risk drivers.
Changes to risk drivers may be based on, among other things: Changing
business needs, new product launches, open interest, or other changes
in product mix. Moreover, when adding, changing, or retiring risk
drivers, STWG would consider factors including, but not limited to:
Contract specifications (e.g. a derivative's underlying asset, the
asset classification of a product), the relationship between proposed
new products and existing risk drivers, the correlation between risk
drivers and risk factors, and/or quality of available data. STWG may
also approve the retirement and removal of a risk driver that has no
risk factors mapped to it or if the risk driver itself is delisted. In
addition, OCC would revise the methodology description to further
clarify that, unlike annual recalibrations, the STWG would only approve
quarterly recalibration of risk driver shocks when warranted (and not
as a matter of course). The Methodology Description would also be
updated to note that risk drivers and their mappings are maintained by
the STLRM group and are available in the stress testing system. OCC
does not believe that these proposed changes constitutes a material or
substantive change in OCC's Methodology Description but rather more
appropriately documents OCC's process for maintaining and updating risk
drivers.\26\
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\25\ ``Risk factors'' refer broadly to all of the individual
underlying securities (such as Google, IBM and Standard & Poor's
Depositary Receipts (``SPDR''), S&P 500 Exchange Traded Funds
(``SPY''), etc.) listed on a market. ``Risk drivers'' are a selected
set of securities or market indices (e.g., SPX or VIX) that are used
to represent the main sources or drivers for the price changes of
the risk factors.
\26\ OCC notes that the Methodology Description would continue
to specify that SPX and VIX are the main risk drivers for shocks of
equity risk factors as equity risk factors make up the vast majority
of volume, open interest, and risk at OCC. Due to the nature of
equity risk factors, OCC's stress testing methodology treats equity
risk factors in a standard and consistent fashion with respect to
the mapping of risk drivers. Non-equity products, such as commodity
futures and certain exchange-traded products (e.g., ETFs and ETNs),
may have different risk drivers or risk drivers may change due to
the evolving nature of the securities markets and the products OCC
clears. Consequently, OCC believes it is necessary to maintain
appropriate flexibility to adjust risk drivers as evolving
circumstances warrant through the established STWG governance
process.
---------------------------------------------------------------------------
In addition, OCC proposes to revise the Methodology Description to
provide a more straightforward discussion of the modeling of risk
factor returns and price shocks for Hypothetical and Historical
Scenarios and for OCC's various cleared products. Specifically, OCC
proposes clarifying, streamlining, and organizational changes to the
description of its modeling of volatility shocks for risk factors with
SPX as the risk driver and for non-SPX driven risk factors. The
proposed changes would also provide additional details on OCC's
volatility modeling for flexibly structured options (or ``flex
options''),\27\ for which shocked implied volatility is calculated from
shocked implied volatilities of regular options.
---------------------------------------------------------------------------
\27\ Flex options are options that give investors the ability to
customize basic option features including size, expiration date,
exercise style, and certain exercise prices that do not correspond
to the terms of any series of non-flexibly structured options
previously opened for trading on an Exchange. See OCC By-Laws,
Article I., Section 1.F.(8).
---------------------------------------------------------------------------
OCC also proposes to replace a section specifically discussing
price shocks for products where the underlying security is a basket of
deliverable obligation securities with a more generalized discussion of
OCC's approach to modeling price shocks for products with multiple risk
factors as the underlying. In this case, the Methodology Description
would describe how the underlyings are shocked by applying the one-
factor model to each component risk factor. In addition, this proposed
change would eliminate a restriction limiting the methodology to an
``all or none'' approach where price shocks are modeled using either
all historical shocks or all shocks derived from OCC's beta methodology
\28\ to provide appropriate flexibility for OCC to determine price
shocks on an individual risk factor basis depending on whether
historical data is available. This allows for consistency between the
shocks of the basket and the shocks used to price products on the
basket's components. The Methodology Description would also be revised
to describe how, in the case of a leveraged product, shocks are
determined using a leverage ratio with respect to its tracking index
used as the default beta. OCC believes the proposed changes are more
generally aligned with the intended purpose of the Methodology
Description, which is designed, in general, to provide a general
description of the materials aspects of OCC's stress testing and
Clearing Fund methodologies.
---------------------------------------------------------------------------
\28\ The ``beta'' is the sensitivity of a security with respect
to its corresponding risk driver (i.e., the sensitivity of the price
of the security relative to the price of the risk driver).
---------------------------------------------------------------------------
Additionally, OCC proposes to correct a reference to the use of log
returns in the calculation of volatility shocks to more accurately
state that these calculations are currently made using two-day
arithmetic returns. OCC's stress testing methodology utilizes two-day
arithmetic returns to calculate these shocks to align with OCC's two-
day liquidation horizon assumption for its margin methodology and the
arithmetic returns used in its dynamic VIX calibration process.\29\
---------------------------------------------------------------------------
\29\ See supra note 7.
---------------------------------------------------------------------------
OCC also proposes to clarify that implied volatility shocks for
Systemic Scenarios are based on the expected risk, or ``variance,'' of
the risk factor in a forward-looking period after the price shock as
opposed to the ``standard deviation.'' OCC believes that using the
terms ``variance'' or ``standard deviation'' are essentially equivalent
ways to describe the equation; however, the term ``variance'' would
more accurately reflect the terms of equation used in the document.
Proposed Changes to Description of Calibrations
OCC proposes to revise its Methodology Description to more
correctly describe the approach for generating shocks for U.S.
Treasuries and Canadian Government Bond by replacing the term
``covariance'' with ``correlation.'' While the calibration does use a
covariance matrix, the inputs to the calibration are normalized by
their standard deviation and so the resulting matrix actually contains
correlations. The correlation matrix is then scaled by standard
deviation terms to generate interest rate shocks.\30\
---------------------------------------------------------------------------
\30\ OCC notes that this is a standard practice. See Litterman,
Robert and Sheinkman, Jose, ``Common Factors Affecting Bond
Returns,'' Journal of Fixed Income, 1991.
---------------------------------------------------------------------------
Proposed Changes to Description of Stress Test Scenarios
Finally, OCC proposes to revise the Methodology Description to
provide additional clarity around the use and calibration of risk
driver shocks in Hypothetical, Historical and Idiosyncratic Scenarios.
OCC would
[[Page 57917]]
also remove specific references to certain risk drivers and parameters
that are subject to periodic review and change through its internal
governance processes. OCC would also update the sample table of stress
test scenarios in the document to: (1) Reflect the addition of the
proposed Idiosyncratic Scenarios; (2) remove Informational Scenarios
from the table, which do not drive financial resource determinations
and are subject to periodic change; and (3) provide additional
information on the type of price shock used for each scenario in the
table. In addition, OCC proposes to remove certain language from the
document that provides qualitative justification for OCC's Clearing
Fund allocation methodology but does not have any relevance to the
actual calculation of Clearing Fund allocations.
Clearing Member Outreach
To inform Clearing Members of the proposed changes, OCC has
provided an overview of the proposed changes to the Financial Risk
Advisory Council (``FRAC''), a working group comprised of exchanges,
Clearing Members and indirect participants of OCC. OCC has also
performed direct outreach to Clearing Members that would be most
impacted by the proposed changes. To-date, OCC has not received any
material objections or concerns in response to this outreach.
Implementation Timing
OCC expects to implement the proposed changes within sixty (60)
days after the date that OCC receives all necessary regulatory
approvals for the proposed changes. OCC will announce the
implementation date of the proposed change by an Information Memorandum
posted to its public website at least two (2) weeks prior to
implementation.\31\
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\31\ OCC notes that the impact of certain changes, such as the
proposed changes to the Clearing Fund allocation formula and
potential for a new Idiosyncratic Scenario to set the size of the
Clearing Fund, will not occur until the first monthly resizing of
the Clearing Fund following the announced implementation date.
---------------------------------------------------------------------------
(1) Statutory Basis
OCC believes the proposed rule change is consistent with
requirements of the Act and rules and regulations thereunder applicable
to registered clearing agencies. Specifically, OCC believes the
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act
\32\ and Rule 17Ad-22(b)(3) \33\ and Rule 17Ad-22(e)(4) \34\
thereunder, as described in further detail below.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(F).
\33\ 17 CFR 240.17Ad-22(b)(3).
\34\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
Consistency With the Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Act \35\ requires, among other things,
that the rules of a clearing agency be designed to promote the prompt
and accurate clearance and settlement of securities and derivatives
transactions. Taken together, OCC believes the proposed changes are
designed to enhance OCC's overall framework for managing credit risk
and are consistent with Section 17A(b)(3)(F) of the Act \36\ for the
reasons set forth below.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(F).
\36\ Id.
---------------------------------------------------------------------------
OCC believes that implementing the proposed Idiosyncratic Scenarios
would enhance OCC's stress testing methodology and overall resiliency
by providing a more comprehensive suite of Sizing Stress Tests to
ensure that OCC maintains appropriate level of Pre-Funded Financial
Resources to cover its credit exposures under scenarios addressing both
systemic market risks and idiosyncratic risks. As noted above, OCC's
Sizing Stress Tests are used to establish the monthly size of the
Clearing Fund necessary for OCC to maintain sufficient Pre-Funded
Financial Resources to cover losses arising from the default of the two
Clearing Member Groups that would potentially cause the largest
aggregate credit exposure to OCC in extreme but plausible market
conditions. The proposed Idiosyncratic Scenarios would supplement OCC's
current set of Sizing Scenarios (which are generally designed to
estimate risk exposures arising from more broad-based market and
systemic shocks reflected in OCC's Systemic Scenarios) by enabling OCC
to appropriately consider the risks of extreme moves in individual or
small subsets of securities. OCC therefore believes that the proposed
rule change would enhance OCC's overall framework for managing credit
risks and reduce the risk that its Pre-Funded Financial Resources would
be insufficient in an actual default so that it can continue to provide
prompt and accurate clearance and settlement of securities and
derivatives transactions consistent with Section 17A(b)(3)(F) of the
Act.\37\
---------------------------------------------------------------------------
\37\ Id.
---------------------------------------------------------------------------
In addition, OCC proposes to enhance its stress testing methodology
to more accurately and appropriately model price shocks for VIX
futures. Under OCC's current stress testing methodology, prices shocks
for VIX futures are equivalent to the price shock for the underlying
VIX index. OCC believes that this approach is unrealistic in that it
produces a uniform shock across expirations of the VIX futures
contract, which leads to an overestimation of VIX futures price shocks,
particularly in market decline scenarios. OCC therefore proposes to
enhance its stress testing methodology to produce more appropriate VIX
futures price shocks that would vary based on the expiration of
contracts as is more realistically observed in the market.\38\ OCC
believes the proposed changes would enhance OCC's framework for
managing credit risk because it would result in more accurate and
realistic stress testing results and are therefore designed to promote
the prompt and accurate clearance and settlement of securities and
derivatives transactions consistent with Section 17A(b)(3)(F) of the
Act.\39\
---------------------------------------------------------------------------
\38\ Additionally, because VIX futures are used to calculate
theoretical values for VIX options, the proposed enhancement would
improve the pricing of both VIX futures and VIX options in OCC's
stress testing methodology.
\39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
OCC also proposes to revise the Policy to require that STLRM
provide written notification to the Office of the CEO whenever a
Sufficiency Stress Test margin call imposed on an individual Clearing
Member exceeds 75% of the Clearing Member's excess net capital. The
proposed change would allow OCC's senior management to be informed of,
and to subsequently monitor, circumstances where a margin call may
strain a particular Clearing Member's ability to meet such requirements
based on its financial condition or the amount of collateral it has
available to pledge when certain pre-identified thresholds have been
exceeded. OCC believes the proposed rule change would improve its
process for monitoring and managing credit risk, particularly those
identified through Sufficiency Stress Test margin calls, and take steps
to reduce potential default risks so that it can continue to promote
the prompt and accurate clearance and settlement of securities and
derivatives transactions consistent with Section 17A(b)(3)(F) of the
Act.\40\
---------------------------------------------------------------------------
\40\ Id.
---------------------------------------------------------------------------
Additionally, OCC proposes to standardize the margin risk component
of its Clearing Fund allocation formula by using only STANS-based
margin requirements for all Clearing Members. OCC believes it is
appropriate to use the same margin risk measurement for all Clearing
Members/accounts when determining Clearing Fund allocations since this
allows for a more equitable comparison across all accounts through the
utilization of a consistent margin methodology. OCC believes that the
[[Page 57918]]
proposed changes would result in an allocation formula that determines
Clearing Member contribution requirements that are commensurate to the
risks posed by each Clearing Member. As a result, OCC believes the
proposed rule change is 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 consistent with Section 17A(b)(3)(F) of the Act.\41\
---------------------------------------------------------------------------
\41\ Id. OCC also believes that by standardizing the margin risk
component of its Clearing Fund allocation formula the proposed rule
change promotes compliance with the requirement of Section
17A(b)(3)(F) of the Act that a clearing agency's rules not be
designed to permit unfair discrimination among participants in the
use of the clearing agency.
---------------------------------------------------------------------------
OCC proposes to revise its Rules and Policy to provide that the
cooling-off period and associated assessment caps apply to any
proportionate charge related to a Clearing Member default, including
any use of the Clearing Fund to make good losses or expenses suffered
by OCC or as a result of a borrowing by OCC (1) in connection with
protective transactions effected for the account of OCC pursuant to
Chapter XI of the Rules and (2) as a result of a failure of any
Clearing Member to make any other required payment or render any other
required performance, and are not limited to a certain subset of
Clearing Member default-related events. The proposed rule change would
ensure that the cooling-off period and associated assessment caps are
consistently applied for any proportionate charge resulting from any of
the events described in clauses (i) through (vi) of Rule 1006(a) and
thereby ensure that OCC can fully access and utilize its Clearing Fund
resources to continue to provide prompt and accurate clearance and
settlement of securities and derivatives transactions consistent with
Section 17A(b)(3)(F) of the Act \42\ if such events were to occur.
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
OCC also proposes to make clarifying, streamlining, and
organizational changes to the Methodology Description that are not
intended to change the substance of OCC's stress testing and Clearing
Fund methodology, but that OCC believes would improve the clarity and
readability of the document. OCC believes that by improving the clarity
of the primary documents governing OCC's Clearing and stress testing
requirements the proposed changes are designed, in general, to protect
the investors and the public interest in a manner consistent with
Section 17A(b)(3)(F) of the Act.\43\
---------------------------------------------------------------------------
\43\ Id.
---------------------------------------------------------------------------
Consistency With Rule 17Ad-22 Under the Exchange Act
Rule 17Ad-22(b)(3) \44\ requires a registered clearing agency that
performs central counterparty services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain sufficient financial resources to withstand, at a
minimum, a default by the participant family to which it has the
largest exposure in extreme but plausible market conditions. Rules
17Ad-22(e)(4)(iii) and (iv) \45\ further require, in part, that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by maintaining additional financial
resources (beyond those collected as margin or otherwise maintained to
meet the requirements of Rule 17Ad-22(e)(4)(i)) \46\ at the minimum to
enable it to cover a wide range of foreseeable stress scenarios that
include, but are not limited to, the default of the participant family
that would potentially cause the largest aggregate credit exposure for
the covered clearing agency in extreme but plausible market conditions
and do so exclusive of assessments for additional guaranty fund
contributions or other resources that are not prefunded.
---------------------------------------------------------------------------
\44\ 17 CFR 240.17Ad-22(b)(3).
\45\ 17 CFR 240.17Ad-22(e)(4)(iii) and (iv).
\46\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
The proposed rule change would enhance OCC's stress testing
methodology and overall resiliency by providing a more comprehensive
suite of Sizing Stress Tests to ensure that OCC maintains an
appropriate level of Pre-Funded Financial Resources to cover its credit
exposures under scenarios addressing both systemic market risks and
idiosyncratic risks. The proposed Idiosyncratic Scenarios would
supplement OCC's current set of Sizing Scenarios, which are generally
designed to estimate risk exposures arising from more broad-based
market and systemic shocks reflected in OCC's Systemic Scenarios, by
enabling OCC to appropriately consider the risks of extreme moves in
individual or small subsets of securities. OCC therefore believes that
the proposed rule change would enhance OCC's overall framework for
managing credit risks and reduce the risk that its Pre-Funded Financial
Resources would be insufficient in an actual default.
In addition, OCC proposes to enhance its stress testing methodology
by using SPX at-the-money implied volatility shocks across different
expirations to model price shocks for VIX futures contracts for
corresponding expirations as opposed to using a uniform shock for all
expirations. The proposed rule change is designed to more accurately
measure OCC's credit exposure in its stress scenarios by producing
price shocks for VIX futures that would vary based on the expiration as
is more realistically observed in the market.
Taken together, OCC believes the proposed changes are reasonably
designed so that OCC can measure its credit exposures to its
participants and manage such exposures by maintaining sufficient
financial resources at a minimum to enable it to cover a wide range of
foreseeable stress scenarios that include, but are not limited to, the
default of the participant family that would potentially cause the
largest aggregate credit exposure for OCC in extreme but plausible
market conditions (and do so exclusive of assessments for additional
Clearing Fund contributions or other resources that are not prefunded).
For these reasons, OCC believes the proposed changes are consistent
with Rule 17Ad-22(b)(3) and Rules 17Ad-22(e)(4)(iii) and (iv).\47\
---------------------------------------------------------------------------
\47\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(iii) and (iv).
---------------------------------------------------------------------------
Furthermore, Rule 17Ad-22(e)(4) \48\ generally requires that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes. OCC believes the proposed changes to its
Sufficiency Stress Test monitoring process would improve its overall
processes for monitoring and managing credit risk. OCC would revise the
Policy to require that STLRM provide written notification to the Office
of the CEO whenever a Sufficiency Stress Test margin call imposed on an
individual Clearing Member exceeds 75% of the Clearing Member's excess
net capital (in addition to the current requirement to provide
notification for any margin call exceeding $500 million). The proposed
change would allow OCC's senior management to be informed of, and to
subsequently monitor, circumstances where a margin call may strain a
particular Clearing Member's ability to meet such requirements based on
its financial condition or the amount of
[[Page 57919]]
collateral it has available to pledge when certain pre-identified
thresholds have been exceeded. OCC therefore believes the proposed rule
change is reasonably designed to help OCC identify, measure, and
monitor its credit exposures to participants, particularly those
identified through Sufficiency Stress Test margin calls, consistent
with Rule 17Ad-22(e)(4).\49\
---------------------------------------------------------------------------
\48\ 17 CFR 240.17Ad-22(e)(4).
\49\ Id. OCC also believes that the proposed change to the
Policy would: (1) Provide for governance arrangements that specify
clear and direct lines of responsibility consistent with the
requirements of Rule 17Ad-22(e)(2)(v) and (2) contribute to a sound
risk management framework for identifying, measuring, monitoring and
managing credit and other risks that arise in or are borne by OCC in
furtherance of the requirements of Rule 17Ad-22(e)(3)(i). See 17 CFR
240.17Ad-22(e)(2)(v) and 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------
OCC also believes that the proposed changes to standardize the
margin risk component of its Clearing Fund allocation formula by using
only STANS-based margin requirements for all Clearing Members are
reasonably designed to measure and manage its credit exposures to
participants. With respect to the use of Clearing Funds and the
requirements of Rule 17Ad-22(e)(4),\50\ the Commission has noted that,
to the extent that a clearing agency uses guaranty or clearing fund
contributions to mutualize risk across participants, the clearing
agency generally should value margin and guaranty fund contributions so
that the contributions are commensurate to the risks posed by the
participants' activity.\51\ OCC believes it is appropriate to use the
same margin risk measurement for all Clearing Members/accounts when
determining Clearing Fund allocations since this allows for a more
equitable comparison across all accounts and would result in
contribution requirements that are commensurate to the risks posed by
each Clearing Member. As a result, OCC believes the proposed changes
are reasonably designed to comply with the requirements of Rule 17Ad-
22(e)(4).\52\
---------------------------------------------------------------------------
\50\ Id.
\51\ See Securities Exchange Act Release No. 78961 (September
28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards
for Covered Clearing Agencies'') at 70813.
\52\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(ix) \53\ requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by describing its process to replenish any financial resources it may
use following a default or other event in which use of such resources
is contemplated. OCC believes the proposed changes to its cooling-off
period and associated assessment cap Rules would ensure that the
cooling-off period and associated assessment caps are consistently
applied for any proportionate charge resulting from any of the events
described in clauses (i) through (vi) of Rule 1006(a) and thereby
ensure that OCC can fully access, utilize, and replenish its Clearing
Fund resources to address any losses chargeable against the Clearing
Fund and manage its credit exposures to participants and those arising
from its payment, clearing, and settlement processes in a manner
consistent with Rule 17Ad-22(e)(4)(ix).\54\
---------------------------------------------------------------------------
\53\ 17 CFR 240. 17Ad-22(e)(4).
\54\ Id.
---------------------------------------------------------------------------
Finally, OCC believes the proposed clarifying, organizational, and
streamlining changes to its Rules, Policy, and Methodology Description
would improve the clarity and readability of its stress testing and
Clearing Fund-related rules and policies are therefore consistent with
the Rule 17Ad-22(e)(4) \55\ requirement that OCC maintain policies and
procedures that are reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes.
---------------------------------------------------------------------------
\55\ 17 CFR 240. 17Ad-22(e)(4).
---------------------------------------------------------------------------
B. Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \56\ 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 the proposed rule change would impose any burden on
competition. First, OCC proposes to introduce new Idiosyncratic
Scenarios for OCC's inventory of Sizing Stress Tests. OCC does not
believe that introducing the Idiosyncratic Scenarios would have an
impact on competition. As part of OCC's Sizing Stress Tests, the
Idiosyncratic Scenarios would impact all Clearing Members similarly and
would not impact individual Clearing Member allocations. In addition,
based on analysis performed by OCC, OCC expects that the worst-case
Cover 2 Idiosyncratic Scenario shortfall amounts would generally fall
below OCC's current 1-in-80 year market event Sizing Scenarios and
therefore would not ordinarily have a material impact on the size of
the Clearing Fund.\57\ Accordingly, OCC does not believe the proposed
change would have any impact or burden on competition.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78q-1(b)(3)(I).
\57\ OCC has observed that there were certain circumstances
where the Idiosyncratic Scenarios generated the largest shortfalls
among OCC's Sizing Scenarios due to position increases relating to
corporate action activity in very liquid securities; however, in
these circumstances the size of the Clearing Fund would have been
established at the minimum requirement of $6.3 billion under Rule
1001(b).
---------------------------------------------------------------------------
OCC does not believe the proposed changes to its methodology for
modeling VIX futures price shocks would have a material impact on
competition. The proposed changes are designed to generate more
realistic price shocks that better reflect observed market conditions,
which could generally result in lower shortfalls in market decline
scenarios. OCC expects that the proposed VIX futures changes would have
minimal impact on the monthly sizing of the Clearing Fund; however, the
proposed change may result in reduced shortfalls in OCC's Sufficiency
Scenarios (particularly the historical 1987 market event scenario) and
therefore result in less frequent Sufficiency Stress Test margin calls
(or margin calls of a lower magnitude). The impact of the proposed
change would depend on the composition of a Clearing Member's portfolio
at a given time. Generally, Clearing Members with longer tenor
positions in VIX future contracts or VIX options will experience a
change in the profit and loss on the contracts. Where these positions
are driving the shortfall in an account, the account would experience a
change in shortfall due to the decrease in the amount of the shock,
dependent on the position and direction of the shock for the scenario
in question. When shortfalls increase, a large Clearing Member may be
more likely to be subject to more frequent and/or larger Sufficiency
Stress Test margin calls than under the current model. When shortfalls
decrease, Clearing Members may be less likely to breach Sufficiency
Thresholds and/or may experience smaller Sufficiency Stress Test margin
calls as a result of the change. OCC does not believe that this would
present an impact or burden from a competitive standpoint, however. The
proposed approach is simply intended to more accurately reflects the
risks carried by Clearing Members and align any potential margins calls
with this more accurate risk measure.
OCC also proposes to modify its Clearing Fund allocation
methodology to standardize the margin risk component of the allocation
formula for
[[Page 57920]]
all members by using only the STANS base amount, plus certain add-on
charges, in the Clearing Fund allocation process. Under the proposed
change, Clearing Members with segregated futures accounts would
typically see their Clearing Fund requirements decrease, while other
Clearing Members' requirements would generally increase to balance out
the full allocation of the Clearing Fund. While OCC acknowledges the
impact of the proposed change on individual Clearing Member
contribution requirements, OCC believes that using the same margin risk
measurement for all Clearing Members/accounts when determining Clearing
Fund allocations allows for a more equitable comparison across all
accounts. As a result, OCC believes the proposed change would promote
competition by standardizing its Clearing Fund allocation formula and
treating all Clearing Members similarly in the allocation process.
In addition, OCC proposes changes to its cooling-off period and
associated assessment cap rules that would ensure that the cooling-off
period and associated assessment caps are consistently applied for any
proportionate charge resulting from any of the events described in
clauses (i) through (vi) of Rule 1006(a). These changes would apply
equally to all Clearing Members and therefore OCC does not believe the
proposed changes would have any impact or burden on competition.
Finally, OCC proposes to make clarifying changes to its Methodology
Description, which are not expected to have any impact on competition.
The proposed changes are not intended to materially change OCC's
Clearing Fund or stress testing rules but are simply designed to
provide more accuracy and clarity in OCC's methodology documentation.
As a result, OCC does not believe the proposed changes would have any
impact or burden on competition.
For the reasons set forth above, OCC believes that the proposed
rule change would not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act
C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange 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-2019-009 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-2019-009. 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/about/publications/bylaws.jsp.
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-2019-009 and
should be submitted on or before November 19, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
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\58\ 17 CFR 200.30-3(a)(12).
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Jill M. Petersen,
Assistant Secretary.
[FR Doc. 2019-23550 Filed 10-28-19; 8:45 am]
BILLING CODE 8011-01-P