[Federal Register Volume 84, Number 218 (Tuesday, November 12, 2019)]
[Notices]
[Pages 61120-61128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24548]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87475; File No. SR-OCC-2019-806]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice Related to Proposed Changes to The
Options Clearing Corporation's Rules, Clearing Fund Methodology Policy,
and Clearing Fund and Stress Testing Methodology
November 6, 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
October 10, 2019, the Options Clearing Corporation (``OCC'') filed with
the Securities and Exchange Commission (``Commission'') an 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 submitted in connection with proposed
enhancements to OCC's Clearing Fund and stress testing rules and
methodology designed to: (1) 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-
[[Page 61121]]
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.
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\
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\4\ OCC also has filed a proposed rule change with the
Commission in connection with the proposed changes. See SR-OCC-2019-
009.
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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.\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 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
Written comments were not and are not intended to be solicited with
respect to the advance notice 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
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 61122]]
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 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
[[Page 61123]]
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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5. Correction of Cooling-Off Period and Replenishment/Assessment Power
Rules
OCC proposes several corrections to its Rules and Policy concerning
its
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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 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'').
[[Page 61125]]
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). OCC 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 constitute 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.
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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.
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\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).
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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\
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\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.
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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 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
[[Page 61126]]
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.
---------------------------------------------------------------------------
Expected Effect on and Management of Risk
OCC believes the proposed changes are designed to enhance OCC's
overall framework for managing credit risk. The introduction of 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. 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 the event
of a Clearing Member default.
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.\32\ 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.
---------------------------------------------------------------------------
\32\ 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.
---------------------------------------------------------------------------
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
risks that may be identified in the Sufficiency Stress Test margin call
process, and allow OCC to take steps to reduce potential default risks
for its Clearing Members.
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
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.
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.\33\
Section 805(a)(2) of the Clearing Supervision Act \34\ 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 \35\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
---------------------------------------------------------------------------
\33\ 12 U.S.C. 5461(b).
\34\ 12 U.S.C. 5464(a)(2).
\35\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
OCC believes that the proposed changes described herein are
consistent with the objectives and principles of Section 805(b) of the
Clearing Supervision Act \36\ and the risk management standards adopted
by the Commission in Rule 17Ad-22 under the Act for the reasons set
forth below.\37\
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\36\ Id.
\37\ 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''). OCC is a ``covered clearing agency'' as
defined in Rule 17Ad-22(a)(5) and therefore must comply with the
requirements of Rule 17Ad-22(e).
---------------------------------------------------------------------------
[[Page 61127]]
OCC believes the proposed changes are consistent with the
objectives and principles of Section 805(b) of the Clearing Supervision
Act.\38\ The proposed changes are designed to enhance OCC's overall
framework for managing credit risk. The proposed changes would
introduce new Idiosyncratic Scenarios to provide for a more
comprehensive suite of Sizing Stress Tests and 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. OCC also proposes to enhance its
stress testing methodology to more accurately and appropriately model
price shocks for VIX futures. 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,
which would allow for a more equitable comparison across all accounts
through the utilization of a consistent margin methodology, and result
in an allocation formula that determines Clearing Member contribution
requirements that are commensurate to the risks posed by each Clearing
Member. Moreover, OCC proposes to enhance its process for monitoring
and managing credit risk, particularly those risks that may be
identified in the Sufficiency Stress Test margin call process, and
allow OCC to take steps to reduce potential default risks for its
Clearing Members. OCC believes the proposed changes are generally
designed to promote robust risk management, promote safety and
soundness, reduce systemic risks, and support the stability of the
broader financial system in accordance with the objectives and
principles of Section 805(b) of the Clearing Supervision Act.\39\
---------------------------------------------------------------------------
\38\ 12 U.S.C. 5464(b).
\39\ Id.
---------------------------------------------------------------------------
OCC also believes the proposed changes are consistent with the risk
management standards adopted by the Commission in Rule 17Ad-22 under
the Act. Rule 17Ad-22(b)(3) \40\ 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) \41\ 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)) \42\ 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.
---------------------------------------------------------------------------
\40\ 17 CFR 240.17Ad-22(b)(3).
\41\ 17 CFR 240.17Ad-22(e)(4)(iii) and (iv).
\42\ 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 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).\43\
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\43\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(iii) and (iv).
---------------------------------------------------------------------------
Furthermore, Rule 17Ad-22(e)(4) \44\ 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 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).\45\
---------------------------------------------------------------------------
\44\ 17 CFR 240. 17Ad-22(e)(4).
\45\ 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).
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[[Page 61128]]
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),\46\ 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.\47\ 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).\48\
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\46\ Id.
\47\ 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.
\48\ Id.
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Rule 17Ad-22(e)(4)(ix) \49\ 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).\50\
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\49\ 17 CFR 240. 17Ad-22(e)(4).
\50\ 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) \51\ 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.
---------------------------------------------------------------------------
\51\ 17 CFR 240. 17Ad-22(e)(4).
---------------------------------------------------------------------------
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:
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-2019-806 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-2019-806. 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-2019-806 and
should be submitted on or before November 27, 2019.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24548 Filed 11-8-19; 8:45 am]
BILLING CODE P