[Federal Register Volume 84, Number 239 (Thursday, December 12, 2019)]
[Notices]
[Pages 67977-67981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26730]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87672; File No. SR-OCC-2019-806]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Related To Proposed Changes to 
The Options Clearing Corporation's Rules, Clearing Fund Methodology 
Policy, and Clearing Fund and Stress Testing Methodology

December 6, 2019.

I. Introduction

    On October 10, 2019, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2019-806 (``Advance Notice'') 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'') \3\ to make changes to OCC's Clearing Fund and 
stress testing rules and methodology.\4\ The Advance Notice was 
published for public comment in the Federal Register on November 12, 
2019,\5\ and the Commission has received no comments regarding the 
changes proposed in the Advance Notice.\6\ The Commission is hereby 
providing notice of no objection to the Advance Notice.
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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.
    \4\ See Notice of Filing infra note 5, at 84 FR 61120.
    \5\ Securities Exchange Act Release No. 87475 (Nov. 6, 2019), 84 
FR 61120 (Nov. 12, 2019) (File No. SR-OCC-2019-806) (``Notice of 
Filing''). On October 10, 2019, OCC also filed a related proposed 
rule change (SR-OCC-2019-009) with the Commission pursuant to 
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder 
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in 
the Federal Register on October 29, 2019, OCC seeks approval of 
proposed changes to its rules necessary to implement the Advance 
Notice. Securities Exchange Act Release No. 87386 (Oct. 23, 2019), 
84 FR 57911 (Oct. 29, 2019). The comment period for the related 
Proposed Rule Change filing closed on November 19, 2019.
    \6\ Since the proposal contained in the Advance Notice was also 
filed as a proposed rule change, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or the Advance Notice.
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II. Background 7
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    \7\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    As noted above, OCC proposes to revise its Clearing Fund and stress 
testing rules and methodology. Specifically, OCC proposes 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) revise 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; and (4) 
adopt an additional threshold for notifying senior management of intra-
day margin calls based on certain stress test results. OCC also 
proposes to correct certain rules concerning OCC's cooling-off period 
and replenishment/assessment powers.\8\
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    \8\ Additionally, OCC proposes clarifying and conforming changes 
to its Rules, Clearing Fund Methodology Policy (``Policy''), and 
Stress Testing and Clearing Fund Methodology Description 
(``Methodology Description'').
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A. Sizing Stress Test Scenarios

    On a monthly basis, OCC establishes the size of its Clearing Fund 
at the level it believes is necessary to maintain sufficient 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 under certain stress scenarios.\9\ OCC determines the 
size of its Clearing Fund each month through an approach based on 
broad-based market and systemic shocks (``Systemic Scenarios'').\10\ 
OCC proposes to incorporate an additional 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 (``Idiosyncratic Scenarios''). The Idiosyncratic 
Scenarios would be in addition to the existing Systemic Scenarios. 
Because OCC's monthly Clearing Fund sizing process is designed to cover 
OCC's largest aggregate stress test exposures, the expansion of the set 
of Clearing Fund sizing stress tests could not reduce the size of OCC's 
Clearing Fund.
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    \9\ See Notice of Filing, 84 FR at 61121.
    \10\ See Notice of Filing, 84 FR at 61122. See also, Securities 
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37857 
(Aug. 2, 2019) (SR-OCC-2018-008) (describing OCC's Clearing Fund 
sizing stress test scenarios as an approach based on hypothetical 
stress scenarios that assume shocks to the Cboe S&P 500 Index 
(``SPX'') associated with a 1-in-80-year market event).
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    In constructing the Idiosyncratic Scenarios, OCC would shock each 
single-name equity (i.e., excluding exchange-traded funds, exchange-
traded notes, indices, and non-equity products). OCC would evaluate the 
effects of such shocks on every Clearing Member Group's portfolios. 
Within each Clearing Member Group's portfolio, OCC would identify the 
four single-name equities for which such shocks would result in the 
largest losses. OCC would then identify the two Clearing Member Groups 
with the largest aggregate losses. The combined losses of the two 
identified Clearing Member Groups would represent the loss that OCC 
would seek to cover in its monthly Clearing Fund sizing process. 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 financial resources to cover 
its credit exposures under scenarios addressing both systemic market 
risks and idiosyncratic risks.\11\
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    \11\ See Notice of Filing, 84 FR at 61122.
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B. Volatility Index Futures

    Under OCC's current stress testing methodology, prices shocks for 
futures based on the Cboe Volatility Index (``VIX'') \12\ are 
equivalent to a price shock for the underlying. Because the VIX has no 
term structure, this process produces a uniform shock across 
expirations of the VIX futures contracts. Futures contracts for 
different expirations, however, generally trade at different prices 
reflecting the differing future price expectations of the underlying 
asset.\13\ OCC believes that applying a uniform shock across 
expirations is unrealistic, and that it would lead to an overestimation 
of VIX futures price shocks, particularly in market decline 
scenarios.\14\ As noted above, OCC proposes to revise its stress 
testing methodology for modeling certain volatility index futures.

[[Page 67978]]

Specifically, the proposed change would produce differing price shocks 
for VIX futures across the term structure. The proposed methodology 
would be based on SPX volatility shocks across different expirations, 
as opposed to the current methodology's reliance on a single shock to 
the VIX. OCC believes that implementation of the proposed methodology 
would improve pricing for VIX futures as well as VIX options.\15\
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    \12\ The VIX is an index designed to measure the 30-day expected 
volatility of the SPX.
    \13\ 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. See 
Notice of Filing, 84 FR at 61122, n. 11.
    \14\ See Notice of Filing, 84 FR at 61122.
    \15\ See Notice of Filing, 84 FR at 61123. OCC uses VIX futures 
to calculate theoretical values for VIX options.
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C. Clearing Fund Allocation

    OCC allocates Clearing Fund contribution requirements to individual 
Clearing Members, in part, based on each Clearing Member's 
proportionate share of risk margin, which OCC refers to as ``total 
risk.'' \16\ The majority of Clearing Member margin requirements are 
based on OCC's System for Theoretical Analysis and Numerical 
Simulations (``STANS''), which is OCC's proprietary risk management 
system. The margin requirement for certain Clearing Members' accounts, 
however, is calculated using the Standard Portfolio Analysis of Risk 
Margin Calculation System (``SPAN''), which reflects customer gross 
margining.\17\ OCC proposes to define ``total risk'' as based on the 
same margin model for all Clearing Members.\18\ OCC believes it is more 
appropriate to use the same margin risk measurement for all Clearing 
Members when allocating Clearing Fund contribution requirements to 
allow for a more equitable comparison across all accounts.\19\
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    \16\ Currently, OCC uses the following weighting in its 
allocation of clearing fund requirements: 70 percent total risk; 15 
percent open interest; and 15 percent volume. See Securities 
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37863 
(Aug. 2, 2019) (SR-OCC-2018-008).
    \17\ See Notice of Filing, 84 FR at 61123, n. 16 (stating that 
``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'' (citation 
omitted)).
    \18\ Specifically, OCC proposes to use STANS plus certain add-on 
charges as the basis for determining each Clearing Member's 
proportionate share of total risk.
    \19\ See Notice of Filing, 84 FR at 61123.
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D. Margin Call Notification

    On a daily basis, OCC evaluates the sufficiency of its financial 
resources based on OCC's potential exposure to Clearing Member Groups 
under certain stress test scenarios (``Sufficiency Stress Tests''). 
Based on the results of the Sufficiency Stress Tests, OCC may call for 
additional collateral to ensure that it maintains sufficient financial 
resources to guard against potential losses. For example, OCC is 
authorized to make an intra-day margin call against a Clearing Member 
Group whose Sufficiency Stress Test exposures breach a pre-determined 
threshold. Currently, OCC's rules require that written notification of 
such intra-day margin calls in excess of $500 million be provided to 
OCC's Executive Chairman, Chief Executive Officer, and Chief Operating 
Officer (``Office of the CEO''). OCC proposes to revise its rules to 
require that written notification of stress test-related intra-day 
margin calls also be sent to the Office of the CEO when a stress test-
related intra-day margin call would exceed 75 percent of the Clearing 
Member's excess net capital. OCC believes that this additional 
notification requirement is appropriate because it would 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\ See Notice of Filing, 84 FR at 61123.
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E. Cooling-Off Period

    In 2018, OCC implemented a set of recovery tools, including 
revisions to OCC's authority to assess its Clearing Members for funds 
to replenish OCC's Clearing Fund.\21\ For example, OCC implemented a 
``cooling-off period'' during which its authority to levy such 
assessments is capped, which provides certainty to Clearing Members 
regarding their potential obligations to OCC. In proposing such 
revisions, OCC intended that the cooling-off period would be triggered 
by any proportionate Clearing Fund charges to Clearing Members related 
to the default of a Clearing Member.\22\ OCC's current rules, however, 
do not provide for a cooling-off period based on proportionate Clearing 
Fund charges arising out of two specific sets of circumstances: (1) In 
connection with protective transactions effected for the account of OCC 
pursuant to Chapter XI of OCC's 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 OCC 
Rule 1006(a)). OCC proposes to revise its rules such that any 
proportionate Clearing Fund charges to Clearing Members related to the 
default of a Clearing Member, including the two listed above, would 
trigger a cooling-off period.
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    \21\ See Securities Exchange Act Release No. 83916 (Aug. 23, 
2018), 83 FR 44076 (Aug. 29, 2018) (SR-OCC-2017-020).
    \22\ See Notice of Filing, 84 FR at 61124. Such triggers include 
the assessments arising out of a Clearing Member's failure to meet 
its obligations regarding confirmed trades, exercised or assigned 
contracts, stock loan transactions, or the liquidation of a Clearing 
Member's open positions. See id. at n. 22.
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III. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: 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 (``SIFMUs'') and strengthening the 
liquidity of SIFMUs.\23\
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    \23\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \24\ authorizes 
the Commission to prescribe regulations containing risk-management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the 
Clearing Supervision Act \25\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
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    \24\ 12 U.S.C. 5464(a)(2).
    \25\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among other areas.\26\
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    \26\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\27\

[[Page 67979]]

The Clearing Agency Rules require, among other things, each covered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures that are reasonably designed to meet certain 
minimum requirements for its operations and risk-management practices 
on an ongoing basis.\28\ As such, it is appropriate for the Commission 
to review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the Commission believes the changes proposed in the 
Advance Notice are consistent with the objectives and principles 
described in Section 805(b) of the Clearing Supervision Act,\29\ and in 
the Clearing Agency Rules, in particular Rules 17Ad-22(e)(2) and 
(4).\30\
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    \27\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Securities Exchange Act Release No. 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing Agency 
Standards''). The Commission established an effective date of 
December 12, 2016 and a compliance date of April 11, 2017 for the 
Covered Clearing Agency Standards. OCC is a ``covered clearing 
agency'' as defined in Rule 17Ad-22(a)(5). The Commission 
established an effective date of December 12, 2016 and a compliance 
date of April 11, 2017 for the Covered Clearing Agency Standards. 
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
    \28\ 17 CFR 240.17Ad-22.
    \29\ 12 U.S.C. 5464(b).
    \30\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Advance Notice is consistent with the stated objectives and principles 
of Section 805(b) of the Clearing Supervision Act. Specifically, as 
discussed below, the Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk management 
in the area of credit risk, promoting safety and soundness, reducing 
systemic risks, and supporting the stability of the broader financial 
system.\31\
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    \31\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposed changes to OCC's stress 
testing methodology are consistent with the promotion of robust risk 
management as well as safety and soundness at OCC. As described above, 
OCC proposes to expand the suite of stress tests it uses to size the 
Clearing Fund each month, and to revise OCC's estimation of VIX futures 
prices for stress testing. The introduction of the Idiosyncratic 
Scenarios to the monthly sizing of OCC's Clearing Fund would be in 
addition to the Systemic Scenarios OCC already uses to size its 
Clearing Fund and would help OCC address risks not currently 
contemplated by OCC's Systemic Scenarios. Additionally, OCC proposes to 
revise its process for shocking VIX futures prices to reflect the 
actual term structure dynamics of such futures. OCC's current use of a 
uniform shock for VIX futures contracts, regardless of tenure, is 
inconsistent with its observation that futures contracts with different 
expirations generally trade at different prices reflecting the 
differing future price expectations of the underlying asset. By 
enhancing its methodology for modeling price shocks for VIX futures, 
OCC should be able to produce more appropriate VIX futures price shocks 
in its stress scenarios, which in turn should enhance OCC's ability to 
accurately and appropriately size its Clearing Fund. The Commission 
believes that these changes, taken together, are consistent with the 
promotion of robust risk management as well as safety and soundness at 
OCC.
    The Commission also believes that the proposed changes to OCC's 
stress testing methodology are generally consistent with reducing 
systemic risk and supporting the broader financial system. The 
introduction of the Idiosyncratic Scenarios and revision of stress test 
shocks to VIX futures are designed to provide OCC with a more robust 
and accurate stress testing methodology. OCC uses its stress testing 
methodology to size and monitor its total financial resources. OCC 
relies on such resources to manage the potential losses arising out of 
the default of a Clearing Member under extreme but plausible market 
conditions. Strengthening the methodology that OCC uses to manage its 
financial resources, therefore, strengthens OCC's ability to manage 
Clearing Member defaults, which, in turn, enhances OCC's ability to 
manage systemic risk and to support the broader financial system.
    The Commission believes that the proposed changes regarding notice 
of intra-day margin requirements and allocation of Clearing Fund 
requirements also are consistent with the promotion of robust risk 
management at OCC. Currently, OCC notifies its Office of the CEO when 
intra-day margin calls generated in response to OCC's daily stress 
tests are large in absolute terms (i.e., in excess of $500 million). 
OCC proposes to also notify its Office of the CEO when such margin 
calls are large relative to the Clearing Member against which they are 
made (i.e., in excess of 75 percent of the Clearing Member's excess net 
capital). The Commission believes that such notification would provide 
additional meaningful risk management information to OCC's senior 
management, which in turn could be used to inform critical decisions. 
Additionally, OCC proposes to revise its method of allocating Clearing 
Fund contribution requirements across Clearing Members. OCC proposes to 
redefine the ``total risk'' component of its Clearing Fund allocation 
formula such that it would rely on the same underlying model for all 
Clearing Members when calculating total risk (as opposed to using 
different models for different Clearing Members depending on their 
cleared positions). The proposed change would not alter the allocation 
weighting, but, in the Commission's view, it would provide a more 
consistent metric by which to assess risks across Clearing Members.\32\ 
The Commission believes that these changes as well are consistent with 
the promotion of robust risk management as well as safety and soundness 
at OCC.
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    \32\ While the proposed change would not affect the total size 
of the Clearing Fund, it would result in changes to Clearing 
Members' proportionate share of the Clearing Fund.
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    Finally, the Commission believes that the proposed expansion of 
triggers for the cooling-off period is consistent with the promotion of 
safety and soundness at OCC. The Commission continues to believe that 
the cooling-off period provides certainty and predictability regarding 
Clearing Members' maximum liability for Clearing Fund 
contributions.\33\ Currently, however, the cooling-off period would be 
triggered by some, but not all proportionate Clearing Fund charges to 
Clearing Members arising out of a Clearing Member's failure to meet 
certain obligations under OCC's rules. OCC proposes to expand the set 
of events that would trigger the cooling-off period to include certain 
protective transactions and the failure of a Clearing Member to meets 
its obligations under certain of OCC's rules. The two events to be 
added as cooling-off period triggers are similar to the current 
triggers in that they pertain to proportionate Clearing Fund charges 
designed to manage the failure of a Clearing Member to meet its 
obligations to OCC. The Commission believes that including these two 
additional events as cooling-off period triggers would provide Clearing 
Members with additional certainty and predictability regarding their 
potential maximum liability for Clearing Fund contributions, which in 
turn is consistent with the promotion of safety and soundness at OCC.
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    \33\ See Securities Exchange Act Release No. 83916 (Aug. 23, 
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
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    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance

[[Page 67980]]

Notice are consistent with Section 805(b) of the Clearing Supervision 
Act.\34\
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    \34\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

    Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that, among other things, specify clear and 
direct lines of responsibility.\35\
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    \35\ 17 CFR 240.17Ad-22(e)(2)(v).
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    As described above, OCC proposes to add a new internal reporting 
requirement regarding certain intra-day margin calls. OCC may call for 
additional margin from Clearing Members based on the results of its 
Sufficiency Stress Tests. In addition to notifying its Office of the 
CEO when such margin calls are large in absolute terms (i.e., in excess 
of $500 million), OCC now proposes to also notify to its Office of the 
CEO when such margin calls are large relative to the Clearing Member 
against which they are made (i.e., in excess of 75 percent of the 
Clearing Member's excess net capital). The Commission agrees that such 
notification would inform OCC's senior management, who could then 
monitor circumstances as appropriate, when an intra-day margin call 
could strain the resources of a particular Clearing Member based on its 
financial condition. Accordingly, the Commission believes that the 
adoption of such a notification requirement is consistent with Rule 
17Ad-22(e)(2)(v) under the Exchange Act.\36\
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    \36\ 17 CFR 240.17Ad-22(e)(2)(v).
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C. Consistency With Rule 17Ad-22(e)(4) Under the Exchange Act

    Rule 17Ad-22(e)(4) under the Exchange Act requires, 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.\37\
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    \37\ 17 CFR 240.17Ad-22(e)(4).
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1. Stress Testing
    Rules 17Ad-22(e)(4)(i) and (iii) under the Exchange Act require 
that a covered clearing agency's policies and procedures meet the 
requirements of Rule 17Ad-22(e)(4) by maintaining financial resources 
at the minimum to enable OCC 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.\38\ Further, Rule 17Ad-22(e)(4)(vi) under the Exchange Act 
requires that a covered clearing agency's policies and procedures meet 
the requirements of Rule 17Ad-22(e)(4) by testing the sufficiency of a 
covered clearing agency's total financial resources available to meet 
the minimum financial resource requirements under Rules 17Ad-
22(e)(4)(i) through (iii).\39\
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    \38\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
    \39\ 17 CFR 240.17Ad-22(e)(4)(vi).
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    As described above, OCC proposes to expand the set of stress tests 
that it uses to size the Clearing Fund by adding the Idiosyncratic 
Scenarios to its current suite of stress tests. The Idiosyncratic 
Scenarios are designed to capture the risk of extreme moves in 
individual securities or small subsets of securities while the current 
Systemic Scenarios are based on broad-based market and systemic shocks. 
Consistent with the general view that expanding the types of scenarios 
that a clearing agency uses in its monthly sizing process makes the 
clearing agency's risk management robust to a broader range of shocks, 
the Commission believes that OCC's proposal to add the Idiosyncratic 
Scenarios to its suite of stress tests would be a strengthening change 
that is consistent with the requirements of Rules 17Ad-22(e)(4)(i) and 
(iii) under the Exchange Act.\40\
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    \40\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
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    Additionally, OCC proposes to revise its stress testing methodology 
to produce differing price shocks for VIX futures across the term 
structure. The proposed methodology would be based on SPX volatility 
shocks across different expirations, as opposed to the current 
methodology's reliance on a single shock to the VIX. As discussed 
above, these changes would help OCC produce more appropriate VIX 
futures price shocks in its stress scenarios, which in turn should 
enhance OCC's ability to accurately and appropriately size its Clearing 
Fund, consistent with the requirements of Rule 17Ad-22(e)(4)(vi).
    Accordingly, the Commission believes that, taken together, OCC's 
proposed changes to its stress testing methodology would be consistent 
with the requirements of Rules 17Ad-22(e)(4)(i), (iii), and (vi).\41\
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    \41\ 17 CFR 240.17Ad-22(e)(4)(i); 17 CFR 240.17Ad-22(e)(4)(iii); 
and 17 CFR 240.17Ad-22(e)(4) (vi).
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2. Clearing Fund Allocation
    As noted above, Rule 17Ad-22(e)(4) under the Exchange Act 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.\42\
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    \42\ 17 CFR 240.17Ad-22(e)(4).
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    OCC relies on the Clearing Fund as a source of mutualized resources 
available to manage losses arising out of a Clearing Member's default. 
OCC's method for allocating contributions to the Clearing Fund among 
Clearing Members is aligned primarily with the credit risk posed by 
each Clearing Member.\43\ OCC proposes to redefine the margin risk 
component of its Clearing Fund allocation formula such that it would 
rely on the same underlying model--STANS--for all Clearing Members (as 
opposed to relying on STANS for most Clearing Members and SPAN for 
certain Clearing Members with segregated futures accounts). The 
proposed change would not change the overall allocation weighting 
(i.e., margin risk would still account for 70 percent of Clearing 
Members' Clearing Fund allocation), but the Commission believes it 
would provide a more consistent metric by which to assess margin risk 
across Clearing Members. Accordingly, the Commission believes that the 
proposed change is reasonably designed to support the management of 
OCC's credit exposures to its participants. OCC relies on the Clearing 
Fund as a source of mutualized resources available to manage losses 
arising out of a Clearing Member's default. OCC method for allocating 
contributions to the Clearing Fund is aligned primarily with the credit 
risk posed by each Clearing Member. The proposed change would not 
change the allocation weighting but, the Commission believes, it would 
provide a more consistent metric by which to assess risks across 
Clearing Members. The Commission believes, therefore, that OCC's 
proposed change to its Clearing Fund allocation methodology is 
consistent with the requirements of Rule 17Ad-22(e)(4).\44\
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    \43\ Clearing Fund allocations are based on a weighting of 70% 
margin risk, what OCC refers to as the ``total risk'' component of 
its Clearing Fund allocation formula, with open interest and cleared 
volume weighted at 15% each.
    \44\ 17 CFR 240.17Ad-22(e)(4).
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3. Cooling-Off Period
    Rule 17Ad-22(e)(4)(ix) under the Exchange Act requires, in part, 
that a

[[Page 67981]]

covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to describe its 
process to replenish any financial resources it may use following a 
default or other event in which use of resources is contemplated.\45\
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    \45\ 17 CFR 240.17Ad-22(e)(4)(ix).
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    As noted above, OCC's current recovery tools include a cooling-off 
period, during which OCC's authority to assess Clearing Members for 
funds to replenish OCC's Clearing Fund is limited. Recognizing the 
limit that such a cooling-off period places on the financial resources 
available to OCC, the Commission continues to believe that the cooling-
off period provides certainty and predictability regarding Clearing 
Members' maximum liability for Clearing Fund contributions.\46\ OCC 
proposes to expand the set of events that would start the cooling-off 
period to include proportionate Clearing Fund charges to Clearing 
Members triggered by certain protective transactions or the failure of 
a Clearing Member to meet certain obligations under OCC's rules, 
consistent with OCC's original intention with its prior filing. The two 
events to be added as triggers for the cooling-off period are similar 
to the current triggers in that they pertain to amounts paid out of the 
Clearing Fund to manage the failure of a Clearing Member to meet its 
obligations to OCC. Consistent with the Commission's statements 
regarding the current formulation of the cooling-off period, the 
Commission believes that the proposed expansion is consistent with 
OCC's obligations to describe its process to replenish any financial 
resources it may use following a default or other event in which use of 
resources is contemplated as required under Rule 17Ad-22(e)(4)(ix).\47\
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    \46\ See Securities Exchange Act Release No. 83916 (Aug. 23, 
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
    \47\ 17 CFR 240.17Ad-22(e)(4)(ix).
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    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
Rule 17Ad-22(e)(4) under the Exchange Act.\48\
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    \48\ 17 CFR 240.17Ad-22(e)(4).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-OCC-2019-806) and that OCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-OCC-
2019-009 whichever is later.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26730 Filed 12-11-19; 8:45 am]
 BILLING CODE 8011-01-P