[Federal Register Volume 85, Number 147 (Thursday, July 30, 2020)]
[Notices]
[Pages 45938-45941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16472]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89392; File No. SR-OCC-2020-007]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Concerning The Options Clearing Corporation's Synthetic Futures Model

July 24, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 10, 2020, the Options Clearing Corporation 
(``OCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by OCC. OCC filed the 
proposed rule change pursuant to Section 19(b)(3)(A) \3\ of the Act and 
Rule 19b-4(f)(4)(ii) \4\ thereunder so that the proposal was effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC is filing a proposed rule change to clarify the intended scope 
of use of an existing OCC margin model. The proposed changes to OCC's 
Margins Methodology are contained in confidential Exhibit 5 of filing 
SR-OCC-2020-007. Material proposed to be added to the Margins 
Methodology as currently in effect is underlined and material proposed 
to be deleted is marked in strikethrough text. All capitalized terms 
not defined herein have the same meaning as set forth in the OCC By-
Laws and Rules.\5\
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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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[[Page 45939]]

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
Background
    On May 15, 2019, the Commission issued a Notice of No Objection to 
an advance notice filing by OCC to enhance its margin model for 
Volatility Index Futures.\6\ On May 16, 2019, the Commission approved a 
proposed rule change by OCC concerning the same changes.\7\ The model 
enhancements included: (1) The daily re-estimation of prices and 
correlations using ``synthetic'' futures; \8\ (2) an enhanced 
statistical distribution for modeling price returns for synthetic 
futures (i.e., an asymmetric Normal Reciprocal Inverse Gaussian (or 
``NRIG'') distribution); and (3) a new anti-procyclical floor for 
variance estimates. The main feature of the enhanced model was the 
replacement of the use of the underlying index itself as a risk factor 
\9\ (e.g., the VIX) with risk factors that are based on observed 
futures prices (i.e., the ``synthetic'' futures contracts). These risk 
factors are then used in the generation of Monte Carlo scenarios for 
the futures by using volatility and correlations obtained from the 
existing simulation models in OCC's propriety margin system, the System 
for Theoretical Analysis and Numerical Simulations (``STANS'').\10\ 
Additionally, the model has the ability to capture the ``Samuelson 
effect,'' \11\ when appropriate for a product, thus offering more 
accurate margins across the term structure.
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    \6\ See Securities Exchange Act Release No. 85870 (May 15, 
2019), 84 FR 23096 (May 21, 2019) (SR-OCC-2019-801). Certain indices 
are designed to measure the volatility implied by the prices of 
options on a particular reference index or asset (``Volatility 
Indexes''). For example, the Cboe Volatility Index (``VIX'') is 
designed to measure the 30-day expected volatility of the Standard & 
Poor's 500 index (``SPX''). OCC clears futures contracts on 
Volatility Indexes. These futures contracts are referred to herein 
as ``Volatility Index Futures.''
    \7\ See Securities Exchange Act Release No. 85873 (May 16, 
2019), 84 FR 23620 (May 16, 2019) (SR-OCC-2019-002).
    \8\ A ``synthetic'' futures time series, for the intended 
purposes of OCC, relates to a uniform substitute for a time series 
of daily settlement prices for actual futures contracts, which 
persists over many expiration cycles and thus can be used as a basis 
for econometric analysis.
    \9\ A ``risk factor'' within OCC's margin system may be defined 
as a product or attribute whose historical data is used to estimate 
and simulate the risk for an associated product.
    \10\ 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/.
    \11\ The Samuelson effect is a term used to describe the 
observation that shorter tenor contracts tend to be more volatile 
than back tenor contracts. See Samuelson, Paul A., ``Proof that 
Properly Anticipated Prices Fluctuate Randomly,'' Industrial 
Management Review, Vol. 6 (1965).
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    The enhanced model was initially adopted to replace OCC's former 
model for Volatility Index Futures, which modeled the potential final 
settlement prices of Volatility Index Futures using the underlying 
index as the risk factor.\12\ However, this enhanced model is also fit 
for use for Cboe's AMERIBOR Futures \13\ because the model is better 
able to capture the correlation and idiosyncrasy in futures contracts 
where coverages across the term structure may potentially be 
different.\14\
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    \12\ OCC's former model for Volatility Index Futures was subject 
to certain limitations, which were addressed by the enhanced model. 
For example, Volatility Indexes, unlike futures contracts, are not 
investible (i.e., they cannot be replicated by static portfolios of 
traded contracts). In addition, the futures market has a term 
structure that cannot be modeled using just the underlying index.
    \13\ AMERIBOR Futures are futures on the American Interbank 
Offered Rate disseminated by the American Financial Exchange, LLC, 
which is a transactions-based interest rate benchmark that 
represents market-based borrowing costs (http://www.cboe.com/products/futures/ameribor-futures).
    \14\ For example, OCC also maintains a ``Generic Futures 
Model,'' which is a simple model based on the cost of carry that is 
primarily used to margin equity-like futures such as SPX futures and 
interest rates futures such as AMERIBOR Futures. This model also has 
certain limitations (e.g., the model does not consider the 
volatility term structure of futures contracts by assuming a flat 
volatility for all contracts, and it assumes a perfect correlation 
among different futures contracts on the same underlying asset).
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Proposed Changes
    OCC proposes to revise its Margins Methodology to clarify the 
intended scope and use of its ``Volatility Index Futures Model,'' which 
would be renamed the ``Synthetic Futures Model.'' Under the proposed 
rule change, the Synthetic Futures Model would be available for use for 
the AMERIBOR Futures cleared by OCC. OCC also proposes to modify the 
Margins Methodology to describe certain model parameter calibrations 
more generally for a given futures product. For example, the proposed 
rule change would allow OCC to adjust certain features of the model 
involving the use of logarithmic returns and seasonal adjustments so it 
can be appropriately calibrated for AMERIBOR Futures, which do not 
exhibit the Samuelson effect observed with Volatility Index Futures. In 
addition, the methodology would be revised for AMERIBOR Futures to 
provide flexibility in applying the anti-procyclical floor currently 
used for Volatility Index Futures. OCC adopted a scaled variance floor 
for Volatility Index Futures, where the scaling is calculated based on 
the underlying Volatility Index, to ensure the model had an effective 
floor to address anti-procyclicality. Based on the characteristics of 
AMERIBOR Futures, OCC proposes to use the unconditional variance from 
the 500-days of synthetic futures data to estimate the procyclical 
floor and the scale factor applied to the variance floor would be set 
to 1.
    OCC also proposes other clean-up changes to the Margins 
Methodology. Specifically, OCC would clarify that OCC no longer uses a 
Student's t-distribution for univariate modeling for most risk factors 
\15\ and remove redundant language used to describe how estimations for 
synthetic futures are done on a daily basis (i.e., are designated as 
``non-pending''). OCC also proposes to remove statements related to 
OCC's old Clearing Fund methodology, which was replaced in September 
2018.\16\
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    \15\ See Securities Exchange Act Release No. 83326 (May 24, 
2018), 83 FR 25081 (May 31, 2018) (SR-OCC-2017-022) and Securities 
Exchange Act Release No. 83305 (May 23, 2018), 83 FR 24536 (May 29, 
2018) (SR-OCC-2017-811).
    \16\ On July 26, 2018, the SEC 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 SEC 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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(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act \17\ and the rules thereunder applicable to OCC. Section 
17A(b)(3)(F) of the Act \18\ requires, in part, that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of derivative agreements, contracts, and 
transactions. The proposed rule change would make minor changes to 
OCC's Margins Methodology so that the Synthetic

[[Page 45940]]

Futures Model can be used to model Cboe's AMERIBOR Futures. OCC 
believes the Synthetic Futures Model may provide better margin coverage 
for these products than other margin models maintained by OCC. OCC uses 
the margin it collects from a defaulting Clearing Member to protect 
other Clearing Members from losses as a result of the default and 
ensure that OCC is able to continue the prompt and accurate clearance 
and settlement of its cleared products. OCC therefore believes that the 
proposed rule change is designed to promote the prompt and accurate 
clearance and settlement derivatives transactions in accordance with 
Section 17A(b)(3)(F) of the Act.\19\
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    \17\ 15 U.S.C. 78q-1.
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ Id.
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    Exchange Act Rules 17Ad-22(e)(6)(i), (iii), and (v) \20\ further 
require that a covered clearing agency establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
cover its credit exposures to its participants by establishing a risk-
based margin system that, among other things: (1) Considers, and 
produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market; (2) 
calculates margin sufficient to cover its potential future exposure to 
participants in the interval between the last margin collection and the 
close out of positions following a participant default; and (3) uses an 
appropriate method for measuring credit exposure that accounts for 
relevant product risk factors and portfolio effects across products. 
OCC believes that using the Synthetic Futures Model for AMERIBOR 
Futures would produce margin levels commensurate with the risks and 
particular attributes of product in question, generate margin 
requirements to cover OCC's potential future exposure to its 
participants, and appropriately take into account relevant product risk 
factors for AMERIBOR Futures. In this way, OCC believes the proposed 
rule change is consistent with the requirements of Rules 17Ad-
22(e)(6)(i), (iii), and (v).\21\
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    \20\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
    \21\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
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(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \22\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would have any impact or impose a 
burden on competition. Recent impact analysis by OCC indicates that the 
impact on margin requirements for currently affected Clearing Members 
would be relatively minimal, both in terms of absolute dollars and as a 
percentage of aggregate account-level margin requirements.\23\ As a 
result, OCC does not believe that the proposed rule change would 
unfairly inhibit access to OCC's services or disadvantage or favor any 
particular user in relationship to another user. Accordingly, OCC does 
not believe that the proposed rule change would have any impact or 
impose a burden on competition.
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    \22\ 15 U.S.C. 78q-1(b)(3)(I).
    \23\ OCC has provided impact analysis of the proposed change in 
confidential Exhibit 3 to filing SR-OCC-2020-007.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(3)(A) of the Act,\24\ and Rule 19b-
4(f)(4)(ii) thereunder,\25\ the proposed rule change is filed for 
immediate effectiveness because it effects a change in an existing 
service of OCC that (i) primarily affects the clearing operations of 
OCC with respect to products that are not securities and (ii) does not 
significantly affect any securities clearing operations of OCC or any 
rights or obligations of OCC with respect to securities clearing or 
persons using such securities clearing services.
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4(f)(4)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\26\
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    \26\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Rule 40.6.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2020-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2020-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/about/publications/bylaws.jsp.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2020-007 and 
should be submitted on or before August 20, 2020.


[[Page 45941]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16472 Filed 7-29-20; 8:45 am]
BILLING CODE 8011-01-P