[Federal Register Volume 85, Number 201 (Friday, October 16, 2020)]
[Notices]
[Pages 65886-65888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22740]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90139; File No. SR-OCC-2020-012]


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

October 8, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on September 30, 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 primarily by OCC. OCC 
filed the proposed rule change pursuant to Section 19(b)(3)(A) \3\ of 
the Exchange 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 expand the 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-
2020-012. 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: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

(1) Purpose
Background
    On May 15, 2019, the Commission issued a Notice of No Objection to 
an advance notice filing by OCC to adopt an enhanced 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 accommodate negative prices 
and interest rates.
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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/.
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    On July 10, 2020, OCC filed a proposed rule change to expand the 
use of the model, currently known as the ``Synthetic Futures Model,'' 
to Cboe's AMERIBOR Futures.\11\ OCC now proposes to expand the use of 
the Synthetic Futures Model to certain

[[Page 65887]]

products planned to be listed by Small Exchange Inc. (``Small'').
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    \11\ See Securities Exchange Act Release No. 89392 (July 24, 
2020), 85 FR 45938 (July 30, 2020) (SR-OCC-2020-007). 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).
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Proposed Changes
    On December 6, 2019, OCC filed a proposed rule change to execute an 
Agreement for Clearing and Settlement Services between OCC and Small in 
connection with Small's intention to operate as a designated contract 
market regulated by the Commodity Futures Trading Commission.\12\ Small 
plans to launch new futures products linked to indexes comprised of 
continuous yields based on the most recently issued (i.e., ``on-the-
run'') U.S. Treasury notes (``Small Treasury Yield Index 
Futures'').\13\ OCC proposes to extend the use of its Synthetic Futures 
Model to these Small Treasury Yield Index Futures.
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    \12\ See Securities Exchange Act Release No. 87774 (December 17, 
2019), 84 FR 70602 (December 23, 2019) (SR-OCC-2019-011).
    \13\ See https://smallexchange.com/products/s10y.
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    The Synthetic Futures model maps the price risk factor of a traded 
futures product to a synthetic time series constructed from the traded 
prices of similar tenor futures in history. This allows the model to 
capture differences in volatility of futures across the term structure. 
Such differences in volatility are exhibited for futures products whose 
underlying deliverable is linked to a different tenor of a market 
observable risk factor such as interest rates or volatility. The 
initial Small Treasury Yield Futures will be based on the underlying 
yield of the on-the-run 10 year U.S. Treasury notes and hence the 
volatility of the future will depend on the volatility of the forward 
value of the on-the-run treasury yield at future expiry. As a result, 
OCC believes that the Synthetic Futures Model would provide more 
appropriate margin coverage for Small Treasury Yield Index Futures than 
other models in OCC's inventory.\14\
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    \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 
can be used to model certain interest rates futures. This model has 
certain limitations (e.g., the model cannot currently accommodate 
negative prices and rates).
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    OCC proposes to make certain modifications to its Margins 
Methodology to implement the proposed change. Specifically, the Margins 
Methodology would be revised to clarify that certain products with 
limited price history, such as the Small Treasury Yield Index Futures, 
may use proxy data to generate price scenarios for the synthetic 
futures. In addition, OCC would revise the Margins Methodology to note 
that for Small Treasury Yield Index Futures, OCC would use a fixed NRIG 
asymmetry parameter, which OCC believes is better suited to the risk 
profile of the product as the asymmetry of returns is primarily on the 
left-tail (or negative returns) and already captured by the GARCH model 
specifications. Consistent with the original implementation of the 
Synthetic Futures Model, the Small Treasury Yield Index Futures will 
also use proportional returns in the calibration. Finally, the Margins 
Methodology would also be revised to note that OCC would initially use 
a fixed scale factor for purposes of determining the long-run variance 
floor until sufficient data for the Small Treasury Yield Index Futures 
is available for this scale factor to be calibrated on a regular basis. 
The scale factor setting will be reviewed periodically based on the 
futures data and adjusted, if appropriate.
(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act \15\ and the rules thereunder applicable to OCC. Section 
17A(b)(3)(F) of the Act \16\ 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 Futures Model can be 
used to model Small Treasury Yield Index 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.\17\
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    \15\ 15 U.S.C. 78q-1.
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ Id.
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    Exchange Act Rules 17Ad-22(e)(6)(i), (iii), and (v) \18\ 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 Small Treasury 
Yield Index 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 Small Treasury Yield Index Futures.\19\ In this way, OCC 
believes the proposed rule change is consistent with the requirements 
of Rules 17Ad-22(e)(6)(i), (iii), and (v).\20\
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    \18\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
    \19\ OCC has provided backtesting analysis for the proposed 
change in confidential Exhibit 3 to filing SR-OCC-2020-012.
    \20\ 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 \21\ 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. The Synthetic Futures Model would be used for 
Small Treasury Yield Index Futures for all Clearing Members upon the 
launch of the new products. 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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    \21\ 15 U.S.C. 78q-1(b)(3)(I).
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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.

[[Page 65888]]

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

    Pursuant to Section 19(b)(3)(A) of the Act,\22\ and Rule 19b-
4(f)(4)(ii) thereunder,\23\ 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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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 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.\24\
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    \24\ 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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2020-012 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-2020-012. 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-2020-012 and 
should be submitted on or before November 6, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22740 Filed 10-15-20; 8:45 am]
BILLING CODE 8011-01-P