[Federal Register Volume 88, Number 243 (Wednesday, December 20, 2023)]
[Notices]
[Pages 88163-88173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27912]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99169; File No. SR-OCC-2023-008]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Concerning Amendments to the Options Clearing Corporation's Collateral 
Risk Management Policy and Margin Policy

December 14, 2023.
    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 December 4, 2023, The Options Clearing 
Corporation (``OCC'' or ``Corporation'') filed with the Securities and 
Exchange Commission (``SEC'' or ``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)(i) \3\ of the Act and Rule 19b-4(f)(1) 
\4\ thereunder, such that the proposed rule change was immediately 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would amend OCC's Collateral Risk 
Management Policy (``CRM Policy'') and Margin Policy (collectively, 
``OCC Policies''). The proposed changes are designed to update the OCC 
Policies to better align the descriptions therein with OCC's current 
practices, delete extraneous information, and make other non-
substantive clarifying, conforming and administrative changes.
    The proposed changes to the OCC Policies are included in 
confidential Exhibits 5A and 5B to File No. SR-OCC-2023-008. Material 
proposed to be added to the OCC Policies 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    As the sole clearing agency for standardized equity options listed 
on national securities exchanges registered with the Commission 
(``listed options''), OCC is exposed to certain risks, including credit 
risk arising from its relationships with the Clearing Members for which 
OCC becomes the buyer to every seller and the seller to ever buyer with 
respect to listed options. In order to manage counterparty credit risk 
and mitigate related systemic risks, OCC requires Clearing Members to 
collateralize financial obligations that result from maintaining 
options, futures and stock loan positions at OCC.
    OCC maintains policies filed with the Commission as OCC rules that 
are designed to address such credit risk,

[[Page 88164]]

including the CRM Policy and the Margin Policy. The CRM Policy 
identifies OCC's approach for managing the risks associated with 
accepting collateral deposits.\6\ Specifically, the CRM Policy sets the 
governance processes for establishing and maintaining standards used to 
determine acceptable forms of collateral, as well as the methodology 
for establishing the valuation practices, including applicable haircuts 
and concentration limits to effectively manage OCC's credit 
exposure.\7\ In addition, the CRM Policy describes the requirements for 
periodically evaluating the forms of accepted collateral and the 
ongoing adequacy of the valuation processes.\8\ The Margin Policy 
describes OCC's approach to managing credit exposure presented by its 
Clearing Members by requiring Clearing Members to deposit margin, which 
OCC would use to cover losses if a member defaults.\9\ The Margin 
Policy addresses positions considered for margin calculations, cross-
margining, treatment of collateral included in margin calculations, key 
margin assumptions, OCC's margin methodologies, protocols for margin 
calls and adjustments, and margin monitoring, including through daily 
backtesting and model validation that OCC conducts to assess the 
performance of its margin methodologies.\10\
---------------------------------------------------------------------------

    \6\ See Exchange Act Release No. 82311 (Dec. 13, 2017), 82 FR 
60252, 60252-53 (Dec. 19, 2017) (SR-OCC-2017-008).
    \7\ See id.
    \8\ See id. at 60253.
    \9\ See Exchange Act Release No. 82658 (Feb. 7, 2018), 83 FR 
6646, 6646 (Feb. 14, 2018) (SR-OCC-2017-007).
    \10\ See id. at 6647.
---------------------------------------------------------------------------

    Consistent with regulatory obligations,\11\ OCC and its Board 
reviews these risk management policies at least annually. Through these 
annual reviews, OCC has identified proposed revisions intended to 
revise certain descriptions to better reflect current practices, remove 
extraneous information and make other non-substantive, clarifying and 
administrative changes to the text of those policies. These changes are 
designed to enhance the clarity of OCC's internal governance 
arrangements and are not expected to have any impact on OCC's Clearing 
Members or other market participants.
---------------------------------------------------------------------------

    \11\ See 17 CFR 240.17Ad-22(e)(3)(i) (requiring, among other 
things, that a covered clearing agency subject its risk management 
policies, procedures and systems to review on a specified periodic 
basis and approval by the board of directors annually).
---------------------------------------------------------------------------

(1) Purpose
    OCC proposes to make the following changes to the CRM Policy and 
Margin Policy to better reflect current practices, remove extraneous 
information and make other non-substantive, clarifying and 
administrative changes to the text of those policies.
1. CRM Policy
    OCC proposes to add a statement in the Purpose section that the CRM 
Policy sets forth processes to establish and maintain standards used to 
``maintain a collateral system that is well-designed and operationally 
flexible.'' OCC's Collateral Management system meets this standard 
today and no changes to its operations would be required. The proposed 
revision would merely clarify that OCC's collateral system conforms to 
the standard established at Principle 5, Key Consideration 6 of the 
Principles for Financial Market Infrastructures.\12\
---------------------------------------------------------------------------

    \12\ See Committee on Payment and Settlement Systems and 
Technical Committee of the International Organization of Securities 
Commissions (``CPSS-IOSCO''), Principles for financial market 
infrastructures (Apr. 16, 2012) (stating that ``[a]n FMI should use 
a collateral management system that is well-designed and 
operationally flexible''), available at http://www.bis.org/publ/cpss101a.pdf. In 2014, the CPSS became the Committee on Payments and 
Market Infrastructures (``CPMI'').
---------------------------------------------------------------------------

    OCC proposes to insert an Applicability and Scope section that, 
consistent with other recently filed policies,\13\ would identify the 
primary OCC business units that support OCC's approach to managing the 
risks associated with accepting collateral deposits, including but not 
limited to Pricing and Margins (``P&M''), Collateral Services, and 
Quantitative Risk Management (``QRM'').
---------------------------------------------------------------------------

    \13\ See Exchange Act Release No. 93916 (Jan. 6, 2022), 87 FR 
1819, 1820 (Jan. 12, 2022) (SR-OCC-2021-014) (discussing the 
applicability and scope of OCC's Cash and Investment Management 
Policy).
---------------------------------------------------------------------------

    OCC proposes to retitle the Policy Detail section as the Policy 
Content section to conform with current OCC titling conventions as 
reflected in other policies. OCC also proposes to amend a statement 
therein that Clearing Members must maintain sufficient collateral at 
OCC to meet their margin and clearing fund obligations ``at all 
times.'' OCC proposes to remove this phrase that could imply that a 
Clearing Member's failure to maintain sufficient collateral would 
constitute a violation of OCC's Rules (i.e., if the value of the 
collateral on deposit fell below the Clearing Member's margin 
requirement). Such a reading would be inconsistent with OCC operations 
and the implicit intent behind OCC Rules 601 and 1001, which establish 
OCC's ability to call for margin and Clearing Fund collateral as 
needed. The revised statement would better describe OCC's long-standing 
requirements and practices.
    OCC proposes to remove lists of acceptable margin and Clearing Fund 
collateral types from the Margin and Clearing Fund sections. OCC Rules 
604 and 610 describe asset types that OCC accepts as margin collateral 
and OCC Rule 1002 describes Clearing Fund collateral. Because the list 
of acceptable collateral to be removed is appropriately reflected in 
the Rulebook, it need not be duplicated in the CRM Policy. Similarly, 
OCC proposes to delete a statement regarding the current composition of 
sovereign debt accepted by OCC in the Sovereign Credit Risk section. 
This text provides background information regarding the current 
composition of OCC's sovereign debt collateral and maintaining this 
description in the CRM Policy text raises the risk of inaccuracy should 
OCC's collateral composition change over time. The statement does not 
establish a stated policy, practice or interpretation of OCC regarding 
the forms of Government securities acceptable to OCC, which are 
established by OCC Rules 604 and 1002.
    OCC proposes to restate Financial Risk Management's (``FRM'') 
stated obligation in the Market Risk section to value collateral 
``continuously,'' to ``throughout regular market trading hours.'' The 
modifier ``continuously'' could imply that FRM is required to value 
collateral on a 24/7 basis. OCC's policies and procedures are designed 
to set and enforce appropriately conservative haircuts for the 
collateral it accepts,\14\ but OCC does not believe this would require 
it to adhere to a standard of continuous and ongoing revaluation of 
collateral. Accordingly, OCC proposes these revisions to more clearly 
reflect its long-standing practices. Similarly, OCC proposes to restate 
the obligation in the Valuations section from requiring P&M to perform 
its collateral valuation processes ``on a continuous basis'' to 
``during regular market trading hours.'' In each case the revised 
statements are fairly and reasonably implied by OCC's rules.\15\
---------------------------------------------------------------------------

    \14\ See 17 CFR 240.17Ad-22(e)(5).
    \15\ For example, the CRM Policy explains that OCC's approach to 
valuation includes that the maximum period between collateral 
revaluations is at least daily. See Exchange Act Release No. 82009 
(Nov. 3, 2017), 82 FR 52079, 52080-81 (Nov. 9, 2017) (SR-OCC-2017-
008).
---------------------------------------------------------------------------

    OCC proposes to amend the description of its approach to 
concentration risk in the Concentration Risk section. The current 
description focuses on OCC's measures to mitigate

[[Page 88165]]

concentration risk in relatively limited scenarios, including where 
appropriate to limit the aggregation or concentration of large 
positions in a single security or mitigate price dislocation when 
selling a large position into a thin market. This description does not 
address other relevant instances where OCC could face or seek to 
mitigate concentration risk. As such, OCC proposes to more broadly 
describe its approach to mitigating concentration risk, which consists 
of restrictions for certain assets intended to allow OCC to liquidate 
collateral quickly without adverse price effects. The proposed 
revisions would more fully describe OCC's approach to mitigating 
concentration risk without altering the substance or requirements of 
the CRM Policy as they relate to OCC's core risk management activities.
    The Systems and Processing section describes OCC's collateral 
management system as highly automated yet flexible enough to accept a 
variety of collateral types. While this description of the system's 
flexibility is accurate, it does not establish a rule, standard or 
interpretation with respect to OCC's operation of the system. OCC 
proposes to replace the extraneous discussion of flexibility with a 
statement indicating that the system supports the maintenance and 
processing of various asset types, which more objectively conveys 
similar information. This section further provides that the collateral 
management system maintains the same performance, efficiency and 
effectiveness for each collateral type OCC accepts. OCC proposes to 
delete this provision because different processing methods for 
collateral types and associated timelines could render that statement 
inaccurate and the discussion of the collateral system's capabilities 
likewise does not establish a stated policy, practice or interpretation 
and should not be considered a rule per se. The proposed revisions 
would clarify the description of OCC's collateral management system in 
accordance with current OCC operations.
    In the Reconciliation section, OCC intends to clarify that the 
information it uses in the daily balancing of collateral against 
activity and inventory reports is not limited to end-of-day reports 
provided by custody banks and depositories. Accordingly, OCC proposes 
to remove the ``end-of-day'' modifier and include OCC's internal 
systems within the description of potential sources of information and 
reports used for daily balancing activity. These revisions are intended 
to better reflect the sources of information OCC uses when conducting 
its daily balancing activity.
    The Reconciliation section also provides exceptions to the daily 
monitoring requirement concerning certain collateral for which OCC's 
daily balancing activities previously were impractical. OCC believes 
these reviews and associated exceptions to the daily monitoring 
requirement are no longer necessary. Specifically, OCC would delete 
reference to the monthly reviews of collateral deposited pursuant to 
letters of credit or depository receipts and security agreements. With 
respect to letters of credit, the monthly reviews date to when 
documentation for such collateral was maintained in physical files. 
Currently, OCC verifies and electronically retains documentation for 
letters of credit on the date a letter of credit is processed 
consistent with the CRM Policy's daily monitoring requirement, making 
the monthly review exception for letters of credit redundant and 
unnecessary. With respect to depository receipts and security 
agreements, the processing of Canadian Government securities, to which 
those monthly reviews apply, no longer rely on such documentation. In 
any event, Collateral Services conducts a daily inventory 
reconciliation of Canadian Government securities, which is reasonably 
and fairly implied by the generally applicable daily balancing 
requirement under the Reconciliation section, discussed above. 
Accordingly, OCC proposes to delete the reference to these monthly 
reviews from the CRM Policy because the monthly reviews no longer serve 
any practical purpose.
    Similarly, OCC proposes to remove the CRM Policy's discussion of 
the requirement that Collateral Services regularly review escrow 
deposit banks to ensure acceptable and sufficient collateral is 
maintained. This review dates to a time when OCC did not have daily 
visibility into the actual collateral holdings held at the banks as 
supporting collateral.\16\ OCC would review a collateral listing 
supplied by the banks on a quarterly basis. Currently, all non-cash 
collateral is pledged to OCC through the Depository Trust Company 
(``DTC''), which not only provides OCC with visibility into the 
holdings but allows OCC to validate and value the collateral in an 
automated fashion prior to giving credit to such deposits.\17\ OCC 
reconciles the non-cash inventory daily and performs a daily audit of 
any cash collateral maintained at the escrow banks against what OCC 
maintains in its systems. These daily reconciliation activities are 
reasonably and fairly implied by the generally applicable daily 
balancing requirement under the Reconciliation section, discussed 
above.
---------------------------------------------------------------------------

    \16\ See Exchange Act Release No. 79094 (Oct. 13, 2016), 81 FR 
72129 (Oct. 19, 2016) (SR-OCC-2016-009) (approving changes to OCC's 
escrow deposit program).
    \17\ Id. at 72129.
---------------------------------------------------------------------------

    The Reconciliation section also requires OCC's Collateral Services 
team to ``immediately address'' any discrepancies identified during its 
activity reviews and inventory balancing. How Collateral Services 
addresses such discrepancies is addressed in procedures maintained by 
Collateral Services. OCC proposes to revise the text of this section to 
recognize that Collateral Services maintains procedures to satisfy this 
obligation.
    OCC proposes to remove the entirety of the Margin Offset section, 
which consists of a description of margin collateral assets that are 
permitted to directly offset cleared positions (i.e., deposits in lieu 
of margin) and a statement that cleared positions can be fully covered 
by such assets and thus excluded from margin calculations. OCC Rules 
610 and 601(f)(2) authorize such offsets and describe the collateral 
assets permitted to be offset. As such, OCC believes it is unnecessary 
to duplicate this information in the CRM Policy.
    The Governance and Annual Review section provides that a 
recommendation to add a new collateral type for margin or clearing fund 
purposes must address whether the collateral should be subject to a 
haircut or modeled within the System for Theoretical Analysis and 
Numerical Simulation (``STANS''). OCC proposes to specify in the CRM 
Policy that when the collateral type will be subject to haircuts, such 
haircuts will be expressed as percentages, as is consistent with 
current OCC practice.
    In addition, OCC proposes to make clarifying, conforming and other 
non-substantive changes to the CRM Policy. The proposed changes 
discussed below would not substantively alter the meaning of the 
revised provisions or the substance or requirements of the CRM Policy 
as they relate to OCC's core clearance, settlement, and risk management 
activities. The following conforming revisions are intended to align 
the text of the CRM Policy with existing provisions of the Rulebook, 
By-Laws or other documents, as applicable, and to update the titles of 
documents referenced in the CRM Policy:
     In the section to be renamed as Policy Content, and again 
in the subsequent Margin section, OCC proposes to insert references to 
Rule 610. Rule 610 establishes the rules around deposits in lieu of 
margin,

[[Page 88166]]

which are a form of margin collateral. These changes would ensure 
alignment between the text of the CRM Policy and the Rulebook with 
respect to acceptable forms of margin collateral. In the amended Policy 
Content section, OCC also proposes to add that Clearing Fund collateral 
can be used to meet OCC liquidity needs for settlement. This change is 
also consistent with existing practice, as codified in OCC Rule 
1006(f).
     OCC would revise two references to chapter 2 of the 
``STANS Margin Methodology document'' to instead refer to the ``STANS 
Methodology Description,'' which replaced the legacy STANS Margin 
Methodology as the description of the STANS Methodology filed with the 
Commission.\18\
---------------------------------------------------------------------------

    \18\ See Exchange Act Release No. 91079 (Feb. 8, 2021), 86 FR 
9410 (Feb. 12, 2021) (SR-OCC-2020-016) (approving the establishment 
of the STANS Methodology Description).
---------------------------------------------------------------------------

    The following clarifying revisions are intended to restate existing 
provisions for improved clarity and accuracy:
     In the Purpose section, OCC proposes to replace collateral 
that ``OCC has determined exhibits low credit, market and liquidity 
risks'' with collateral that ``is of low risk based on credit, market, 
and liquidity characteristics.'' These revisions would not alter 
currently existing standards or practices but more clearly state what 
OCC's definition of high quality collateral is based on.
     In the Margin section, OCC proposes to replace ``price'' 
with ``value'' in reference to the liquidation of margin assets at a 
price that reasonably approximates the value given to the asset as a 
collateral deposit, which would be consistent with the term ``value'' 
that is used later in the sentence.
     In the Risk Considerations section, OCC proposes to insert 
the word ``collateral'' after ``margin'' to align with the term 
``Clearing Fund collateral'' used immediately thereafter. In light of 
this alignment, OCC also proposes to insert ``or both'' to make clear 
that the Credit and Liquidity Risk Working Group (``CLRWG'') \19\ 
determines which assets are considered acceptable for each category of 
collateral, or both categories, as applicable.
---------------------------------------------------------------------------

    \19\ CLRWG is a cross-functional group responsible for assisting 
OCC's Management Committee in overseeing and governing OCC's credit 
and liquidity risk management activities and currently consists of 
representatives from Financial Risk Management--including Credit 
Risk Management and Stress Testing and Liquidity Risk Management--
Corporate Risk Management, Treasury, and Operations.
---------------------------------------------------------------------------

     In the Sovereign Credit Risk section, OCC proposes to 
delete ``particular'' as a qualifier preceding ``foreign sovereign's 
debt.'' The qualifier is unnecessary as OCC reviews each form of 
collateral prior to accepting it as collateral, so the revision does 
not substantively alter the meaning of the provision.
     In the Valuations section, OCC proposes to restate how the 
haircut determination and review process informs OCC's approach to 
addressing procyclicality. The current policy states that such process 
also ``protects against potential pro-cyclical concerns'' by 
considering stressed market conditions. OCC proposes to delete 
``potential'' and instead state that the process ``shall also protect 
against pro-cyclical concerns'' by considering stressed market 
conditions. The revisions would not substantively alter existing 
processes but make more definitive OCC's intent to address pro-
cyclicality through its existing haircut determination and review 
process. OCC proposes to remove ``in order'' from the same sentence as 
it is a redundant statement of OCC's purpose, which is adequately 
reflected in the statement.
     The Haircuts section provides that changes to applicable 
haircut rates shall be made in accordance with applicable authority 
under Rule 604. OCC proposes to delete ``applicable authority under'' 
Rule 604 as it is redundant in the context of this sentence.
     The Collateral Re-hypothecation and Substitution section 
refers to ``Clearing Fund securities.'' OCC proposes to revise the 
reference to ``Clearing Fund collateral'' for greater consistency with 
the section header and discussion in the preceding sentence, which 
refers to rehypothecation of ``margin collateral.''
    Finally, OCC proposes to make typographical and administrative 
changes to the CRM Policy intended to correct spelling, capitalization, 
punctuation and grammar, remove unnecessary verbiage, and conform the 
CRM Policy's format to OCC's latest policy template.
2. Margin Policy
    OCC proposes the following changes to the Margin Policy identified 
through its annual reviews of the policy.
    In the Purpose section of the Margin Policy, OCC proposes to delete 
``assure performance'' of Clearing Members as a stated purpose for 
collecting margin. The act of collecting margin recognizes that no 
counterparty's performance can be fully assured. The proposed revisions 
would merely clarify the discussion in the Margin Policy without any 
impact on the substance or requirements of OCC's margin collection 
practices or Clearing Member obligations.
    OCC proposes to insert an Applicability and Scope section, which, 
similar to the change to the CRM Policy discussed above, would identify 
the primary OCC business units that support OCC's approach to managing 
margin and credit exposure presented by its Clearing Members, including 
but not limited to P&M, Collateral Services, and QRM.
    In the Net/Gross Margining Accounts section, OCC proposes to revise 
the discussion of net and gross margining to focus on OCC's calculation 
of margin rather than OCC's approach to liquidating positions in the 
event of a default. The current text provides that two approaches under 
applicable regulations to liquidating a Clearing Member's positions 
include the immediate liquidation of positions that are margined on a 
net omnibus basis and the porting of customer positions that are 
margined on a gross basis. OCC believes it would be more appropriate to 
frame this discussion in the Margin Policy in terms of margin 
calculation considerations rather than position liquidation 
considerations, which are covered in other OCC policies and 
procedures.\20\ Accordingly, OCC proposes to restate this section in 
terms of two approaches under applicable regulations for calculating 
margin, which include margining positions on a net omnibus basis and 
margining positions on a gross individual customer basis. The proposed 
revision would more accurately reflect the nature of the applicable 
regulatory provision while more clearly stating OCC's approach to 
margin calculation in a manner that is consistent with its current 
operations and margin calculation processes. At the same time, OCC 
proposes to state in the Margin Policy that it calculates margin on a 
customer gross basis for select accounts, which facilitates the porting 
of futures Customer accounts in accordance with OCC's Rules or By-Laws. 
The gross margin calculation is consistent with OCC's current practice 
for customer segregated futures positions in accordance with U.S. 
Commodity Futures Trading Commission (``CFTC'') Regulation 
39.13(g)(8)(i)(A),\21\ which applies to OCC by virtue of its 
registration as a derivatives clearing organization (``DCO''). Lastly, 
OCC proposes to delete

[[Page 88167]]

a statement from this section indicating that the methodology used to 
liquidate a customer account directly influences the manner in which 
OCC margins the account. Liquidation methodology is but one of numerous 
factors (e.g., position risk, concentration of positions, correlations 
and offsets, and regulatory standards) influencing the manner in which 
an account is margined. Each of the above revisions would be consistent 
with OCC's current operations and margin calculation processes.
---------------------------------------------------------------------------

    \20\ OCC's Default Management Policy outlines the steps that OCC 
may take in the event of a Clearing Member's suspension, including 
the close-out of positions. See Exchange Act Release No. 82310 (Dec. 
13, 2017), 82 FR 60265 (Dec. 19, 2017) (SR-OCC-2017-010).
    \21\ See 17 CFR 39.13(g)(8)(i)(A).
---------------------------------------------------------------------------

    In the same section, OCC proposes to revise how it describes its 
approach to liquidating and/or porting a suspended Clearing Member's 
accounts. The Margin Policy currently provides that OCC's primary 
approach with respect to the positions of a suspended Clearing Member 
shall be immediate liquidation of net omnibus positions and porting of 
futures customer positions margined on a gross basis. The Margin Policy 
further specifies that accounts utilizing a net margining approach 
shall be liquidated on a net omnibus basis either through market 
transactions or an auction format. As above, OCC proposes to reframe 
the discussion in the Margin Policy to focus on the calculation of 
margin rather than considerations around liquidating positions, by 
noting instead that the calculation of margin on a net basis is 
consistent with OCC's primary approach for liquidating a Clearing 
Member's positions. In light of this revised focus on margin 
calculation rather than liquidation, OCC proposes to delete the 
statement regarding how net margin accounts will be liquidated. The 
proposed changes are intended to clarify the relationship between OCC's 
margin calculation approach and its decisions to port or liquidate 
positions in a default scenario, in accordance with applicable 
regulations and OCC's existing Rules.\22\
---------------------------------------------------------------------------

    \22\ See OCC Rule 1106(c) (providing that OCC shall close open 
futures positions of a suspended Clearing Member in the most orderly 
manner practicable).
---------------------------------------------------------------------------

    The same section provides that gross margining of accounts ``shall 
permit'' OCC to port individual customer accounts and associated margin 
to a solvent futures commission merchant (``FCM''). This text could be 
read to imply that gross margining ensures that OCC will be able to 
port individual customer accounts and associated margin in all cases, 
which cannot be guaranteed in advance. Accordingly, OCC proposes to 
revise this statement to instead focus on the effect of gross margining 
on OCC's decision-making by clarifying that gross margining permits OCC 
to ``identify'' individual customer positions and margin deposits, 
which facilitates porting along with associated margin deposits. As 
provided in OCC Rule 1106 and implied by the proposed revision to this 
statement, and to further ensure that OCC retains an appropriate and 
necessary degree of flexibility to manage risk arising from a Clearing 
Member default, OCC further proposes to state that utilizing gross 
margining would not preclude OCC from liquidating those positions on a 
net basis. Each of these proposed revisions would align the discussion 
in the Margin Policy to be consistent with OCC's currently contemplated 
approach to porting considerations as reflected in the Rules, and other 
policies and procedures governing OCC's default management process, and 
would not alter the substance or requirements of the Margin Policy as 
they relate to OCC's core clearance, settlement, and risk management 
activities.
    In the Segregated Futures Customer Gross Margining section, the 
Margin Policy provides that OCC margins customer segregated futures 
accounts on a gross margin basis to facilitate the porting of futures 
customers in the event of an FCM default. As noted above, the 
requirement to collect gross margin for customer futures accounts is 
established at CFTC Regulation 39.13(g)(8)(i)(A),\23\ which applies to 
OCC by virtue of its registration as a DCO. This is a requirement that 
applies to OCC by operation of law and does not need to be restated in 
the Margin Policy.\24\ Lastly, the statement could be interpreted to be 
contradictory to a later statement in the same section that OCC will 
require the larger of the gross or net margin requirement calculated 
for the account. For these reasons, OCC proposes to delete the 
statement in its entirety.
---------------------------------------------------------------------------

    \23\ 17 CFR 39.13(g)(8)(i)(A).
    \24\ Because this margin calculation requirement is codified in 
a regulation it would be potentially confusing to continue stating 
that OCC margins customer futures accounts on a gross basis ``to 
facilitate the porting of customers.'' While this may be the 
intended outcome of the gross margin minimum requirement, it is more 
accurate that OCC collects the required amount primarily to meet its 
risk management obligations in accordance with applicable 
regulations.
---------------------------------------------------------------------------

    In the Stock Loan Positions section, OCC proposes to revise its 
discussion of add-on charges for stock loan positions to enhance 
clarity. The Margin Policy currently provides that OCC will include 
add-on margin charges as needed based on pricing and corporate action 
conventions. Because there are not different conventions to how 
corporate actions are applied to stock loan contracts, OCC proposes to 
instead provide that add-on margin charges will be included based on 
pricing conventions and corporate action entitlements of the applicable 
stock loan program. OCC would remove the phrase ``as needed'' from the 
current text since the relevant add-on margin charges are driven by the 
pricing conventions and cash entitlements of the program, making that 
phrase redundant in the context. The proposed revisions would update 
and clarify the description of OCC's approach to add-on charges in the 
Margin Policy without impacting current OCC operations. In addition, 
OCC would change an ``i.e.,'' to ``e.g.,'' in the same section because 
the subsequent list of risk calculations is non-exhaustive.
    In the Cross-Margin section, OCC proposes to expressly state that 
margin requirements for cross-margin accounts shall be calculated in 
accordance with OCC's margin methodology, while taking into account any 
provisions of the applicable cross-margin agreement. The revised text 
would conform with what is reflected in OCC Rule 704(a), which provides 
that margin in respect of cross-margin accounts shall be determined by 
OCC in accordance with that rule and the relevant cross-margin 
agreement. In a footnote to the same section, OCC notes that the 
establishment, implementation, maintenance and review of cross-margin 
agreements is governed by the rule-filed Third-Party Risk Management 
Framework \25\ and a list of underlying procedures that support that 
Framework. OCC proposes to streamline this footnote by instead cross-
referencing the ``Third-Party Risk Management Framework and underlying 
procedures.'' Reference to each of the underlying procedures was not 
intended to be a rule per se, and eliminating this information from the 
Margin Policy would encourage OCC staff to use OCC's internal system of 
record to identify the procedures that are related to the specific 
purpose or function that they are performing instead of relying on a 
list that may be outdated or underinclusive.
---------------------------------------------------------------------------

    \25\ See Exchange Act Release No. 90797 (Dec. 23, 2020), 85 FR 
86592, 86593 (Dec. 30, 2020) (SR-OCC-2020-014) (``The [Third-Party 
Risk Management Framework] describes OCC's framework for managing 
risk throughout the relationship lifecycle (i.e., at on-boarding, 
monitoring and off-boarding) for Clearing Members, Financial 
Institutions, and vendors.'').
---------------------------------------------------------------------------

    In the Collateral section, the Margin Policy states that margin 
deposits are due on ``the morning'' following the trade date. OCC 
proposes to amend reference to the generally applicable deadline, which 
could vary in certain circumstances (e.g., with respect to trades that 
clear on dates preceding a

[[Page 88168]]

weekend or a bank holiday or where OCC issues an intra-day margin 
call). The reference would be updated to the ``morning of the business 
day'' following the trade date, as provided by OCC Rule 601(a). The 
reference would be further updated to provide that with respect to 
intraday margin calls, margin deposits are due at such other time as 
provided by OCC Rule 609 and the section of the CRM Policy that 
addresses intra-day margin calls. The proposed revisions would update 
and clarify the description of OCC's practices in the Margin Policy to 
better reflect a wider range of circumstances than are currently 
contemplated therein, and would not entail any changes to current OCC 
operations or margin collection practices.
    The Collateral in Margins section provides that OCC shall promote 
incentives to hedge by including certain forms of margin within the 
STANS margin calculation, as specified in referenced rules approved by 
the Commission pursuant to section 19(b) of the Exchange Act.\26\ OCC 
proposes to delete extraneous information regarding the content of 
OCC's rules, including that OCC's rules include scenarios that could 
impact Clearing Member exposures as a result of the collateral 
deposited. This information is implied by the beginning of the 
sentence, which explains that OCC intends to achieve the desired result 
by including margin collateral as specified in the referenced 
documents, and need not be duplicated in the Margin Policy.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    The same section currently requires QRM to perform an analysis, in 
accordance with referenced procedures, to confirm that risk 
interactions between derivative and cash market positions are being 
appropriately recognized. OCC proposes to update the reference to 
conform to the current name of the referenced procedures. In addition, 
to remove potential ambiguity regarding the scope of the required 
analysis, OCC proposes to specify that the analyses performed by QRM in 
accordance with the referenced procedures should confirm that the STANS 
margin model is effectively modeling the risk interactions. This 
addition would clarify that the Margin Policy requires QRM's analyses 
to confirm the effectiveness of STANS' modeling of the risk 
interactions, but does not establish a requirement that QRM separately 
confirm the appropriate recognition of risk interactions between 
derivative and cash markets outside of the STANS margin model. The 
scope of QRM's obligation to confirm that risk interactions are being 
appropriately recognized in STANS is reasonably and fairly implied in 
the context of the paragraph, which discusses collateral that is 
included in STANS margin calculations, but OCC proposes to add 
specificity to enhance clarity regarding QRM's obligations.
    In the Risk Factors section, OCC proposes to change the description 
of its evaluation of the appropriateness of risk factors considered 
within its models to strike ``on an ongoing basis'' and replace it with 
``on a regular basis.'' That section lists several types of periodic 
reviews designed to achieve this aim, including reviews of Exchange 
proposals to list new products pursuant to referenced procedures, FRM's 
daily backtesting, monthly reporting of such backtesting results to the 
Model Risk Working Group (``MRWG''),\27\ and QRM's review of OCC's 
margin methodology in accordance with referenced procedures to 
reasonably ensure that the margin methodology incorporates all 
significant risk factors and supports the robustness of OCC's margin 
resources, which QRM performs monthly or more frequently as required by 
regulations applicable to OCC.\28\ In addition, as discussed elsewhere 
in the Margin Policy, OCC's Model Risk Management business unit 
performs an annual review of the overall performance of the STANS 
margin methodology and its associated models. The periodicity of such 
reviews is discussed elsewhere in the Margin Policy. This revised text 
would be consistent with similar revisions noted above,\29\ as well as 
the timeline for periodic reviews of risk model performance conducted 
under applicable policies and procedures. The proposed rule change 
would not entail a change to current OCC operations.
---------------------------------------------------------------------------

    \27\ The MRWG is a cross-functional group responsible for 
assisting OCC's Management Committee in overseeing and governing 
OCC's model-related risk issues and currently consists of 
representatives from FRM, including QRM, and from Corporate Risk 
Management, including Model Risk Management.
    \28\ See 17 CFR 240.17Ad-22(e)(6)(vi)(C) (requiring a clearing 
agency to conduct sensitivity analysis of its margin model and a 
review of its parameters and assumptions for backtesting more 
frequently than monthly during periods of time when the products 
cleared or markets served display high volatility or become less 
liquid, or when the size or concentration of positions held by the 
covered clearing agency's participants increases or decreases 
significantly).
    \29\ See supra notes 14-15 and accompanying text.
---------------------------------------------------------------------------

    The same paragraph also provides that FRM shall continually 
evaluate the effectiveness of specified risk models. OCC proposes to 
delete the modifier ``continually'' as it could be read to create an 
expectation that OCC conducts 24/7 evaluations of its models. The 
revisions would only change the description of OCC's practices in the 
Margin Policy to enhance consistency with regard to its current model 
performance review process and would not impact OCC operations.
    In the same section, OCC proposes to delete text indicating that 
QRM is responsible for reasonably ensuring that margin methodologies 
incentivize Clearing Members to be aware of their own risks and 
mitigate their exposures. One of QRM's primary responsibilities, as 
discussed above, is to establish, implement, maintain and review margin 
methodologies to reasonably ensure that they incorporate all 
significant risk factors and support the robustness of OCC's margin 
resources. The measure of any incentive effect from OCC's margin 
methodology on Clearing Members' awareness of risk or mitigation of 
exposures is inherently qualitative and falls outside of QRM's ordinary 
remit. OCC further believes that well-designed margin methodologies 
would naturally support the creation of incentives at each Clearing 
Member to be aware of and mitigate their risks. Accordingly, OCC 
proposes to remove QRM's responsibility to monitor indirect and 
qualitative effects of the methodology at third-party Clearing Members 
while retaining that team's primary responsibilities with respect to 
quantitative aspects of margin model design, implementation, monitoring 
and review processes.
    The Market Data and Pricing Considerations section provides that 
P&M shall transmit pricing data to both OCC's primary and back-up data 
centers, pursuant to a referenced procedure. OCC proposes to delete 
this operational detail with respect to OCC's current data 
infrastructure from the Margin Policy. Changes in OCC's data 
infrastructure could render that statement inaccurate and the reference 
to OCC's current primary and back-up data centers is not intended to be 
a rule per se.\30\ In any event, the statement about transmission of 
data is reasonably and fairly implied by the existing text of the 
section, which provides that P&M shall review the quality and 
completeness of market data ``prior to distribution [to] downstream 
systems and external consumers.''
---------------------------------------------------------------------------

    \30\ See Exchange Act Release No. 96113 (Oct. 20, 2022), 87 FR 
64824 (Oct. 26, 2022) (SR-OCC-2021-802) (SEC notice of no objection 
to OCC's proposed adoption of cloud infrastructure for OCC's new 
clearing, risk management, and data management applications).
---------------------------------------------------------------------------

    The same section also provides that OCC shall rely upon real-time 
market data in order to continually evaluate the value of Clearing 
Member portfolios.

[[Page 88169]]

OCC proposes to remove the ``real-time'' qualifier for enhanced 
accuracy because other market data beyond real-time data is also 
relevant to OCC's evaluation process. The proposed rule change would 
clarify that OCC may use intraday data. As above, the statement that 
OCC ``continually'' evaluates the value of portfolios could be read to 
imply that OCC values portfolios on a 24/7 basis. OCC proposes to 
revise this statement to say that it evaluates portfolios ``during 
market hours,'' which OCC believes to be consistent with its regulatory 
and risk management obligations. These revisions are for clarification 
only and would not entail any changes to current OCC operations.
    The following paragraph in the same section provides that P&M shall 
systemically process and manually validate referenced settlement values 
in accordance with a referenced procedure. OCC proposes to delete 
``systemically'' with regard to processing and ``manually'' with regard 
to validations in order to provide OCC with an appropriate degree of 
flexibility in determining how it shall process and validate the 
referenced values. Operational details regarding the conduct of such 
processes and validations are contemplated in the referenced procedure. 
OCC believes it is unnecessary to duplicate those operational terms in 
the Margin Policy as doing so creates the risk of inaccuracy in the 
Margin Policy should the relevant processes be amended in the future in 
accordance with applicable governance requirements. The proposed 
revisions would remove from the Margin Policy constraints on the 
mechanical processes OCC could use to process and validate referenced 
settlement values, but would not significantly impact OCC's core 
clearance, settlement or risk management activities.
    In the Recalibration section, OCC proposes to update the discussion 
of the recalibration process for STANS econometric models to reflect 
its automation. The revised text would provide that recalibrations are 
to be performed systemically as reflected in the current STANS 
Methodology Description.\31\ P&M would retain responsibility for 
monitoring outputs of the process and escalating issues and the stated 
timeline for the processing would not need to change. The proposed 
revisions would update the description of OCC's mechanical process for 
recalibrations to reflect the automation of certain components, but 
would not otherwise impact its overall method for recalibrations or 
OCC's core clearance, settlement, and risk management activities.
---------------------------------------------------------------------------

    \31\ See Exchange Act Release No. 91079 (Feb. 8, 2021), 86 FR 
9410 (Feb. 12, 2021) (SR-OCC-2020-016) (approving the establishment 
of the STANS Methodology Description).
---------------------------------------------------------------------------

    In the same section, OCC proposes to add a footnote to explain that 
synthetic futures represent an exception to the 10-year lookback period 
for univariate parameters. This revision does not impact OCC's 
operations as it merely conforms the discussion in the Margin Policy to 
be consistent with what is reflected in the STANS Methodology 
Description.\32\
---------------------------------------------------------------------------

    \32\ See id.
---------------------------------------------------------------------------

    The Stress Test Components section of the Margin Policy currently 
provides that FRM is required to continually evaluate the portion of 
stress losses that are not collected as margin against the Clearing 
Member's net capital, in accordance with referenced procedures, and 
require the Clearing Member to deposit additional margin, in accordance 
with Rules 601 and 609, in an amount equal to the exposure in excess of 
its net capital where FRM determines that the uncollateralized exposure 
exceeds the Clearing Member's ability to absorb the loss based on its 
current capitalization. For clarity, OCC proposes to add that OCC's 
policy of calling for additional margin in such circumstances does not 
preclude OCC from taking other protective measures under OCC's recently 
amended Rule 307 if FRM determines a Clearing Member's uncollateralized 
exposure presents elevated risk to OCC, including restrictions on 
distributions under Rule 307A, restrictions on certain transactions, 
positions and activities under Rule 307B, and additional operational, 
personnel, financial resource and risk management requirements under 
Rule 307C.\33\
---------------------------------------------------------------------------

    \33\ See Exchange Act Release No. 97439 (May 5, 2023), 88 FR 
30373, 30376 (May 11, 2023) (SR-OCC-2023-002) (approving amendments 
to OCC's membership standards).
---------------------------------------------------------------------------

    The SPAN section states that the System for Portfolio Analysis of 
Risk (``SPAN'') \34\ is used to assess risk for a wide variety of 
financial instruments, including futures, options, physicals, equities 
or any combination thereof. OCC proposes to delete such informational 
background on SPAN's capabilities as it is irrelevant to the discussion 
of how OCC uses SPAN to calculate margin requirements, which is the 
focus of this section, and OCC does not use SPAN to assess risk for all 
the instruments listed in that sentence. OCC also proposes to relocate 
a statement regarding OCC's use of SPAN to compute gross margin for all 
segregated futures customers' accounts within the paragraph in order to 
enhance clarity.
---------------------------------------------------------------------------

    \34\ 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.
---------------------------------------------------------------------------

    OCC also proposes to revise the Scan Ranges section of the Margin 
Policy, which details certain functions related to the SPAN 
methodology. While this section accurately describes OCC's use of scan 
ranges to establish margin covered under SPAN, OCC also performs 
recalibration of spread rates and other parameters under the SPAN 
methodology. For completeness, OCC proposes to specify parameters in 
addition to scan ranges that are used to calculate SPAN margin 
requirements. These changes would align the text of the Margin Policy 
with existing practices. OCC also proposes to delete the Scan Ranges 
section header in light of the expanded scope of parameters addressed 
thereunder. In the same section, OCC proposes to extend P&M's 
recalibration responsibilities beyond scan ranges to include the 
additional parameters. These changes are reasonably and fairly implied 
by the SPAN section of the Margin Policy, which requires OCC to compute 
gross margin for all segregated futures customers' accounts using SPAN.
    In the same section, OCC proposes to revise its description of 
maintenance and initial margin calculations. These proposed changes are 
descriptive only and would not substantively alter OCC's margin 
calculation process or the ratio between the calculated amounts. This 
section currently provides that minimum scan ranges used to satisfy the 
initial speculator margin and spread rates shall exceed 110% of the 99% 
VaR of the daily historical observations. To enhance clarity around its 
initial and maintenance margin calculations and the ratio between the 
two values and update terminology with the latest conventions, OCC 
proposes to provide that the scan ranges established for the 
calculation of maintenance margin shall exceed the 99% VaR of the daily 
historical observations, and further provide that the scan ranges 
established for heightened risk profile margin calculations shall be at 
least 110% of that maintenance margin amount. These revisions only 
change the description of the two rates and the ratio between them to 
enhance clarity and are consistent with OCC's current calculation 
practices for maintenance

[[Page 88170]]

and initial margin and the latest terminology used by the CFTC.\35\
---------------------------------------------------------------------------

    \35\ See Final Rule, Derivatives Clearing Organization General 
Provisions and Core Principles (Dec. 20, 2019), 85 FR 4800 (Jan. 27, 
2020) (amending CFTC Rule 39.13(g)(8)(ii)).
---------------------------------------------------------------------------

    In the same section, OCC proposes to add that inter-month spread 
charges, in addition to SPAN scan ranges, incorporate a long-run 
historical estimate or look to periods of heightened volatility to 
guard against pro-cyclicality. The added reference to ``inter-month 
spread charges'' is consistent with OCC's current process for 
calculating margin requirements under SPAN. OCC also proposes to add 
that the standard historical data look-back period used to establish 
scan ranges shall be ``at least'' 500 business days, except as provided 
in a referenced procedure. The addition of ``at least'' would be 
clarifying and would not impact OCC's current approach to the SPAN 
margin calculations. OCC also proposes to remove ``volatility'' from 
the phrase ``long-run historical volatility estimate,'' which is only a 
textual change and would not impact OCC's current approach to SPAN 
margin calculations.
    In the same section, OCC also proposes to remove the parenthetical 
example of unique risk characteristics attributable to particular 
products. The single example provided is not exhaustive and the 
referenced procedure includes additional detail regarding risk 
characteristics. Duplicating this information in the Margin Policy is 
unnecessary and creates the risk of inaccuracy in the Margin Policy 
should the relevant processes be amended in the future in accordance 
with applicable governance requirements.
    In the Intraday Margin Calls section, OCC proposes to change 
references to a ``window'' for issuing margin calls to a ``standard 
time for processing'', or similar term. This change would enhance the 
clarity of the discussion in the Margin Policy by adopting uniform, 
clear language to refer to margin calls issued during the standard 
processing timeline, without impacting OCC operations associated with 
issuing margin calls.
    In the Extended Trading Hours Margin Calls section, OCC proposes to 
insert a reference to a ``standard time for processing'' an extended 
trading hours margin call and provide that OCC will establish such 
standard time in the referenced procedure. The use of the ``standard 
time for processing'' term is intended to align with the adoption of 
similar language in the immediately preceding Intraday Margin Calls 
section, as discussed above. The establishment of the deadline in a 
referenced procedure is consistent with and reasonably and fairly 
implied by OCC Rule 601(a), which authorizes OCC to specify the time by 
which Clearing Members are required to deposit margin with the 
Corporation. The proposed revision would not impact the operations of 
OCC as it relates to OCC's core clearance, settlement, and risk 
management activities. In the same section OCC proposes to remove a 
reference to the 9:00 a.m. CT deadline for OCC to issue an extended 
trading hours margin call. Rule 601(a) authorizes OCC to specify the 
time by which every Clearing Member shall be obligated to deposit 
margin assets. OCC believes that reflecting such operational terms in 
the Margin Policy creates the risk of inaccuracy in OCC's Margin 
Policy, which is filed as a rule with the Commission, should the 
specified deadline be amended or extended in accordance with applicable 
governance requirements. Accordingly, OCC has determined to remove the 
specific reference within OCC's internal Margin Policy and instead 
refer to applicable procedures to establish the relevant timeline by 
which the margin call must be issued. OCC's authority to amend or 
extend the deadline to deposit margin is fairly and reasonably implied 
by the text of Rule 601(a), and the proposed revisions would better 
enable OCC to give effect to this authority.
    The Holiday Margin Calls section requires OCC to issue holiday 
margin calls in specified amounts and circumstances. Currently, that 
section provides that when an account is subject to both a holiday and 
position risk margin call on the same day, OCC applies the larger of 
the two. Subsequent to the addition of this provision to the Margin 
Policy, OCC amended its rules to reflect Clearing Fund margin calls--
that is, margin calls for a Clearing Member Group when an estimate of 
its Clearing Fund Draw \36\ exceeds 75% of the amount of the current 
Clearing Fund.\37\ Pursuant to OCC's authority under OCC Rules 601(c) 
\38\ and 609,\39\ it is OCC's practice to issue a Clearing Fund margin 
call in situations where a Clearing Member is subject to these other 
types of margin calls and the Clearing Fund margin call is the largest 
of the three. OCC proposes to update the Margin Policy to reflect this 
practice. Specifying Clearing Fund calls as an additional category of 
margin call would align the discussion in the Margin Policy with the 
types of calls OCC issues today and would not entail a change to 
current OCC operations or margin collection processes.
---------------------------------------------------------------------------

    \36\ The term ``Clearing Fund Draw'' refers to an estimated 
stress loss exposure in excess of margin requirements.
    \37\ See Exchange Act Release No. 83735 (July 27, 2018), 83 FR 
37855 (Aug. 2, 2018) (SR-OCC-2018-008) (amending Rule 609 related to 
intra-day margin).
    \38\ See OCC Rule 601(c) (``Notwithstanding any other provision 
of this Rule 601, [OCC] may fix the margin requirement for any 
account or any class of cleared contracts at such amount as it deems 
necessary or appropriate under the circumstances to protect the 
respective interests of Clearing Members, [OCC], and the public.'')
    \39\ See OCC Rule 609 (``The Corporation may require the deposit 
of additional margin (`intra-day margin') by any Clearing Member in 
any account at any time during any business day to . . . protect 
[OCC], other Clearing Members or the general public.'').
---------------------------------------------------------------------------

    The Review of Margin Methodology section outlines Model Risk 
Management's responsibilities for evaluating the overall performance of 
STANS at least annually, in accordance with referenced policies and 
procedures, and for reporting its findings to the Risk Committee, which 
is tasked with reviewing the adequacy of OCC's margin and clearing fund 
methodology, including the STANS margin methodology, at least once 
every twelve months. OCC proposes to delete a duplicative reference in 
the Margin Policy regarding Model Risk Management's obligation to 
produce an annual report of the STANS margin methodology, which is 
fairly and reasonably implied in the preceding sentence as well as the 
Risk Committee Charter.\40\ OCC also proposes to delete references to 
Model Risk Management's obligations to present its validation findings 
and annual report of the STANS margin methodology to the Risk 
Committee. Model Risk Management is the primary group responsible for 
ensuring the completion of the annual validation, which it conducts in 
accordance with applicable procedures, and reporting of its findings. 
Because the requirement to validate STANS is established in OCC's rules 
and applicable procedures establish how Model Risk Management plans and 
conducts its validation and reports any findings to the Risk Committee, 
OCC believes it is unnecessary to duplicate such details in the Margin 
Policy as doing so creates the risk of inaccuracy

[[Page 88171]]

in the Margin Policy should the relevant requirements or processes be 
amended in the future in accordance with applicable governance 
requirements.
---------------------------------------------------------------------------

    \40\ See OCC Risk Committee Charter, available at https://www.theocc.com/company-information/documents-and-archives/board-charters (last revised May 26, 2022).
---------------------------------------------------------------------------

    Like the changes to the CRM Policy discussed above, OCC proposes to 
make clarifying, conforming and other non-substantive changes to the 
Margin Policy. The proposed changes discussed below would not 
substantively alter the meaning of the revised provisions or the 
substance or requirements of the Margin Policy as they relate to OCC's 
core clearance, settlement, and risk management activities. The 
following conforming revisions are intended to align the text of the 
Margin Policy with existing provisions of the Rulebook, By-Laws or 
other documents, as applicable, and to update the titles of documents 
referenced in the Margin Policy:
     The STANS section describes STANS as modeling the 
volatility of individual products and the correlation amongst products. 
OCC proposes to replace references to ``products'' in this sentence 
with references to ``risk factors.'' These proposed revisions would 
align references in the Margin Policy and the STANS Methodology 
Description without impacting OCC's operations or risk management 
activities.
     The Recalibration section provides that recalibrations 
will incorporate a long-run historical volatility estimate, which 
serves as a floor during periods of low market volatility to reduce 
pro-cyclicality in OCC's margin estimates. OCC proposes to replace 
``reduce'' with ``control,'' to more affirmatively state OCC's intent 
in adopting volatility floors.
     The Margin Policy currently contains references to certain 
related policies, procedures and other documents that OCC maintains in 
support of the Margin Policy. These documents are reviewed and updated 
on a periodic basis, which at times may result in the consolidation of 
certain related policies, procedures and documents or changes in their 
names. OCC proposes to revise the Margin Policy to update internal 
policy and procedure names to reflect any changes resulting from these 
periodic reviews to ensure the accuracy, consistency, and clarity of 
the Margin Policy. The proposed changes are administrative in nature 
and are not intended to change the substance of the Margin Policy.
    The following clarifying revisions are intended to restate existing 
provisions for improved clarity and accuracy:
     In the Segregated Futures Customer Gross Margining 
section, OCC proposes to insert ``for these accounts'' to clarify that 
OCC will effect gross margining for customer segregated futures 
accounts. The revision is only intended to clarify the applicability of 
the statement.
     In the Collateral in Margins section, OCC proposes to 
revise ``certain forms of margin'' within the STANS margin calculation 
to ``certain forms of collateral'' instead. This change is to enhance 
clarity in the description of OCC's operations but does not change the 
meaning of the provision or OCC's operations. The same section provides 
that OCC's Management Committee shall be ultimately responsible for 
determining which types of collateral are included in STANS margin 
calculations. OCC proposes to remove ``ultimately'' to enhance clarity, 
as the Management Committee's authority to make such determinations 
derives from the Board, which implies that the Board has ``ultimate'' 
responsibility for such decisions. OCC also proposes to change a 
reference to ``exchange traded fund[s]'' in a parenthetical providing 
examples of deposits of collateral eligible for inclusion in STANS to 
``exchange traded product[s]'' because collateral-in-margin treatment 
also extends to exchange traded notes.
     In the Market Data and Pricing Considerations section, the 
Margin Policy establishes that P&M shall reasonably ensure that 
measures are taken to review the quality and completeness of market 
data prior to its distribution. OCC proposes to remove the qualifying 
language and establish that P&M is responsible for reviewing the 
quality and completeness of market data, as opposed to reasonably 
ensuring that measures are taken to review the data, prior to its 
distribution. This deletion would clarify P&M's obligation for 
reviewing market data quality and completeness before it is distributed 
to downstream systems and external consumers. The proposed revision 
would add clarity to the Margin Policy and better ensure the integrity 
of market data at the critical stage prior to its downstream or 
external consumption.
     In the Recalibration section, the Margin Policy provides 
that where P&M has ``reasonable grounds for believing (e.g., with a 
newly created passive ETF tracking a longstanding index) that a 
suitable proxy exists,'' such proxy may be used in place of the default 
distribution pursuant to the referenced procedure. OCC proposes to 
restate this section for additional clarity. The revised text would 
state that where P&M has ``reasonable grounds for assigning a suitable 
proxy (e.g., a newly created passive ETF tracking a longstanding 
index),'' such proxy may be used in place of the default distribution 
pursuant to the referenced procedure. These revisions would more 
clearly state P&M's obligations as well as the circumstances in which 
P&M may exercise its discretion. In addition, OCC would amend a 
reference to the Model Risk Management business unit (formerly known as 
the Model Validation Group or ``MVG'') to reflect the current name of 
that department, consistent with changes that OCC made to other such 
references in a prior rule filing.\41\
---------------------------------------------------------------------------

    \41\ See Exchange Act Release No. 95842 (Sept. 20, 2022), 87 FR 
58409, 58419 (Sept. 26, 2022) (SR-OCC-2022-010) (proposing 
conforming changes to OCC's risk management policies regarding the 
name of OCC's Model Risk Management business unit).
---------------------------------------------------------------------------

     In the Add-on Charges section, the Margin Policy states 
that in some instances, exposures that may be modeled outside of STANS 
through the use of add-on charges may not require sophisticated models 
to be derived. OCC proposes to remove ``in some instances'' as it is 
implied by the beginning of the sentence, which states that these 
exposures ``may'' not require sophisticated models to be derived, as 
well as language in the next sentence referring to ``other instances.'' 
In addition, the Margin Policy states that consistent with the 
referenced procedure, MRWG has the discretion to recommend approval of 
add-on margin charges to the Management Committee. OCC proposes to 
delete the reference to MRWG's discretion as it is implied by the 
language that MRWG ``may'' recommend approval.
     In the Margin Monitoring section, OCC proposes to clarify 
that FRM conducts the backtests that are designed by QRM. This division 
of labor is implied in the preceding statements of that section and is 
appropriately reflected in the relevant procedures.
    Finally, OCC proposes to make typographical and administrative 
changes to the Margin Policy intended to correct spelling, punctuation 
and grammar and remove unnecessary verbiage in the Margin Policy.
(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act \42\ and the rules thereunder applicable to OCC by 
improving the accuracy, clarity, and consistency of the OCC Policies so 
that they remain reasonably designed to achieve the standards and 
requirements thereunder. Section 17A(b)(3)(F) of the Act \43\ requires, 
among other things, that the rules of a clearing agency be designed to 
promote the prompt and accurate clearance and settlement of securities

[[Page 88172]]

transactions and, to the extent applicable, derivative agreements, 
contracts, and transactions and to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing or agency or for which it is responsible. In turn, Exchange 
Act Rule 17Ad-22(e)(1) through (3) require OCC to maintain written 
policies and procedures reasonably designed to, among other things:
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78q-1.
    \43\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

     ensure a well-founded, clear, transparent, and enforceable 
legal basis for each aspect of OCC's activities; \44\
---------------------------------------------------------------------------

    \44\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

     provide for governance arrangements that are clear and 
transparent and specify clear and direct lines of responsibility; \45\ 
and
---------------------------------------------------------------------------

    \45\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

     maintain a risk management framework that includes 
policies, procedures and systems that are designed to manage risks and 
which are subject to periodic review and annual approval by the 
Board.\46\
---------------------------------------------------------------------------

    \46\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------

    OCC believes that the proposed changes, which are intended to 
better reflect current practices, remove extraneous information, and 
make other non-substantive, clarifying and administrative changes to 
the text of those policies, are consistent with the Exchange Act and 
these requirements for the following reasons.
1. Update Descriptions To Better Align With Current Practices
    The proposed rule changes are designed to align the text of the OCC 
Policies with current practices and to otherwise enhance accuracy, 
clarity and consistency in the documents. The OCC Policies, including 
descriptions of practices and processes therein, are subject to 
periodic review. The proposed rule change would apply recommendations 
made as part of OCC's annual review of the OCC Policies and which are 
intended to ensure the OCC Policies maintain accurate descriptions of 
OCC practices and operations. These changes are primarily clarifying in 
nature and would not significantly alter the substance or requirements 
of the OCC Policies as they relate to core clearing, settlement or risk 
management activities. OCC believes improving the clarity of the 
descriptions in the OCC Policies, which are central to OCC's clearance 
and settlement activities, will, in turn, promote the accurate 
clearance and settlement of securities transactions and the 
safeguarding of securities and funds, in accordance with Section 
17A(b)(3)(F) of the Exchange Act.\47\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The proposed rule change would also update descriptions of 
processes and governance requirements in the OCC Policies to align with 
current practices and requirements. OCC believes these proposed 
revisions would thus support clarity in OCC's governance arrangements 
and better ensure that OCC's lines of responsibility are clear and 
direct, in accordance with Exchange Act Rule 17Ad-22(e)(2).\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

    The proposed rule change would apply updates to the OCC Policies 
that were recommended pursuant to annual reviews by the Board. The 
proposed revisions would not significantly impact the practices 
relating to OCC's core clearance, settlement, and risk management 
activities. Accordingly, OCC believes the proposed rule changes would 
support its obligation to maintain a sound risk management framework 
that is subject to periodic review and annual approval by the Board in 
accordance with 17Ad-22(e)(3).\49\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------

2. Delete Extraneous Information
    The proposed rule change would remove extraneous information, 
including certain provisions that are substantively duplicative of 
provisions that are reasonably and fairly implied by other OCC rules or 
that do not independently meet the criteria of rules, stated policies, 
practices or interpretations. Certain provisions to be removed consist 
of background information that does not establish an OCC requirement or 
impact its practices. These proposed changes would enhance clarity by 
deleting provisions from the OCC Policies that do not create OCC 
obligations or substantively impact its practices or operations. Other 
provisions to be removed consist of text that duplicates provisions 
found in OCC's By-Laws and Rules or other documentation filed with the 
Commission. OCC believes that it can avoid potential future confusion 
by removing from the OCC Policies information that is appropriately 
maintained in other documentation. Removing this information from the 
OCC Policies will eliminate inconsistencies that could arise from 
maintaining it in multiple places with different approval processes. 
Accordingly, OCC believes that removal of these extraneous provisions 
would facilitate the effective administration of OCC's policies and 
procedures, which support the prompt and accurate clearance and 
settlement of securities transactions and the safeguarding of 
securities and funds, and thus is consistent with the requirements of 
Section 17A(b)(3)(F) of the Exchange Act.\50\ OCC also believes that 
removing these duplicative provisions from the OCC Policies would 
enhance clarity around OCC's governance arrangements, better ensure 
clear and direct lines of responsibility and prioritize efficient 
governance processes for the relevant provisions, in accordance with 
the requirements of Exchange Act Rule 17Ad-22(e)(2).\51\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78q-1(b)(3)(F).
    \51\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

3. Non-Substantive, Clarifying and Administrative Changes
    OCC proposes to make other non-substantive, clarifying and 
administrative changes to the OCC Policies to enhance their accuracy, 
clarity and consistency with other OCC rules. By correcting 
typographical errors, updating references to documentation, and 
conforming references with other documentation and descriptions, the 
proposed revisions would help facilitate the administration of existing 
rules that are intended to promote the prompt and accurate clearance 
and settlement of securities and derivatives transactions, in 
accordance with Section 17A(b)(3)(F) of the Exchange Act.\52\ In 
addition, correcting errors, making clarifications and conforming 
references and descriptions within the OCC Policies would improve their 
clarity, in accordance with the requirements of Exchange Act Rule 17Ad-
22(e)(1).\53\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78q-1(b)(3)(F).
    \53\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \54\ 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 proposed rule change is intended to update 
internal policies to better reflect OCC's current practices, remove 
duplicative provisions that could result in overlap or inconsistencies 
with other OCC documentation and to make other administrative updates 
that would have no impact on Clearing Members or other market 
participants. None of the proposed updates to the OCC Policies would 
affect Clearing Members' access to OCC's services or impose any direct 
burdens on Clearing Members.

[[Page 88173]]

Accordingly, the proposed rule change would not unfairly inhibit access 
to OCC's services or disadvantage or favor any particular user in 
relationship to another user.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \55\ and paragraph (f) of Rule 19b-4 \56\ 
thereunder. 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.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78s(b)(3)(A).
    \56\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\57\
---------------------------------------------------------------------------

    \57\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Regulation 40.6.
---------------------------------------------------------------------------

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-OCC-2023-008 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-2023-008. 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 (https://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 
a.m. and 3 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/Company-Information/Documents-and-Archives/By-Laws-and-Rules. Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection.
    All submissions should refer to file number SR-OCC-2023-008 and 
should be submitted on or before January 10, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
---------------------------------------------------------------------------

    \58\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-27912 Filed 12-19-23; 8:45 am]
BILLING CODE 8011-01-P