Federal Register, Volume 90 Issue 67 (Wednesday, April 9, 2025)

[Federal Register Volume 90, Number 67 (Wednesday, April 9, 2025)]
[Notices]
[Pages 15274-15287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-06041]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102768; File No. SR-OCC-2024-010]

Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change, as Modified by Partial
Amendment No. 1 and Amendments Nos. 2 and 3, by The Options Clearing
Corporation To Establish a Margin Add-On Charge That Would Be Applied
to All Clearing Member Accounts To Help Mitigate the Risks Arising From
Intraday and Overnight Trading Activity

April 3, 2025.

I. Introduction

On July 25, 2024, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2024-010, pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and
Rule 19b-4 \2\ thereunder, to establish a margin add-on charge that
would be applied to all Clearing Member \3\ accounts to assist with
mitigating the risks arising from intraday and overnight trading
activity, particularly activity attributable to short-dated options
trading. Proposed rule change SR-OCC-2024-010 was published for public
comment in the Federal Register on August 12, 2024.\4\ The Commission
has received comments regarding the proposed rule change.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms not defined herein have the same meaning
as provided in OCC's By-Laws and Rules, which can be found on OCC's
public website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
\4\ Securities Exchange Act Release No. 100664 (Aug. 6, 2024),
89 FR 65695 (Aug. 12, 2024) (File No. SR-OCC-2024-010) (``Notice of
Filing'').
\5\ Comments on the proposed rule change are available at
https://www.sec.gov/comments/sr-occ-2024-010/srocc2024010.htm.
Commenters requested that the Commission extend the comment period
for the Notice of Filing (hereinafter ``Initial Filing''). See,
e.g., Letter from James Toes, President & CEO, Security Traders
Association, dated Sept. 2, 2024 (``STA Letter'') at 2. The
Commission provided a new comment period exceeding the commenters
request when it issued the Notice and Extension. See infra n. 8
(defining ``Notice and Extension'').
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On September 4, 2024, OCC partially amended the proposed rule
change to include as Exhibit 2 an information memorandum OCC published
on its website informing OCC's membership of the details of the margin
add-on charge.\6\

[[Page 15275]]

On September 25, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\7\ the Commission issued a Notice of Filing of Partial Amendment
No. 1 and designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove the proposed rule change.\8\ On November 7, 2024, the
Commission instituted proceedings to determine whether to approve or
disapprove the proposed rule change, as modified by Partial Amendment
No. 1.\9\
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\6\ See OCC Info Memo #55123, Intraday Risk Monitoring (dated
Aug. 30, 2024), available at https://infomemo.theocc.com/infomemos?number=55123. The partial amendment did not change the
purpose or basis of the proposed rule change.
\7\ 15 U.S.C. 78s(b)(2).
\8\ Securities Exchange Act Release No. 101193 (Sept. 25, 2024),
89 FR 79977 (Oct. 1, 2024) (File No. SR-OCC-2024-010) (``Notice and
Extension'').
\9\ Securities Exchange Act Release No. 101551 (Nov. 7, 2024),
89 FR 90155 (Nov. 14, 2024) (File No. SR-OCC-2024-010).
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On January 8, 2025, OCC filed Amendment No. 2 to the proposed rule
change to (1) incorporate certain modifications to address comments
from industry participants, (2) conform the proposed rule change to the
Commission's final rule amending the Covered Clearing Agency (``CCA'')
Standards regarding intraday margin calls,\10\ and (3) extend the
implementation timeframe in response to industry concerns about the
need for additional time to prepare for the proposed changes. On
January 14, 2025, OCC filed Amendment No. 3 to the proposed rule
change, which supersedes Amendment No. 2, to correct typographical and
formatting errors. On January 15, 2025, pursuant to Section 19(b)(2) of
the Exchange Act,\11\ the Commission issued a Notice of Filing of
Amendment No. 3.\12\ On February 5, 2025, the Commission designated a
longer period for Commission action on the proceedings to determine
whether to approve or disapprove the proposed rule change, as modified
by Partial Amendment No. 1 and Amendments Nos. 2 and 3.\13\ This order
approves the proposed rule change, as modified by Partial Amendment No.
1 and Amendments Nos. 2 and 3 (hereinafter ``Proposed Rule Change'').
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\10\ See Exchange Act Release No. 101446 (Oct. 25, 2024), 89 FR
91000 (Nov. 18, 2024) (File No. S7-10-23) (``Covered Clearing Agency
Resilience and Recovery and Orderly Wind-Down Plans'').
\11\ 15 U.S.C. 78s(b)(2).
\12\ Securities Exchange Act Release No. 102202 (Jan. 15, 2025),
90 FR 7722 (Jan. 22, 2025) (File No. SR-OCC-2024-010) (``Notice of
Filing of Amendment No. 3'').
\13\ Securities Exchange Act Release No. 102358 (Feb. 5, 2025),
90 FR 9352 (Feb. 11, 2025) (File No. SR-OCC-2024-010).
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II. Background

OCC is a central counterparty (``CCP''), which means that, as part
of its function as a clearing agency, it interposes itself as the buyer
to every seller and the seller to every buyer for certain financial
transactions. As the CCP for the listed options markets in the United
States,\14\ as well as for certain futures and stock loans, OCC is
exposed to certain risks arising from providing clearing and settlement
services to its Clearing Members. Because OCC is obligated to perform
on the contracts it clears, even where one of its Clearing Members
defaults, one such risk to which OCC is exposed is credit risk in the
form of exposure to a Clearing Member's trading activities. OCC manages
such credit risk, in part, by collecting collateral from its Clearing
Members in the form of margin, which may include certain add-on charges
designed to address specific risks.
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\14\ OCC describes itself as ``the sole clearing agency for
standardized equity options listed on a national securities exchange
registered with the Commission (`listed options').'' See Securities
Exchange Act Release No. 96533 (Dec. 19, 2022), 87 FR 79015 (Dec.
23, 2022) (File No. SR-OCC-2022-012).
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At the start of each business day, OCC collects the required margin
for each marginable account calculated by OCC's proprietary System for
Theoretical Analysis and Numerical Simulation (``STANS'') based on the
account's end-of-day positions from the previous business day. OCC also
has broad authority to require additional margin deposits and to make
intraday margin calls if, for example, the value of securities
deposited as margin collateral does not accurately address changes in a
Clearing Member's account during the business day,\15\ circumstances
warrant protective measures in the form of adjusting the amount or
composition of margin,\16\ and when unrealized losses exceed a certain
threshold of an account's total risk charges \17\ during standard
trading hours or extended trading hours (``ETH'').\18\
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\15\ See OCC Rule 609(a) (``[OCC] 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 reflect changes in: .
. . (3) the value of securities deposited by the Clearing Member as
margin'').
\16\ See OCC Rule 307C(b) (providing for protective measures in
the form of requiring Clearing Members to adjust the amount or
composition of margin, including but not limited to requiring the
deposit of additional margin).
\17\ See Securities Exchange Act Release No. 82658 (Feb. 7,
2018), 83 FR 6646, 6648 (Feb. 14, 2018) (File No. SR-OCC-2017-007)
(``Pursuant to the Margin Policy, OCC issues margin calls during
standard trading hours when unrealized losses exceeding 50% of an
account's total risk charges are observed for that account based on
start-of-day positions.''); see also Securities Exchange Act Release
No. 82355 (Dec. 19, 2017), 82 FR 61060, 61064 (Dec. 26, 2017) (File
No. SR-OCC-2017-007) (codifying in the Margin Policy the extended
trading hour intraday margin call OCC would issue prior to 9:00 a.m.
Central Time when: (1) unrealized losses observed for an account,
based on new ETH positions, exceed 25% of that account's total risk
charges and (2) the overall Clearing Member portfolio is also
experiencing losses).
\18\ ETH refers to trades executed in extended and overnight
trading sessions offered by exchanges for which OCC provides
clearance and settlement services. See Securities Exchange Act
Release No. 73343 (Oct. 14, 2014), 79 FR 62684 (Oct. 20, 2014) (File
No. SR-OCC-2014-805).
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Since these margin collection processes were established, OCC
observed a significant increase in the volume of contracts it clears,
particularly of short-dated option (``SDO'') contracts, including those
traded on the day of their expiration (``zero-days-to-expiration'' or
``0DTE'' options).\19\ According to OCC, the average daily cleared
volume increased steadily after 2018 and doubled by 2022, reaching more
than 40 million cleared contracts, of which a significant portion were
SDO contracts.\20\ OCC conducted a study that reflects the evolution of
SDOs and 0DTE options in the broader market, which evolved from weekly
options in 2005 being listed on the S&P 500 Index (``SPX'') and
expiring each Friday of the month, to options now expiring on every
trading day of the year.\21\
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\19\ See Notice of Filing, 89 FR at 65695-96. Additionally, OCC
has provided confidential Exhibit 3A to File No. SR-OCC-2024-010,
which is a 2023 study OCC conducted of its risk exposure to SDOs.
\20\ OCC has provided this information in a confidential Exhibit
3A to File No. SR-OCC-2024-010, which is a 2023 study that OCC
conducted of its risk exposure to short-dated options. As an example
provided in confidential Exhibit 3A, daily option trading volume
transactions examined between February 2023 and July 2023 show that
options with less than a one-month time-to-expiration contributed
around 30 percent of daily trading volume across the days examined.
For 0DTE options during that time on the expiration dates (e.g.,
Fridays or third Fridays of a month), the daily trading volume
increased to 40 percent. See Notice of Filing, 89 FR at 65695-96.
\21\ In 2005, the Chicago Board Options Exchange (``Cboe''), one
of the participant exchanges for which OCC provides clearance and
settlement services, began listing weekly options on the SPX
expiring each Friday of the month. See Notice of Filing, 89 FR at
65695-96. In 2016, Cboe introduced Monday and Wednesday weekly SPX
expirations, and in 2022 it added Tuesday and Thursday weekly SPX
expirations. Id.
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Apart from the increased exposure to risks from its Clearing
Members' intraday trading activity posed by the proliferation of SDOs
and 0DTE options, OCC's current margining system does not generate
margin calls based on intraday position changes across other products
more generally. OCC collects margin at the start of each business day
using the STANS margin calculation,

[[Page 15276]]

which is based on end-of-day positions from the previous trading
session. This margin collection neither accounts for overnight trading
activity, nor encompasses intraday trading activity. Although OCC's
current portfolio revaluation process captures changes related to price
movements, it does not capture the intraday credit risk related to
position changes that exists between the point of margin collection at
the beginning of each business day and the point of margin collection
at the beginning of the next business day, resulting in a margin
requirement that may not be sufficient to cover additional risk
resulting from intraday trading activity during the trading session.
To help address such credit risk exposure, OCC proposes to
implement (1) a margin add-on charge (the ``Intraday Risk Charge'');
and (2) monitoring and escalation criteria to facilitate margin calls
for any Clearing Member whose intraday activity exceeds certain
thresholds (``Intraday Monitoring Thresholds''). The monitoring,
escalation, and calculation of the Intraday Risk Charge would be
conducted through OCC's current Watch Level surveillance system, which
is governed by OCC's Third-Party Risk Management Framework.\22\
Specifically, OCC would utilize its Watch Level surveillance to track
Clearing Members' trading activity during a specific, limited timeframe
during trading hours and identify patterns of risk-increasing activity
on which to base the Intraday Risk Charge. Under the current Watch
Level monitoring system, if OCC observes that certain thresholds are
breached relative to a Clearing Member's net capital, OCC will
calculate, and potentially impose, protective measures in the form of
additional margin.\23\ The Intraday Risk Charge would incorporate this
monitoring and surveillance approach into OCC's margin methodology and
apply it to all products cleared by OCC and to all Clearing Members,
regardless of net capital thresholds.
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\22\ See Securities Exchange Act Release No. 90797 (Dec. 23,
2020), 85 FR 86592 (Dec. 30, 2020) (File No. SR-OCC-2020-014).
\23\ See OCC Rule 307 (authorizing OCC to impose protective
measures on any Clearing Member that presents increased credit or
liquidity risk to the Corporation); OCC Rule 307C (authorizing OCC
to impose protective measures that include requiring Clearing
Members to deposit additional margin).
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A. Intraday Risk Charge

OCC proposes to add OCC Rule 601(i) to its Rule Book to establish
the Intraday Risk Charge. Rule 601(i)(1) would state that OCC may
require a Clearing Member to deposit additional margin assets to
mitigate any increased risk exposure to OCC that may not otherwise be
covered by already calculated margin requirements. Additionally, under
the proposed Rule 601(i)(1), OCC would be able to assess the Intraday
Risk Charge as part of the Clearing Member's daily margin requirement,
as needed, to mitigate exposure and cover uncollateralized risk
resulting from intraday trading activities. Rule 601(i)(2) would state
that the Intraday Risk Charge will generally be the average of the
daily peak intraday risk increases from portfolio position changes
measured between 11:00 a.m. Central Time and 12:30 p.m. Central Time
over the preceding month determined pursuant to OCC's policies and
procedures.\24\ As proposed, Rule 601(i)(3) would grant OCC the
discretion to adjust \25\ the Intraday Risk Charge if it determines
that circumstances particular to a Clearing Member's clearance and
settlement activity warrant a different approach to determining or
applying such charge in a manner consistent with maintaining sufficient
financial resources to cover OCC's credit exposure. According to the
proposed Rule 601(i)(3), any adjustment under this Rule to decrease the
amount of the Intraday Risk Charge calculated from the previous month's
intraday risk increases would be limited to a Clearing Member's
business reduction, termination of account(s), transfer of positions to
different account(s), or the imposition of protective measures under
OCC Rule 307B.
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\24\ As originally proposed, the Intraday Risk Charge would have
captured a more extensive timeframe between 12:30 a.m. and 3:15 p.m.
Central Time, and would have measured risk changes within that
timeframe every 20 minutes. See Notice of Filing of Amendment No 3,
90 FR at 7723. The proposal was amended to address industry comments
that the 20-minute snapshots during overnight and intraday trading
hours were too frequent and the suggestion that OCC use fewer
snapshots at predictable intervals. See id.
\25\ As described below, the Proposed Rule Change would
authorize OCC to increase or decrease the Intraday Risk Charge in
response to specific conditions, such as a Clearing Member's
business expansion or reduction.
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OCC also proposes to amend its Margin Policy and internal policies
and procedures to further detail the calculation and application of the
Intraday Risk Charge.\26\ The amount of a Clearing Member's Intraday
Risk Charge would be based on the increased risk identified through
OCC's current margin system. OCC currently recalculates the margin
requirements using end-of-day portfolio position sets and intraday
price movements updated every 20 minutes between 8:30 a.m. and 6:30
p.m. Central Time, and at least once every hour during ETH.\27\
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\26\ OCC provided the full, unredacted Margin Policy, the Market
Risk Monitoring Procedure, and the Portfolio Revaluation Monitoring
Procedure as confidential Exhibits 5B, 3B, and 3D, respectively, to
File No. SR-OCC-2024-010.
\27\ The Proposed Rule Change would not alter the current ETH
monitoring system that OCC uses, including to determine when to
issue an ETH margin call. The current ETH monitoring system does and
would continue to calculate a forecasted margin requirement as if
the positions at that point in time were present during the previous
night's margin calculation. See Notice of Filing, 89 FR at 65696.
Results of that forecast that show an increase to the prior night's
margin requirement based on STANS expected shortfall and stress test
components are considered risk taking. This also would not change as
a result of the Proposed Rule Change.
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In OCC's view, a considerable limitation of its current monitoring
system is that, because the STANS margin calculation is based on end-
of-day positions and the current portfolio revaluation process only
tracks price movements during the current trading session, the margin
requirement may not account for overnight and intraday position
changes, such as intraday SDOs and 0DTE options trading activity.\28\
If a Clearing Member has closed its position by the end of the day--
through trades, expiration, or exercise, for example--such activity
would not be captured in the end-of-day positions.\29\ To address this
limitation, OCC proposes to incorporate intraday position changes into
its current monitoring system, alongside using the outputs from the
previous night's daily STANS methodology calculation. Specifically, OCC
would identify the peak intraday risk increases over a designated
lookback period and use the average of those peaks as the basis for
imposing the Intraday Risk Charge as a margin add-on charge.
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\28\ See Notice of Filing of Amendment No. 3, 90 FR at 7724.
\29\ See Notice of Filing, 89 FR at 65696. In addition, OCC
stated that its portfolio revaluation process for purposes of
determining intraday margin calls to address the change in value of
margin collateral is based on a Clearing Member's start-of-day
collateral deposits, which would not include margin for SDOs and
0DTE options positions. Id.
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The Intraday Risk Charge, generally, would be calculated monthly
based on the average of the previous month's daily peak intraday risk
increases calculated from the 20-minute snapshots between 11:00 a.m.
and 12:30 p.m. Central Time over the number of business days in the
previous calendar month. The Intraday Risk Charge would be calculated
on the first business day of the month and would be based on data and
STANS outputs generated over the lookback period of the previous month.
For example, a given Clearing Member's Intraday Risk Charge for the
calendar month of March 2025 would be

[[Page 15277]]

based on the average of daily peak intraday risk increase calculated
from the 20-minute snapshots between the hours of 11:00 a.m. and 12:30
p.m. Central Time (``Intraday Risk Charge Measurement Time'') over the
number of business days in February 2025.
The calculation of the peak intraday activity would capture all
products that OCC clears, including SDOs and 0DTE options. The Intraday
Risk Charge would apply to all margin accounts other than cross-margin
accounts for OCC's cross-margining program with the Chicago Mercantile
Exchange, which do not currently support intraday position feeds.
The Proposed Rule Change would authorize OCC to increase or
decrease the amount of the Intraday Risk Charge for a particular
Clearing Member under certain conditions. The Intraday Risk Charge
could be increased following a member's business expansion. The
Proposed Rule Change would also authorize OCC to increase the Intraday
Risk Charge intramonth when OCC determines that OCC maintains
insufficient margin resources to cover the pattern or distribution of
risk increases over the previous lookback period. OCC's authority to
decrease the amount of the charge would be limited to a Clearing
Member's (i) business reduction, (ii) termination of account(s), (iii)
transfer of positions to different account(s), or (iv) imposition of
protective measures under OCC Rule 307B.
The Proposed Rule Change would describe material aspects of the
Intraday Risk Charge more specifically by inserting a new section on
the Intraday Risk Charge in OCC's Margin Policy. The new Intraday Risk
Charge section would provide that, periodically throughout each trading
day and during extended trading hours, OCC's systems measure the
intraday exposure to each margin account for which intraday position
information is available to identify intraday risk increases above the
baseline STANS risk measurement. The Margin Policy would define ``risk
increases'' in this context as results that show an increase to a
portfolio's prior night calculated risk measurement based on the STANS
expected shortfall and stress test components.\30\
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\30\ These proposed amendments to the Margin Policy would not
change any existing ETH margin requirements or safeguards. See
supra, n. 27. For example, Clearing Members trading during ETH hours
will still be obligated to pay an ETH margin add-on charge equal to
the lesser of $10 million or 10% of the firm's net capital, and any
ETH related risk controls will continue to operate independently
from the proposed Intraday Risk Charge changes. See Notice of
Filing, 89 FR at 65697.
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The Margin Policy would be amended to provide that, on at least a
monthly basis, OCC's Financial Risk Management department (``FRM'')
reviews and verifies the daily peak increases in the Intraday Risk
Charge Measurement Time based on a referenced procedure maintained by
FRM's Market Risk business unit.\31\ This verification of risk-
increasing activity is intended to address certain known limitations in
OCC's existing intraday system.\32\ For example, the system does not
take into account options affected by corporate action adjustments and
newly listed option series or strikes, which do not receive adjusted
metrics until the next overnight margin calculation process. In
addition, the 20-minute snapshot generated by the system may not
capture a complete trade in a single snapshot, which may result in a
misalignment of the peak calculation for an account. The snapshot
timing may also cause collateral movements to be recorded as risk-
increasing deposits instead of risk-reducing movements. Market Risk
would prevent these types of erroneous results from affecting the
calculation of the Intraday Risk Charge by verifying the peak daily
results using a process similar to its current process for verifying
results from OCC's system for monitoring a portfolio's unrealized
losses based on current prices and start-of-day positions for purposes
of charging intraday margin calls.\33\
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\31\ OCC has provided as confidential Exhibit 3B to File No. SR-
OCC-2024-010 a copy of the referenced procedure, the Market Risk
Monitoring Procedure. See supra, n. 26.
\32\ See Notice of Filing, 89 FR at 65697, n. 21. As addressed
in the Market Risk Monitoring Procedure, if a peak generated by the
system is determined to represent non-trade activity, it would be
excluded and the previous month's average peak would be used as that
day's peak daily increase instead. For example, peaks could be
excluded if they result from a Regulation SCI system disruption or
if they are the result of position and collateral transfers between
accounts, which the system assumes are risk increasing (e.g., the
transfer of positions from E*Trade to Morgan Stanley resulting from
the merger of those Clearing Members).
\33\ See supra, n. 26. OCC provided, as confidential Exhibit 3D
to File No. SR-OCC-2024-010, a copy of its current Portfolio
Revaluation Monitoring Procedure, which details Market Risk's
process for verifying results prior to issuing intraday margin calls
when an account exhibits unrealized losses exceeding 50% of that
account's total risk charges based upon start-of-day positions.
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The Margin Policy would be amended to describe the processes
governing the imposition of the Intraday Risk Charge. The proposed
language would provide that, with FRM Officer approval,\34\ OCC may
impose the Intraday Risk Charge in the amount of the average of the
verified peak daily risk increases over the prior month. Under the
Proposed Rule Change, OCC may adjust the charge either at the time of
the monthly review or on an intramonth basis, e.g., in response to the
intraday monitoring thresholds, as discussed in Section II.B below.
Under the Proposed Rule Change, OCC would only have authority to reduce
the charge in the event of the relevant Clearing Member's business
reduction, account terminations, transfer of positions to different
account(s), or the imposition of protective measures under OCC Rule
307B. The proposed changes would authorize OCC to increase the charge
in the event of a member business expansion. Any adjustment to the
Intraday Risk Charge--increase or decrease--would require review by
OCC's Model Risk Working Group (``MRWG'') and approval by the Office of
the Chief Executive Officer.
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\34\ See Notice of Filing, 89 FR at 65697, n. 23. Officers are
identified in OCC's By-Laws. See OCC By-Law Art IV. In this context,
an FRM Officer would include any member of FRM appointed by the
Chief Executive Officer or Chief Operating Officer, including a
Managing Director, Executive Director, or Executive Principal.
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B. Intraday Monitoring Thresholds and Margin Calls

OCC also proposes to establish monitoring and escalation criteria
to identify and address instances in which a Clearing Member's intraday
risk increase deviates significantly from its preceding month's average
verified peak intraday risk increases, as determined between 12:30 a.m.
and 3:15 p.m. Central Time over the lookback period. OCC's amended
proposal removes any reference to the Intraday Risk Charge with respect
to the Intraday Monitoring Thresholds and explicitly limits the
issuance of a margin call to a single intraday collection time at or
around 12:00 p.m. Central Time. Aside from stating that intraday margin
calls would be issued at a single intraday collection time, the amended
Margin Policy would require that any margin calls outside of the
collection time must be approved by the Chief Financial Risk Officer,
Chief Executive Officer, Chief Operations Officer, or Chief Risk
Officer. As amended by the Proposed Rule Change, the Margin Policy
would charge FRM with establishing thresholds for monitoring changes in
each Clearing Member's intraday risk: the Intraday Monitoring
Thresholds. FRM would review changes in each member's intraday risk
against such thresholds at least daily. If a Clearing Member's intraday
risk breached the Intraday Monitoring Threshold(s), the Proposed Rule
Change would authorize an FRM Officer to issue a margin call, make a
margin adjustment to lock up excess collateral, or recommend protective
measures under OCC Rule 307. Such a

[[Page 15278]]

margin call would be calculated as the difference between the Intraday
Risk Charge and the reviewed intraday risk increase at the single
intraday collection time at or around 12:00 p.m. Central Time.

C. Discretion To Issue Margin Calls and Related Governance

According to the proposed changes to OCC's Margin Policy, an FRM
Officer may decide against issuing a margin call if, in the Officer's
judgment, the intraday call is not necessary to effectively manage the
risk posed to OCC based on the specific facts and circumstances,
including, but not limited to (1) circumstances in which issuing an
intraday margin call would not align with broader systemic objectives
such as minimizing potential procyclical effects and potential
participant defaults; (2) if the risk increase can be attributed to one
or more intraday events or actions including, but not limited to,
portfolio level changes resulting from positive offsetting P&L amounts
or positive offsetting asset values for options and collateral, or from
non-risk increasing events such as the substitution of collateral or
the pledging of additional valued securities within the same account;
or (3) if the risk increase in the account is the result of a corporate
action or the result of position transfers between accounts, such as
delayed Clearing Member Trade Assignment (``CMTAs'') from execution
only accounts, or when a P&L unrealized loss generates a margin call
that exceeds the intraday margin call.\35\ If the FRM Officer decides
not to issue a margin call at the single intraday collection time for
an account breaching the Intraday Monitoring Threshold, the FRM Officer
will document such determination. OCC stated that, together, these
proposed changes are intended to align with the Commission's new rule
requirements on certain CCA Standards, specifically intraday margin
calls,\36\ and with the documentation requirement in new SEC Rule 17Ad-
22(e)(6)(ii)(D),\37\ which requires a CCA to document when it
determines not to issue an intraday call pursuant to its written
policies and procedures.\38\
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\35\ A CMTA is the process by which an Executing Clearing Member
directs transfer of a confirmed trade to a designated account of a
Carrying Clearing Member. See Article I, Section C.20 of OCC's By-
Laws.
\36\ See Exchange Act Release No. 101446, supra, n. 10, 89 FR at
91009-10 (discussing factors for CCAs to consider when determining
whether to issue an intraday margin call).
\37\ 17 CFR 240.17ad-22(e)(6)(ii)(D).
\38\ See Notice of Filing of Amendment No. 3, 90 FR at 7728.
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The Proposed Rule Change also would establish governance
requirements related to the review and potential adjustment of the
Intraday Monitoring Thresholds. Specifically, the Margin Policy would
be revised to state that FRM coordinates a review of the Intraday
Monitoring Thresholds, as well as the calculation and lookback period,
on at least an annual basis, or on an ad hoc basis, as needed. OCC
would have the authority to adjust the Intraday Monitoring Thresholds,
as well as the calculation and lookback period, based on the review of
intraday risk posed by a Clearing Member's portfolio changes. Any such
adjustment to the Intraday Monitoring Thresholds, calculation, or
lookback period may apply to particular or all Clearing Members,
depending on an analysis of the activity generating peak intraday
margin numbers, the number of breaches above the Intraday Monitoring
Thresholds, and overall market activity and trends within the lookback
period. Any such adjustment would require review by the MRWG and
approval by the Office of the Chief Executive Officer. OCC's Risk
Committee would be notified of all changes.

D. Extension of Implementation Timeframe

OCC's original implementation timeline was a minimum of 14 days and
a maximum of 120 days following regulatory approval.\39\ Some
commenters stated that more time was needed for Clearing Members and
their customers to make preparations to assign and allocate margins,
including the Intraday Risk Charge, more effectively.\40\ Commenters
also stated that the industry would not be in a position within 120
days of passage of the proposal to adopt systems changes and that,
without additional preparation time, ``firms would resort to simplistic
and unfair margin allocations.'' \41\ One commenter stated that ``five
to six months from the date of rule filing'' would be insufficient time
to build out technology and commit resources both in OCC's current
legacy system, ENCORE, and in its planned new system, Ovation.\42\
Another suggested that OCC should not move forward with the proposal at
all ``until such time as [OCC] has assurance that all major clearing
firms with options market maker clients are prepared to account for it
properly, including through appropriate allocation of any heightened
margin requirement across their market maker client base.'' \43\
---------------------------------------------------------------------------

\39\ See Notice of Filing, 89 FR at 65698 (stating that OCC
would implement the change within 120 days of approval, with a
minimum of two weeks' notice prior to implementation).
\40\ See Letter from Kimberly Unger, CEO, the Security Traders
Association of New York, Inc., dated Oct. 30, 2024 (``STANY
Letter'') at 4 (``[t]he intricacies involved in recalibrating margin
calculations and updating operational systems would require
significant time'' and the original implementation timeline would
``likely lead to operational disruptions for many''); Letter from
Ellen Greene, Managing Director, Equities & Options Market
Structure, and Joseph Corcoran, Managing Director and Associate
General Counsel, The Securities Industry and Financial Markets
Association (``SIFMA''), dated Oct. 15, 2024, (``SIFMA II'') at 12
(``a 120-day period will not be long enough for industry members to
adopt systems changes in response to the Proposal.''); Letter from
Matthew MacKenzie, Head of US Advocacy & Regulatory Affairs,
Optiver, dated Nov. 8, 2024 (``Optiver Letter'') at 4 (stating 12
months would be a reasonable timeline ``for firms developing and
implementing a compliance strategy for an entirely new margin
regime'').
\41\ See, e.g., STANY Letter at 4.
\42\ Letter from James Hyde, Chair of the Board, and James Toes,
President and CEO, Security Traders Association, dated Nov. 6. 2024
(``STA II'') at 5-6. Presumably this concern is obviated by the new
September 2025 implementation date, which is intended to align with,
but is not contingent on, OCC's planned replacement of its legacy
ENCORE system with a new system, Ovation, on or around September
2025. See Notice of Filing of Amendment No. 3, 90 FR at 7729.
\43\ Letter from Steve Crutchfield, Head of Business
Development, Chicago Trading Company, dated Aug. 30, 2024 (``CTC
Letter'') at 2.
---------------------------------------------------------------------------

In response, OCC amended the Initial Filing to extend the
implementation timeframe (subject to regulatory approval) to September
2025, with a public announcement of the specific implementation date at
least four weeks prior to implementation.\44\ This extends the
implementation timeline from a minimum of 14 days and a maximum of 120
days \45\ to at least 145 days after approval.\46\ In OCC's view, the
revised timeline allows it both to comply with an upcoming December
2025 compliance date for the amended CCA Standards and to provide a
longer implementation timeline as requested by commenters.\47\
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\44\ See Notice of Filing of Amendment No. 3, 90 FR at 7729.
\45\ See Notice of Filing, 89 FR at 65698 (stating that OCC
would implement the change within 120 days of approval, with a
minimum of two weeks' notice prior to implementation).
\46\ There are 145 days between April 9, 2025, which is the
latest date for the Commission to issue an order approving or
disapproving the Proposed Rule Change, and September 1, 2025, which
is the earliest date of OCC's proposed implementation.
\47\ See Notice of Filing of Amendment No. 3, 90 FR at 7729; see
also Exchange Act Release No. 101446, supra, n. 10, 89 FR at 91037
for additional discussion of the upcoming compliance date for the
Commission's final rule amending the CCA Standards regarding
intraday margin calls. Subsequently, a commenter characterized OCC's
revised implementation date as minor in nature. The commenter
acknowledged that OCC's amendment would provide an additional month
of post-approval implementation, but stated that the extension may
not be meaningful. The commenter did not explain what industry
participants must do to prepare for implementation. Letter from
Ellen Greene, Managing Director, Equities & Options Market
Structure, and Joseph Corcoran, Managing Director and Associate
General Counsel, SIFMA, dated Feb. 20, 2025, (``SIFMA III'') at 4.

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[[Page 15279]]

OCC's extension of the implementation timeline to September 2025 is
a reasonable balance between commenters' concerns and OCC's need both
to ensure that it is collecting sufficient margin to mitigate the risks
arising from the significant increase in intraday and overnight trading
activity it has observed (and is not presently capturing) and to meet
the upcoming compliance date for the Commission's recent final rule
amending the CCA Standards regarding intraday margin calls. While
commenters generally stated that they needed more time to prepare for
the Intraday Risk Charge, there is no indication that, from a technical
or operational standpoint, the Intraday Risk Charge is any different
from other updated margin requirements that Clearing Members and
industry participants have accommodated in the past.\48\ Clearing
Members and other industry participants routinely have two to six
months to update their systems, procedures, and compliance strategies
to accommodate new or updated OCC margin requirements like the Intraday
Risk Charge.\49\ Historically, this has been sufficient time for
industry participants to make any necessary adjustments to accommodate
updated margin requirements without incurring significant operational
or other disruptions. Here, market participants have known about the
Proposed Rule Change since late July 2024. During that time, OCC has
specifically encouraged executing Clearing Members ``to work with their
customers to obtain all information necessary as early as possible to
facilitate allocation of their trades as soon as possible,'' \50\
although it is within market participants' discretion whether they
choose to do so or not. While the specific approval date was not known
in advance, by the time OCC implements the Intraday Risk Charge in
September 2025, the industry will have been aware that OCC intends to
update its margin requirements consistent with the Proposed Rule Change
for well over a year, and will have had at least five months from the
date of approval to make any necessary adjustments to accommodate the
Intraday Risk Charge. This is on the higher end of the time provided to
the industry for similar margin updates in the past \51\ and should be
well within the industry's capability to accommodate without
substantial operational or other disruptions.
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\48\ To the extent commenters are concerned with the market
impact of the Intraday Risk Charge or with its impact on their
specific business model and general practices, these issues are
discussed below. See infra Section III.B.
\49\ See, e.g., Exchange Act Release No. 85755 (Apr. 30, 2019),
84 FR 19815, 19819 (May 6, 2019) (File No. SR-OCC-2019-004)
(providing between 30 and 180 days to implement a new liquidation
cost add-on); Exchange Act Release No. 99426 (Jan. 24, 2024), 89 FR
5974, 5987 (Jan. 30, 2024) (File No. SR-OCC-2023-007) (providing
between seven and 120 days to implement a series of changes,
including changes to stress testing to allow OCC to collect
additional liquidity resources); Exchange Act Release No. 100584
(July 24, 2024), 89 FR 61211, 61220 (July 30, 2024) (File No. SR-
OCC-2024-009) (providing between 14 and 60 days to implement a new
resource backtesting margin add-on).
\50\ See letter from Megan Cohen, General Counsel and Corporate
Secretary, OCC, dated Sept. 18, 2024 (``OCC I'') at 4.
\51\ See supra, n. 49.
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III. Discussion and Commission Findings

Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\52\ Under the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization that proposed the rule change.'' \53\
---------------------------------------------------------------------------

\52\ 15 U.S.C. 78s(b)(2)(C).
\53\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3). Commenters also expressed support for potential
changes that, because they are outside the scope of the Proposed
Rule Change, are not discussed further below. See, e.g., SIFMA II at
7 (stating ``OCC should consider changes to its clearing fund
allocation methodology''); SIFMA III at 7 (suggesting that OCC
should respond to unaddressed comments from the commenter's prior
letter, including the ``concept of paying interest on OCC margin
deposits'' and ``[t]he proposal's potential for deterring Clearing
Members from participating in default auctions''). In addition, OCC
stated that some of these suggestions are not feasible to implement
until Ovation is launched. See letter from Megan Cohen, General
Counsel and Corporate Secretary, OCC, dated Mar. 21, 2025 (``OCC
II'') at 9-10; see also supra n. 42 (discussing Ovation).
---------------------------------------------------------------------------

The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\54\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\55\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\56\
---------------------------------------------------------------------------

\54\ Id.
\55\ Id.
\56\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------

After carefully considering the Proposed Rule Change, the
Commission finds that the proposal is consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to OCC. More specifically, the Commission finds that the proposal is
consistent with Sections 17A(b)(3)(F) and 17A(b)(3)(I) of the Exchange
Act,\57\ and Rules 17Ad-22(e)(2),\58\ 17Ad-22(e)(4),\59\ and 17Ad-
22(e)(6) \60\ thereunder, as described in detail below.
---------------------------------------------------------------------------

\57\ 15 U.S.C. 78q-1(b)(3)(E) and 15 U.S.C. 78q-1(b)(3)(F).
\58\ 17 CFR 240.17ad-22(e)(2).
\59\ 17 CFR 240.17ad-22(e)(4).
\60\ 17 CFR 240.17ad-22(e)(6).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that a clearing agency's rules are designed to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\61\
Based on the Commission's review of the record, and for the reasons
described below, the Proposed Rule Change described above is consistent
with assuring the safeguarding of securities and funds which are in
OCC's custody or control or for which it is responsible.
---------------------------------------------------------------------------

\61\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

As discussed in Section II above, since the inception of OCC's ETH
and intraday monitoring system, there has been a significant uptick in
the number of options contracts, including SDO and 0DTE contracts, that
OCC clears. Although OCC's current portfolio revaluation process
captures changes related to price movements, it does not capture the
intraday credit risk related to position changes that exists between
the point of margin collection at the beginning of each business day
and the point of margin collection at the beginning of the next
business day for all products cleared. As such, OCC's margin monitoring
system does not account for OCC's exposure to intraday trading activity
in a Clearing Member's portfolio. This results in a margin requirement
that may not be sufficient to cover any additional risk resulting

[[Page 15280]]

from intraday trading activity during the trading session.
For example, if a Clearing Member buys a large number of options in
the morning and sells them in the afternoon, such intraday risk is not
captured by OCC's current portfolio evaluation process. As a result,
OCC may not collect sufficient margin collateral to address a Clearing
Member's default. The Intraday Risk Charge is designed to address OCC's
potential future exposure to risk posed by such intraday position
changes by imposing the Intraday Risk Charge as a margin add-on charge.
As described above in Section II.A, OCC would set the Intraday Risk
Charge monthly based on each Clearing Member's intraday activity from
the preceding month. Under a limited set of circumstances, OCC would
have the authority to adjust the Intraday Risk Charge intramonth.
Further, OCC would establish a process for monitoring member activity
and calling for additional margin where such activity exceeds the
Intraday Monitoring Thresholds, as described above in Section II.B.
Together, the collection of the Intraday Risk Charge and authority
to issue margin calls based on the Intraday Monitoring Thresholds would
increase the likelihood that OCC collects sufficient margin collateral
to mitigate OCC's potential future credit exposure to a Clearing Member
default. Increasing the likelihood that OCC collects sufficient margin
collateral to address a Clearing Member's default would, in turn,
assure the safeguarding of non-defaulting Clearing Members' collateral
by reducing the likelihood that OCC would be forced to charge losses to
the Clearing Fund, which is mutualized among Clearing Members.
Accordingly, OCC's proposal to adopt the Intraday Risk Charge and
the Intraday Monitoring Thresholds is consistent with the requirements
of Section 17A(b)(3)(F) of the Exchange Act.

B. Consistency With Section 17A(b)(3)(I) of the Exchange Act

Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the Act.\62\ Section 17A(b)(3)(I) does
not require the Commission to make a finding that OCC chose the option
that imposes the least possible burden on competition; rather, the Act
requires that the Commission find that the Proposed Rule Change does
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act, which involves balancing the
competitive effects of the Proposed Rule Change against all other
relevant considerations under the Act.\63\
---------------------------------------------------------------------------

\62\ 15 U.S.C. 78q-1(b)(3)(I).
\63\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105
(D.C. Cir. 1978).
---------------------------------------------------------------------------

The Commission received various comments expressing concern that
the Proposed Rule Change would lead to an increased burden on
competition. Some commenters stated that additional margin requirements
under the proposal would negatively impact market makers, who would be
subject to pass-through costs and, as a result, would be more likely to
pull out of market participation altogether, thus reducing liquidity
and quality across the market.\64\ Many commenters echoed similar
concerns about execution-only broker-dealers, stating that these firms,
particularly smaller ones, would be negatively impacted if their
clients would be subject to pass-through costs on a pro rata basis and
thus would reduce services and/or leave the market.\65\ The primary
reason behind the proposal's potentially negative impact and increased
burden on competition, according to commenters, is executing brokers'
practice of making end-of day allocations.\66\
---------------------------------------------------------------------------

\64\ See CTC Letter at 2 (``[C]learing firms would likely resort
to passing along their aggregate additional margin requirements on a
pro-rata or other simplistic basis,'' which ``would unfairly and
unreasonably burden options market makers with significant
additional margin requirements,'' thus leading market makers to
reduce their ``participation in liquidity provision''); Letter from
Ellen Greene, Managing Director, Equities & Options Market
Structure, SIFMA, and Joseph Corcoran, Managing Director, Associate
General Counsel, SIFMA, dated Sept. 3, 2024 (``SIFMA I'') at 2
(expressing concern that the proposal ``could have significant
impacts on the businesses of certain SIFMA members and the overall
liquidity and quality of the listed options market''); SIFMA II at
10-11 (stating that OCC did not consider whether the possibility of
pass-through costs could ``lead to wider spreads or potentially
reduce the number of products for which market makers are willing to
provide liquidity''); STANY Letter at 3 (similar); STA II at 3-4
(similar); SIFMA III at 6 (``OCC needs to fully consider how options
market liquidity might be impacted by the pass-through of margin
charges to [market makers] by their Clearing Members under the
Amended Proposal.'').
\65\ See Letter from Timothy Miller, Chief Operating Officer,
DASH Financial Technologies LLC, dated Sept. 3, 2024 (``DASH
Letter'') at 2 (``it's probable that the landscape will become less
competitive'' and ``Agency Brokers will be forced reevaluate their
ability to offer execution services''); Allen Greenberg, Chief
Operating Officer, Matrix Executions, LLC, dated Sept. 3, 2024
(``Matrix Letter'') at 2 (pass-through charges would disincentivize
Matrix and similar brokers from providing liquidity sourcing, price
improvement, and timely execution services); David L. Cavicke, Chief
Legal Officer, Wolverine Execution Services, LLC, dated Sept. 3,
2024, (``WEX I'') at 2-3 (passing through the Intraday Risk Charge
to executing brokers ``could distort pricing and trading behavior''
and ``have a disproportionate impact on such smaller industry
members''); David L. Cavicke, Chief Legal Officer, Wolverine
Execution Services, LLC, dated Mar. 3, 2025 (``WEX II'') at 2-3
(imposing the Intraday Risk Charge on executing brokers ``could
foreseeably cause firms to reduce their capacity and/or exit the
business,'' resulting in fewer client choices and reduced
competition); Optiver Letter at 3 (similar); see also letter from
Ellen Greene, Managing Director, Equities & Options Market
Structure, SIFMA, and Joseph Corcoran, Managing Director, Associate
General Counsel, SIFMA, dated Sept. 3, 2024 (``SIFMA I'') at 2;
SIFMA II at 8-10; SIFMA III at 4-5; STA II at 3-4; STANY Letter at
3-4; and letter from Jackie Mesa, Chief Operating Officer and Senior
Vice President of Global Policy, FIA, dated Sept. 5, 2024 (``FIA
Letter'') at 2.
\66\ See, e.g., letter from Joanna Mallers, Secretary, FIA
Principal Traders Group (``FIA PTG''), dated Sept. 4, 2024 (``FIA
PTG Letter'') at 3 (``Agency Brokers generally receive allocations
from their clients post-trade and these transactions are often not
allocated to the end client's Clearing Member until the end of the
trading day. As a result, these trades are initially cleared at the
Agency Broker's Clearing Member intraday before they are transferred
to the end client's Clearing Member through the OCC CMTA process at
the end of the day.''); see also SIMFA III at 4, 6 (``executing
brokers may not receive client allocations until the end of the
trading day'' and ``market makers (and their market maker clients)
[should] be provided with better data and information . . . as it
relates to the Intraday Risk Charge.''). The issue of market
practices around end-of-day allocations is discussed in more detail
in Section III.D below.
---------------------------------------------------------------------------

In response, OCC stated that it did not observe a disproportionate
impact on smaller brokers.\67\ To support this observation, OCC pointed
to impact analysis data, which was provided to and reviewed by the
Commission as confidential Exhibit 3C to File No. SR-OCC-2024-010. OCC
stated that, based on that impact analysis data, of the 1,122 potential
margin calls that OCC forecasted, 954 of them would have been ``issued
to Clearing Members with more than $100M in net capital,'' while the
remaining calls--168 of them--would have been issued to smaller
Clearing Members.\68\ Based on this data, OCC concluded that ``the most
significant Intraday Risk Charges and potential intraday margin calls
align with the Clearing Members who carry the most day-over-day margin
risk, i.e., OCC's largest Clearing Members.'' \69\ Based on its review
of the data, the Commission agrees with OCC's conclusion that smaller
Clearing

[[Page 15281]]

Members will not be disproportionately impacted by the Intraday Risk
Charge.
---------------------------------------------------------------------------

\67\ See OCC I at 4.
\68\ Id.
\69\ Id. Additionally, OCC noted that the amended proposal would
reduce the overall impact by approximately 50 percent compared to
its Initial Filing. Notice of Filing of Amendment No. 3, 90 FR at
7727. Specifically, based on an impact analysis over a 13-month
period, OCC observed that the proposed add-on would have generated a
margin increase of less than 1.1% in the aggregate on average,
representing almost $1.099 billion across all Clearing Members out
of margin requirements and that, for comparison, under the Initial
Filing, the proposed add-on would have generated an average margin
increase of approximately $1.968 billion, less than a 1.9% increase.
Id.
---------------------------------------------------------------------------

Relatedly, commenters recommended that OCC provide Clearing Members
with tools that identify which of their clients are generating peak
intraday exposures.\70\ Commenters acknowledge, however, that the
ability to net offsetting client positions presents challenges for
identifying the positions generating risk.\71\ In response, OCC pointed
to already existing and available tools, such as Risk Simulator in
Encore, that Clearing Members can use to help them ``assess their OCC
margin requirements and separately devise their own approach to address
this issue with their customers.'' \72\
---------------------------------------------------------------------------

\70\ See STANY Letter at 5; SIFMA II at 8. SIFMA states,
however, that members already engage in real-time monitoring of
customer positions and exposures. See SIFMA II at 3. SIFMA further
requests a response to whether such monitoring could alleviate the
concerns OCC faces from 0DTE trading activity. See SIFMA III at 7.
However, the comment does not indicate how a member's monitoring of
its customers would address risks that the member chooses to present
to OCC unless such monitoring leads the Clearing Member not to
present risk to OCC, which would reduce the collateral OCC requires
such a Clearing Member to post. Separately, the commenter requested
that OCC address costs that executing brokers would incur to
establish intraday allocation functionality. See id. However, this
request that OCC somehow bear the cost of executing brokers to
consider intraday allocation appears inconsistent with comments that
identify the issue of allocation as one of customer behavior (as
opposed to Clearing Member technology). See, e.g., STA II at 5 and
WEX II at 2-3.
\71\ See SIFMA II at 8.
\72\ OCC I at 5. OCC's reference to the Risk Simulator in Encore
as part of a broader toolset came in response to commenters'
suggested alternatives. See STANY Letter at 5; SIFMA II at 8. OCC's
reference to the Risk Simulator is also responsive to commenters'
statement that OCC should provide market makers with better data and
information as it relates to the Intraday Risk Charge. See supra n.
70 and related text.
---------------------------------------------------------------------------

In this instance, the burden on competition stemming from a higher
impact on some members than on others is necessary and appropriate in
furtherance of the Act to reduce OCC's overall margin risk. Under the
Proposed Rule Change, the intraday risk that is currently unaccounted
for would be based on the profile of the portfolio held by certain
Clearing Members during a limited 90-minute window throughout the
entire trading day and extended trading hours. The Proposed Rule Change
focuses on a Clearing Member's portfolio composition and trading
activity, and aims to address the risk in position changes that exists
between the point of margin collection at the beginning of each
business day and the point of margin collection at the beginning of the
next business day, a risk that is not accounted for under OCC's current
margin collection system and that OCC is therefore carrying itself.
This type of agnostic approach aims to balance the potential
competitive effects of the proposal against OCC's requirement under the
Exchange Act and the rules and regulations thereunder to manage its
credit risk by, among other things, collecting sufficient margin to
appropriately address this risk, as well as the goal of preventing the
mutualization of losses among non-defaulting firms in the event of a
Clearing Member default. For example, to the extent that a Clearing
Member would be charged the Intraday Risk Charge or be subject to a
margin call under the Intraday Monitoring Thresholds, the increased
margin collection would be based on the securities held by the member
and its trading activity during specific times, consistent with OCC's
requirement to collect margin to appropriately address the associated
risk. Specifically, as noted, OCC is required to manage its credit
risk, including by maintaining sufficient financial resources to cover
its credit exposure to each participant fully with a high degree of
confidence.\73\ The Proposed Rule Change is intended to provide more
robust coverage of intraday trading risk by authorizing OCC to charge a
margin add-on and make margin calls. As contemplated by, and consistent
with, the Act and Rule 17Ad-22,\74\ each Clearing Member would be
responsible to provide margin commensurate with the default risk posed
to OCC by its business under the Proposed Rule Change. By helping OCC
to better manage its credit exposure, the proposal's updated margin
requirements would improve OCC's ability to mitigate the potential
losses to OCC and its members associated with liquidating a Clearing
Member's portfolio in the event of a Clearing Member default.
---------------------------------------------------------------------------

\73\ See generally Section III. D, below.
\74\ 17 CFR 240.17ad-22.
---------------------------------------------------------------------------

With respect to commenters' concern regarding potential pass-
through costs, OCC responded that it ``cannot direct whether or how
Clearing Members assign or allocate the Intraday Risk Charge to their
customers'' \75\ and explained that, for execution brokers that are not
Clearing Members, OCC would not have insight into which transactions
are currently held by a given execution broker or be in a position to
determine any intraday fee charged by the broker's Clearing Member.\76\
The Commission agrees. The Proposed Rule Change pertains only to the
setting of margin requirements for OCC's Clearing Members; it does not
prescribe whether or how these Clearing Members would pass costs
associated with such margin requirements onto their clients. Indeed,
Section 17A(b)(3)(E) of the Exchange Act requires that the rules of a
clearing agency do not impose any schedule of prices, or fix rates or
other fees, for services rendered by its participants. Consistent with
that requirement, the Proposed Rule Change does not impose a schedule
of fees or attempt to fix prices for the services that OCC's Clearing
Members charge to their customers. This is consistent with other of
OCC's margin requirements, including other margin add-ons, that OCC
imposes on its Clearing Members.\77\ As with all margin requirements
imposed by OCC on its Clearing Members, it is entirely within the
individual Clearing Member's discretion and control--and entirely
outside of OCC's knowledge or control--whether and how to pass on such
requirements to the Clearing Member's customers.
---------------------------------------------------------------------------

\75\ OCC I at 5.
\76\ OCC II at 6.
\77\ See, e.g., Securities Exchange Act Release No. 100998
(Sept. 11, 2024), 89 FR 76171 (Sept. 17, 2024) (File No. SR-OCC-
2024-0009) (implementing a new margin add-on charge that would be
applied to the accounts of Clearing Members based on breaches of a
new category of resource backtesting).
---------------------------------------------------------------------------

Therefore, for the reasons stated above, the Proposed Rule Change
is consistent with Section 17A(b)(3)(I) of the Exchange Act.

C. Consistency With Rule 17Ad-22(e)(4)(i) Under the Exchange Act

Rule 17Ad-22(e)(4)(i) under the Exchange Act requires that a CCA
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of
confidence.\78\
---------------------------------------------------------------------------

\78\ 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------

OCC proposes to adopt the Intraday Risk Charge and the Intraday
Monitoring Thresholds to address margin requirement gaps identified in
its current intraday margining systems. As described above in Section
II.A, the Intraday Risk Charge would be based on the increased risk
identified during a limited timeframe through OCC's current margin
monitoring system, which recalculates the STANS margin risk using
portfolio position sets updated every 20 minutes between 8:30 a.m. and
6:30 p.m. Central Time, and at

[[Page 15282]]

least every hour during ETH sessions. The Intraday Risk Charge would be
set monthly, as measured by the previous month's data and STANS
outputs, and would include verification procedures, governance and
review arrangements, and the authority to make adjustments under
certain circumstances. Likewise, as outlined in Section II.B, the
Intraday Monitoring Thresholds would allow for additional margin based
on risk increases and would be accompanied by detailed governance and
review processes. Collecting additional margin in the form of the
monthly Intraday Risk Charge based on documented margin deficiencies
would reduce the likelihood of future deficiencies. Reducing the
likelihood of margin deficiencies for each Clearing Member would, in
turn, increase the likelihood that OCC would maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.
Several commenters opposed the Initial Filing, stating that agency-
only, executing broker-dealers who do not maintain custody over any
customer positions would be harmed by the Proposed Rule Change because
the 20-minute snapshots would not accurately reflect the entirety of
each trade, would not account for hedging or offsetting, and would not
account for the common business practice of end-of-day allocation among
customer accounts, thus leading to double-margining.\79\ Some
commenters suggested that, as such, Clearing Members who were acting
solely as executing dealers should be exempt from the Proposed Rule
Change.\80\ Commenters also suggested providing relief for positions
executed in one OCC account and moved to another in a reasonable period
of time.\81\
---------------------------------------------------------------------------

\79\ See generally SIFMA II; WEX I; DASH Letter; FIA PTG Letter;
FIA Letter; Matrix Letter; STA II; Optiver Letter; see also STANY
Letter at 3 (``Executing brokers, whose business models are based on
facilitating trades and transferring positions by the end of the
trading day, risk being unfairly penalized through double margining.
Without adjustments to the allocation process or exclusion of `soon-
to-be allocated trades' from intraday margin snapshots, both the
executing broker and the end client could be subjected to margin
calls for the same position.''); see also, generally, WEX II.
\80\ See, e.g., SIFMA II; SIFMA III; Matrix Letter; FIA Letter.
\81\ See Matrix Letter at 5. The commenter also suggested that
the Proposed Rule Change should require exchanges to modify their
systems or require clients to provide specific information,
presumably to their Clearing Members. Id. Such suggestions are
outside the scope of the Proposed Rule Change. Further, even if such
suggestions are viewed as a potential improvement that could have
been included in the proposal, the existence of an alternative does
not, in and of itself, render the proposed approach inconsistent
with applicable law. Finally, Rule 17Ad-22(e) generally provides
CCAs with flexibility in designing their written policies and
procedures, rather than requiring them to take a strictly
prescriptive approach. See, e.g., Securities Exchange Act Release
No. 78961 (Sept. 28, 2016), 81 FR 70786, at 70795-97, and 70800-01
(Oct. 13, 2016) (File No. S7-03-14).
---------------------------------------------------------------------------

Acknowledging the commenters' concerns, OCC filed Amendment No. 3,
which shortened the period on which the Intraday Risk Charge would be
based. By reducing this period to a limited series of 20-minute
snapshots between 11:00 a.m. and 12:30 p.m. Central Time, the Proposed
Rule Change responds to the concern that the originally proposed
measurements of snapshots were too frequent and unpredictable.
According to OCC, under the narrower window in the Proposed Rule
Change, Execution-Only Clearing Members \82\ who are able to allocate
trades prior to the shortened window may eliminate or significantly
reduce their intraday risk exposure for purposes of calculating their
Intraday Risk Charge.\83\ As a result, the Proposed Rule Change would
allow Clearing Members, such as executing brokers, to manage the
potential impact of the changes by moving positions from one account to
another at any time preceding 11 a.m. Central or within a 20-minute
snapshot for those trades executed in the reduced 90-minute period on
which the Intraday Risk Charge would be based.
---------------------------------------------------------------------------

\82\ ``Execution-Only Clearing Member'' means a Clearing Member
approved to act only as a Clearing Member that transfers confirmed
trades or allocates positions to other Clearing Members, and not to
carry positions in its accounts with OCC on a routine basis. See
Article I, Section E.13 of OCC's By-Laws.
\83\ See Notice of Filing of Amendment No. 3, 90 FR at 7725.
---------------------------------------------------------------------------

In response to the amendments, a commenter stated that executing
brokers may not be in a position to allocate trades ahead of the
narrowed window because they may not receive client allocations until
the end of the trading day.\84\ The commenter stated that executing
brokers can work to change their clients practice, but that they will
likely not be 100 percent successful.\85\ Ultimately, the commenter
calls for an exemption for executing brokers that are Clearing Members
with CMTA capabilities.\86\ In a subsequent comment, OCC identifies the
disparate treatment of executing brokers that would arise under the
commenter's suggestion based on whether or not such an executing broker
is a Clearing Member.\87\ As OCC states in its response comment letter,
``executing brokers do bring risk to OCC, and by extension other
Clearing Members, and until the trades are allocated, those risks
remain the responsibility of the executing broker.'' \88\ The purpose
of the Proposed Rule Change is to mitigate such risk by collecting
margin as discussed further below.
---------------------------------------------------------------------------

\84\ See SIFMA III at 4.
\85\ Id. The commenter also stated that OCC is effecting a
change to market practice. See id. However, the comment appears to
misstate the description provided in the Notice of Filing of
Amendment No. 3 in which OCC estimated the reduction in impact to
executing brokers arising out the amendment of more than 40 percent.
See Notice of Filing of Amendment No. 3, 90 FR at 7727 (stating the
aggregated add-on charge for executing brokers would be reduced from
$39.4 million to $23.4 million). OCC acknowledges that the estimated
impact reduction might be greater if members chose to management
positions differently, but OCC did not indicate that executing
brokers must manage their positions differently as a result of the
proposal. See id. at n. 39.
\86\ See SIFMA III at 4.
\87\ See OCC II at 6 (stating that, for non-Clearing Member
execution brokers, OCC would also not be in a position to determine
any intraday fee charged by the broker's Clearing Member).
\88\ See id. (referencing SIFMA III).
---------------------------------------------------------------------------

Some commenters have suggested that OCC provide an exemption for
Clearing Members acting solely as executing dealers.\89\ As OCC
reiterated in its response to commenters, the Proposed Rule Change is
specifically designed to address observed margin requirement gaps
relating not only to increasing 0DTE and SDO clearing activity, but
also to current margining system shortcomings across all products
cleared.\90\ OCC's focus in proposing the Intraday Risk Charge is on
unaddressed intraday risk being introduced to OCC through its Clearing
Members, regardless of who ultimately generates or incurs that risk,
and is explicitly intended to apply to all Clearing Members
equally.\91\ Rule 17Ad-22(e)(4)(i) under the Exchange Act directs OCC
to manage its credit exposures to participants.\92\ Exempting a subset
of Clearing Members from collateralizing the financial risk they pose
to OCC would impede OCC's ability to manage its credit exposures to
participants. Further, the Commission agrees with OCC's statement in
its response to commenters that an exemption for a specific subset of
Clearing Members would not be equitable or fair.\93\ As OCC noted in
its response, ``during any potential intraday default event, the last
account associated with a trade at the time of default could likely be
held responsible

[[Page 15283]]

for making good on the resulting position. Hence, Executing Clearing
Members, like any other Clearing Members that incur risk, should be
assessed the Intraday Risk Charge for their intraday risk increasing
activity.'' \94\
---------------------------------------------------------------------------

\89\ See, e.g., Matrix Letter at 2-3; FIA Letter at 2.
\90\ See OCC II at 2 (``OCC has observed that this intraday risk
has increased in recent years, both with respect to [0DTE Options],
as well as the increased daily contract volume in options of all
expiries'').
\91\ See OCC I at 3.
\92\ See 17 CFR 240.17ad-22(e)(4)(i).
\93\ See OCC I at 3.
\94\ Id.; see also OCC II at 5 (``Furthermore, if OCC were to
exempt certain entities from the Intraday Risk Charge, it would
artificially lower the cost of trading through the exempted entities
compared with those subject to the Intraday Risk Charge. This has
the potential to introduce even more unaccounted for risk into the
system.'').
---------------------------------------------------------------------------

To support its ``call . . . for OCC to exempt executing brokers
that are OCC Clearing members with CMTA capabilities from any Intraday
Risk Charge,'' one commenter suggested that, if such an executing
broker defaults, the trades could be passed onto another Clearing
Member via CMTA, which would provide a mechanism to transfer positions
to other OCC Clearing Members in the event of a default scenario.\95\
In response, OCC stated that it ``would first need to know the intended
recipient of the unallocated contracts, which is not information that
is on the trade record.'' \96\ OCC stated further that, the
``suggestion ignores the fact that a CMTA transfer may be rejected by
the receiving Clearing Member, something which may be more likely
following a default.'' \97\ OCC also stated that, while the commenters
``advocate excluding execution only brokers from the Intraday Risk
Charge,'' they did not ``provide suggestions about who should cover the
risks of an execution only broker's transactions before the trades are
allocated and the identity of the ultimate Clearing Member is known.''
\98\ The commenters also did not explain how such an exemption, or the
use of the CMTA process in the manner suggested, would comply with OCC
Rule 1106, which describes OCC's rights and obligations with respect to
the open positions of a suspended Clearing Member, and calls for the
closing out of positions in the most orderly manner practicable,
including by private auction.
---------------------------------------------------------------------------

\95\ SIFMA III at 4-5. The term ``Executing Clearing Member'' as
used by the commenter means a Clearing Member that has been
authorized by a Carrying Clearing Member to direct confirmed trades
to be transferred to a designated account of the Carrying Clearing
Member pursuant to such Clearing Members' CMTA arrangement. See
Article I, Section E.12 of OCC's By-Laws.
\96\ OCC II at 7.
\97\ Id.
\98\ Id.
---------------------------------------------------------------------------

OCC also highlighted the potential knock-on effects for non-
defaulting Clearing Members in the event that such intraday risk is
left unaddressed. Specifically, OCC stated that it ``is exposed to the
risks posed by intraday price changes and any new contracts held by
Clearing Members during the trading day to the extent those risks
render the margin requirements that OCC sets and collects each morning
insufficient to cover losses that may arise from the default of one of
its Clearing Members.'' \99\ OCC explained further that, if the
defaulting Clearing Member's margin resources are insufficient to cover
such losses, OCC would rely on the defaulting Clearing Member's
Clearing Fund contribution, then OCC's own contribution.\100\ If those
resources were insufficient to cover the loss, ``OCC would have to use
the Clearing Fund contributions of non-defaulting Clearing Members,
resulting in unanticipated losses to non-defaulting Clearing Members.''
\101\ The Commission agrees that OCC's failure to address intraday risk
could lead to non-defaulting Clearing Members incurring unanticipated
losses.
---------------------------------------------------------------------------

\99\ OCC II at 1-2.
\100\ See id. at 2.
\101\ Id.
---------------------------------------------------------------------------

Some commenters framed their concern as one of ``double-
margining,'' because positions could be counted twice--once when they
are held at the executing broker, and a second time when they are
transferred and held at the OCC Clearing Member serving as their prime
broker.\102\ This is not an accurate characterization of the proposal
because the Proposed Rule Change provides a mechanism requiring a
member to post collateral based on past trading activity, which is
distinct from OCC's process for setting a Clearing Member's daily
margin requirement based on that member's end-of-day portfolio. The
Intraday Risk Charge would require a Clearing Member to post margin
calibrated to the risk posed by the intraday activity of that member.
If a Clearing Member executes a risk-increasing trade in the morning,
OCC has no way to know that the member intends to execute a hedging
trade at some later point in the day. Similarly, if a Clearing Member
executes a risk-increasing trade at one point in time, OCC cannot
assume allocation to another Clearing Member if the trade has not yet
been allocated. Further, until such time as the Clearing Member
executes the hedging transaction or allocates the trade to a Carrying
Clearing Member, OCC must rely on the collateral posted to the account
associated with a trade. Consistent with OCC's comments, the margin
posted to a Clearing Member account associated with a trade at the time
of an intraday suspension is the collateral relevant to covering the
potential losses related to such a trade. Further, OCC amended the
proposal to narrow the window on which the Intraday Risk Charge would
be based in response to comments. Focusing solely on the 90-minute
window between 11 a.m. and 12:30 p.m. CT would provide an opportunity
for members to hedge their positions prior to the window to reduce the
impact of the Intraday Risk Charge, similar to the current opportunity
to hedge positions before the end of the trading day.\103\
---------------------------------------------------------------------------

\102\ See e.g., SIFMA II at 9; WEX II at 3.
\103\ See Notice of Filing of Amendment No. 3, 90 FR at 7727,
n.39 (stating that, to the extent a Clearing Member allocates trades
to other Clearing Members under OCC's CMTA Rules or otherwise
reduces its intraday risk in advance of the Intraday Risk
Measurement Time, the actual impact of the Intraday Risk Charge may
be less).
---------------------------------------------------------------------------

OCC also stated in its response to these comments that ``mechanisms
exist to reduce the likelihood of OCC assessing an Intraday Risk Charge
to an Executing Clearing Member.'' \104\ For example, ``OCC observed
over the period between May 1, 2024, and August 15, 2024, that for
approximately 43% of two-sided contract volume, the trade information
for allocated trades accurately identifies the Carrying Clearing Member
of the trading party. This information allows an Executing Clearing
Member to route a trade directly to the clearing account of the
Carrying Clearing Member for the trading party, and thereby bypass the
OCC clearing account of the Executing Clearing Member. In these cases,
intraday risk activity would not be reflected in the Executing Clearing
Member's account.'' \105\ OCC encouraged executing Clearing Members
``to work with their customers to obtain all information necessary as
early as possible to facilitate allocation of their trades as soon as
possible.'' \106\
---------------------------------------------------------------------------

\104\ OCC I at 3.
\105\ OCC I at 3-4. The term ``Carrying Clearing Member'' means
a Clearing Member that has authorized an Executing Clearing Member
to direct the transfer of a confirmed trade to a designated account
of such Carrying Clearing Member pursuant to a CMTA arrangement. See
Article I, Section C.3 of OCC's By-Laws.
\106\ Id. at 4.
---------------------------------------------------------------------------

The Proposed Rule Change also allows OCC to account for instances
where information from an individual snapshot may not capture a trade
in its entirety. Specifically, the Intraday Risk Charge process would
allow for a manual review of the 20-minute snapshot information, as
described in Section II.A above. FRM would review and verify the daily
peak increases on at least a monthly basis, taking into consideration
the monitoring system's known limitations, such as a 20-minute snapshot
not capturing a complete trade

[[Page 15284]]

in a single snapshot or the fact that snapshot timing may cause
collateral movements to be recorded as risk-increasing deposits instead
of risk-reducing movements. To mitigate the risk of such inaccuracies
leading to double-margining, Market Risk would verify the peak daily
results to prevent erroneous results from affecting the calculation of
the Intraday Risk Charge.
Some commenters stated that OCC's proposal to use a one-month
lookback period to assess a monthly margin add-on is unreasonable and
poorly designed.\107\ One such commenter stated that the proposed
measures should be temporary while OCC focuses on technological
improvements to address the intraday risk stemming from SDOs.\108\
Other commenters posited alternatives to the one-month lookback period.
Two commenters suggested a shortened lookback period of one week, with
``average of the peak'' risk increases each day over the prior week
coupled with capped thresholds (e.g., 25%) such that the Intraday Risk
Charge could not rise or fall by more than the threshold from week to
week.\109\ Both of those commenters also offered other alternatives,
including a tiered framework based on the size of activity of
participants \110\ and snapshots that occur at periods longer than 20
minutes.\111\
---------------------------------------------------------------------------

\107\ See generally SIFMA II; FIA Letter; FIA PTG Letter; STANY
Letter.
\108\ FIA Letter at 1.
\109\ SIFMA II at 6; STANY Letter at 2 (agreeing with SIFMA's
suggestions).
\110\ SIFMA II at 6.
\111\ STANY Letter at 5.
---------------------------------------------------------------------------

OCC's use of a one-month lookback period to assess the Intraday
Risk Charge is reasonable and appropriately designed. As OCC stated in
its response to such comments, ``the use of historical lookbacks for
projecting potential future exposures is a common practice in the
financial industry,'' and OCC's ``proposed approach of establishing a
margin add-on using a historical lookback as a buffer to account for
variability in margin requirements is not unique among clearing
agencies.'' \112\ As an example, OCC pointed to the National Securities
Clearing Corporation's margin requirement differential (``MRD''), which
was designed, essentially, as a margin add-on to members' pre-funded
financial resources, calculated and charged daily, based on historical
changes to certain components over a 100-day lookback period.\113\ As
OCC pointed out, although the reasoning behind implementing the MRD was
not related to addressing intraday risk stemming from SDOs and 0DTE
options, the MRD is nevertheless similar to the Proposed Rule Change in
that ``the Intraday Risk Charge has been designed as a margin add-on to
capture variability in the risk presented by a Clearing Member between
OCC's daily morning margin collections.'' \114\ As OCC further stated,
calculating the Intraday Risk Charge monthly based on a one-month
lookback period ``will allow OCC to capture variability in risk from
all products it clears, including SDO and 0DTE options.'' \115\ OCC
added that it believes that ``the one-month lookback period, which
includes a standard monthly expiration and multiple weekly expirations,
is a conservative, yet not punitive, approach that reflects more recent
changes in risk behavior, providing relevant forecasts for the next
monitoring cycle.'' \116\
---------------------------------------------------------------------------

\112\ See OCC I at 2.
\113\ Id. at 2-3; see also Securities Exchange Act Release No.
79245 (Nov. 4, 2016), 81 FR 79071, 79073 (Nov. 10, 2016) (File No.
SR-NSCC-2016-005).
\114\ See OCC I at 2-3.
\115\ Id. at 3.
\116\ Id.
---------------------------------------------------------------------------

The use of a one-month lookback period also is consistent with
other OCC practices related to collateral collection for financial risk
management,\117\ which the Commission has approved in prior
filings.\118\ The alternatives suggested by commenters do not alter the
Commission's determination that OCC's decision to use a one-month
lookback period in this instance is reasonable and that the other
characteristics of the Proposed Rule Change, as designed, are
consistent with the applicable statute, rules, and regulations. Indeed,
one commenter acknowledged that ``a blunt approach is not, in itself,
grounds for disapproval.'' \119\ While there may be more than one
reasonable way to address a given risk, the existence of an alternative
does not, in and of itself, render the proposed approach inconsistent
with applicable law.\120\
---------------------------------------------------------------------------

\117\ See, e.g., OCC Rule 1003, which defines OCC's process for
determining each Clearing Member's pro rata share of the Clearing
Fund each month based on activity from the preceding month.
\118\ See, e.g., Securities Exchange Act Release No. 83735 (July
27, 2018), 83 FR 37855 (Aug. 2, 2018) (File No. SR-OCC-2018-008).
\119\ See STA II at 2.
\120\ Additionally, Rule 17ad-22(e), generally, provides CCAs
with flexibility in designing their written policies and procedures,
rather than to take a strictly prescriptive approach. See, e.g.,
Securities Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR
70786, at 70795-97, and 70800-01 (Oct. 13, 2016) (File No. S7-03-
14).
---------------------------------------------------------------------------

One commenter suggested that OCC should (i) apply the Intraday Risk
Charge in a phased approach, starting by applying it only to 0DTE and
then, only if necessary, extending the Intraday Risk Charge to other
cleared activity; (ii) develop new functionality to monitor in real-
time the intraday risks it faces from Clearing Members; and (iii)
sunset the Intraday Risk Charge within two years, once OCC has such
capability.\121\ As discussed above, applying the Intraday Risk Charge
solely to 0DTE would not be reasonably designed to allow OCC to manage
its credit exposures to participants. As OCC reiterated in its response
to commenters, the Proposed Rule Change is specifically designed to
address observed margin requirement gaps relating not only to
increasing 0DTE and SDO clearing activity, but also to current
margining system shortcomings across all products cleared.\122\
Applying the Intraday Risk Charge solely to 0DTE would prevent OCC from
collateralizing the financial risk posed by the increased clearing
volume across all products cleared by OCC, including SDO clearing
activity beyond just 0DTE products, which in turn would impede OCC's
ability to manage its credit exposures to participants. Further, it is
unclear how OCC would meet its burden of demonstrating consistency with
the Exchange Act for a proposal to preemptively sunset a risk
management tool such as the Intraday Risk Charge based on a potential
future technological capability that has not yet been developed or
implemented, as the commenter suggests. OCC is free to continue
developing its technological capabilities and consider in the future
whether sunsetting or otherwise modifying the Intraday Risk Charge
would be appropriate and consistent with the Exchange Act, but
requiring that outcome, especially on a specific timeline, is outside
the scope of the Proposed Rule Change.
---------------------------------------------------------------------------

\121\ See SIFMA III at 6-7.
\122\ See OCC II at 2 (``OCC has observed that this intraday
risk has increased in recent years, both with respect to [0DTE
Options], as well as the increased daily contract volume in options
of all expiries'').
---------------------------------------------------------------------------

Commenters stated that, while formulating and issuing the proposal,
OCC did not engage with the industry.\123\ OCC responded by stating
that it engaged with Clearing Members and market participants about the
proposal extensively over a long period of time.\124\ Specifically, OCC
stated that, ``[b]eginning as early as April 2023, OCC engaged in
extensive dialogue with industry participants regarding the changes
through OCC's established channels for obtaining feedback from market
participants both prior to OCC's submission of the Initial Filing and

[[Page 15285]]

continuing well after it was filed.'' \125\ OCC further noted that,
``[a]s part of its ongoing efforts to engage Clearing Members and other
market participants about potential OCC rule changes, OCC presented the
proposed changes to its Financial Risk Advisory Council (`FRAC')'' over
the course of six separate meetings since April 2023.\126\ According to
OCC, those six meetings ``included discussions of intraday margin
proposals, including the Initial Filing, and provided the opportunity
for participants to express concerns,'' with the minutes of each
meeting subsequently ``presented to the OCC Board-level Risk
Committee.'' \127\ OCC further stated that it ``recently established
the FRAC Risk Management Committee (`FRAC RMC'),'' that ``FRAC RMC
feedback is socialized with OCC's board level Risk Committee because
the FRAC RMC feedback is relevant to all matters that could materially
affect OCC's risk profile,'' and that the intraday risk proposals were
discussed at the three FRAC RMC meetings held since October 2024.\128\
Finally, OCC stated that, in addition to the FRAC, ``OCC holds
Operations Roundtables with operations staff of a cross-section of
OCC's Clearing Members, operations staff of the options exchanges, and
representatives from industry organizations,'' and that, ``[s]ince
April of 2023, all six Operations Roundtables that have been held have
included a discussion of the Intraday Risk Change and an opportunity
for participants to provide feedback to OCC.'' \129\
---------------------------------------------------------------------------

\123\ See e.g., SIFMA III at 1-2, 7-8; STA II at 4.
\124\ See e.g., OCC II at 3.
\125\ OCC II at 3.
\126\ Id.
\127\ Id.
\128\ Id.
\129\ Id.
---------------------------------------------------------------------------

Some commenters suggested an altogether different approach than the
changes that comprise the Proposed Rule Change. Specifically, a
commenter suggested that OCC rerun its margin methodology intraday as
the basis for collecting intraday margin.\130\ The commenter
recognized, however, that OCC may not have the technology
infrastructure to implement it currently.\131\ Another commenter
suggested that, if OCC is unable implement such an alternative
proposal, that it ``should replace the 20 minute snapshot cycle with 1-
2 intraday snapshots.'' \132\
---------------------------------------------------------------------------

\130\ See SIFMA II at 5-6; see also Optiver at 3 (recommending
that OCC implement an intraday settlement process, using a snapshot
of prices and positions held at the OCC at that time to calculate
variation pays/collects).
\131\ See SIFMA II at 6.
\132\ See Optiver at 3; see also STANY Letter at 2; STA II at 2.
---------------------------------------------------------------------------

The different approach suggested is distinct from what was
proposed. The Proposed Rule Change provides for the daily application
of a margin add-on as part of a member's margin requirement each
morning, similar to other add-ons within OCC's rules.\133\ The
different approach suggested by commenters pertains to the use of
intraday margin calls to manage the deterioration of a Clearing
Member's portfolio, which is a different consideration. While there may
be more than one reasonable way to address a given risk, the existence
of an alternative does not, in and of itself, render the proposed
approach inconsistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to OCC.\134\ Further, the
alternative suggested by a commenter (e.g., reliance on one or two
intraday snapshots) is not dissimilar from OCC's amended proposal,
which narrowed the period during which intraday risk is measured.
---------------------------------------------------------------------------

\133\ See, e.g., Securities Exchange Act Release No. 86119 (June
17, 2019), 84 FR 29267 (June 21, 2019) (File No. SR-OCC-2019-004)
(approving a liquidation cost charge add-on); Securities Exchange
Act Release No. 100998 (Sept. 11, 2024), 89 FR 76171 (Sept. 17,
2024) (File No. SR-OCC-2024-009) (approving a margin add-on charge
based on breaches of the new category of resource backtesting).
\134\ Additionally, Rule 17ad-22(e), generally, provides CCAs
with flexibility in designing their written policies and procedures,
rather than to take a strictly prescriptive approach. See, e.g.,
Securities Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR
70786, at 70795-797, 70800-801 (Oct. 13, 2016) (File No. S7-03-14).
---------------------------------------------------------------------------

Commenters raised concerns regarding the confidentiality of certain
exhibits, stating that they are unable to measure the impact of the
proposal because certain supporting exhibits are confidential.\135\ In
its submission of the Proposed Rule Change to the Commission, OCC
stated that Exhibits 3A-3D and 5B to File No. SR-OCC-2024-010, which
contain internal policies and procedures, internal statistical
calculations and descriptions, and confidential regulatory findings,
were entitled to confidential treatment because they contained
commercial and financial information that is not customarily released
to the public and is treated as the private information of OCC. Under
Section 23(a)(3) of the Exchange Act, the Commission is not required to
make public statements filed with the Commission in connection with a
proposed rule change of a self-regulatory organization if the
Commission could withhold the statements from the public in accordance
with the Freedom of Information Act (``FOIA'').\136\ Under FOIA, an
agency shall withhold information only if the agency reasonably
foresees that disclosure would harm an interest protected by certain of
the exemptions available under FOIA.\137\ The Commission has reviewed
the documents for which OCC requests confidential treatment and
concludes that they could be withheld from the public under FOIA. FOIA
Exemption 4 protects confidential commercial or financial
information.\138\ Information is confidential under Exemption 4 if it
``is both customarily and actually treated as private by its owner and
provided to government under an assurance of privacy.'' \139\ In its
requests for confidential treatment, OCC stated that it has not
disclosed the confidential exhibits to the public, and the information
is the type that would not customarily be disclosed to the public. The
Commission has reviewed the confidential exhibits and confirmed that
they contain trade secrets and commercial or financial information
consisting of internal policies and procedures, internal statistical
calculations and descriptions, and confidential regulatory findings
that have not been disclosed to the public and that would not
customarily be disclosed to the public. In addition, by requesting
confidential treatment, OCC had an assurance of privacy because the
Commission generally protects information that can be withheld under
Exemption 4. After reviewing these documents, the Commission concludes
that their disclosure foreseeably could cause OCC to suffer financial
losses, competitive disadvantage, or reputational harm. For these
reasons, the Commission has determined to afford confidential treatment
to the confidential exhibits.
---------------------------------------------------------------------------

\135\ See STA Letter at 3; see also FIA Letter at 2 (stating
that the Proposed Rule Change ``lacks sufficient detail regarding
the computation of the Intraday Risk Charge as well as the Intraday
Risk Charge Monitoring Thresholds requirement and their potential
economic effects on Clearing Members and their clients''). OCC also
provided more detailed information to the Commission confidentially.
See Notice of Filing, 89 FR at 65697 n.17 (stating that OCC included
an assessment of the impact of the Intraday Risk Charge on OCC's
Clearing Members). Subsequently, a commenter raised this issue again
in response to OCC's amendment of the filing. WEX II at 3-6 (stating
the Proposed Rule Change is inconsistent with the Exchange Act
because it ``lacks sufficient analysis or information'' for the
Commission to analyze or ``critically evaluate any OCC analysis of
the Proposal against relevant statutory standards''). However, OCC
provided updated impact data when it amended the proposal. See
Notice of Filing of Amendment No. 3, 90 FR at 7727.
\136\ 5 U.S.C. 552.
\137\ See 5 U.S.C. 552(a)(8)(A)(i)(I).
\138\ 5 U.S.C. 552(b)(4).
\139\ Food Marketing Institute v. Argus Leader Media, 139 S. Ct.
2356, 2366 (2019).

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

[[Page 15286]]

Another commenter stated that the Initial Filing was missing ``any
analysis of the estimated margin costs associated with the Proposal and
the impact on OCC members and their clients.'' \140\ This is not
accurate. Consistent with other filings, OCC included in the publicly
available portion of its Initial Filing data regarding the potential
impact to Clearing Members of the Proposed Rule Change. Specifically,
OCC observed that the proposed add-on would have generated an average
margin increase of less than 5% in the aggregate,\141\ and that, for
the most impacted members, the average daily margin percentage
increases would range from approximately 3% to 35% based on data from
October 2023.\142\ In addition to the publicly-available analysis in
the Proposed Rule Change, OCC also analyzed the estimated margin costs
associated with the Intraday Risk Charge and its impact on OCC Clearing
Members and their clients and submitted the results of that analysis to
the Commission as confidential exhibits, as discussed above. Further,
in connection with Amendment No. 3, OCC provided additional data
demonstrating that the amendments to the proposal would reduce the
impact on members.\143\ Specifically, where the Initial Filing would
have generated an average margin increase of $1.968 billion across all
Clearing Members, the data provided by OCC demonstrates that the
amended filing would generate an average margin increase of
approximately $1.099 billion across all Clearing Members, a nearly $1
billion reduction.\144\
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\140\ FIA PTG Letter at 2.
\141\ Notice of Filing, 89 FR at 65697.
\142\ Id.
\143\ See Notice of Filing of Amendment No. 3, 90 FR at 7727.
\144\ Id. OCC further broke out the impact by account type. See
id.
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Taken together, as discussed above, the Proposed Rule Change will
increase the likelihood that OCC would maintain sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence. Accordingly, the Proposed Rule Change is
consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the
Exchange Act.\145\
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\145\ 17 CFR 240.17ad-22(e)(4)(i).
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D. Consistency With Rule 17Ad-22(e)(6)(ii) Under the Exchange Act

Rule 17Ad-22(e)(6)(ii) under the Exchange Act requires, inter alia,
that a CCA 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, at a
minimum, among other things, monitors intraday exposures on an ongoing
basis; includes the authority and operational capacity to make intraday
margin calls, as frequently as circumstances warrant, including when
risk thresholds specified by the CCA are breached or when the products
cleared or markets served display elevated volatility; and documents
when the CCA determines not to make an intraday call pursuant to its
written policies and procedures.\146\
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\146\ 17 CFR 240.17ad-22(e)(6)(ii).
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As described in Section II.A. above, the Proposed Rule Change would
establish an Intraday Risk Charge that is calculated based on the
average of the daily peak intraday risk increases from portfolio
position changes measured using 20-minute snapshots between 11:00 a.m.
and 12:30 p.m. Central Time over the preceding month. Separately and
independently from the Intraday Risk Charge, OCC would monitor verified
intraday risk increases for the purpose of issuing margin calls at 20-
minute intervals between the hours of 12:30 a.m. through 3:15 p.m.
Central Time, as described in Section II.B., above. Thus, the Proposed
Rule Change would establish a risk-based margin system that monitors
intraday exposures on an ongoing basis.
In addition to the margin collection capabilities under OCC Rules
609 and 307, the Proposed Rule Change would amend the Margin Policy to
define Intraday Monitoring Thresholds for monitoring intraday exposure
for purposes of issuing potential margin calls. These amendments to the
Margin Policy would not only allow for a single mid-day collection
time, but also facilitate decisions to issue or not issue unscheduled
margin calls based on certain criteria and subject to articulated
governance processes. The Proposed Rule Change also would require
documentation of such decision-making. As such, the Proposed Rule
Change would grant OCC the authority and operational capacity to make
intraday margin calls as frequently as circumstances warrant, and
require the necessary documentation underlying the decision to not make
an intraday call. Accordingly, the Proposed Rule Change is consistent
with the requirements of Rule 17Ad-22(e)(6)(ii) under the Exchange
Act.\147\
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\147\ Id.
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E. Consistency With Rule 17Ad-22(e)(2)(v) Under the Exchange Act

Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that a CCA
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that specify clear and direct lines of responsibility.\148\
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\148\ 17 CFR 240.17ad-22(e)(2)(v).
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Along with establishing the Intraday Risk Charge and the Intraday
Monitoring Thresholds, the Proposed Rule Change would modify OCC's
Margin Policy and internal documents to include specific governance
arrangements and evaluation criteria related to the Intraday Risk
Charge and Intraday Monitoring Thresholds. For example, as stated in
Section II.A above, FRM Officer approval would be necessary to impose
the monthly Intraday Risk Charge. Adjustments could occur at the time
of the determination of the Intraday Risk Charge amount or on an intra-
month basis but would be limited to clearly defined circumstances,
where reductions would be limited to business reduction, account
terminations, transfer of positions to different account(s), or the
imposition of protective measures under Rule 307B, and increases would
be limited to business expansions. If the FRM Officer recommends any
changes to an Intraday Risk Charge, the MRWG would be required to
review and would be authorized to escalate the recommendation to the
Office of the Chief Executive Officer, who would then review and be
authorized to approve the changes.
Similarly, as described in Sections II.B and II.C above, relating
to the Intraday Monitoring Thresholds, OCC's amended Margin Policy
states that intraday margin calls would be issued at a single intraday
collection time and requires that any margin calls outside of the
collection time must be approved by the Chief Financial Risk Officer,
Chief Executive Officer, Chief Operations Officer, or Chief Risk
Officer. The revised Margin Policy also specifies that an FRM Officer
may decide against issuing a margin call at the single intraday
collection time if, in the Officer's judgment, the intraday call is not
necessary to effectively manage the risk posed to OCC based on the
specific facts and circumstances; and the FRM Officer must document
such a determination.
Additionally, FRM will coordinate a review of the thresholds,
calculation, and lookback period for the Intraday Risk Charge and
Intraday Monitoring Thresholds on an at least annual basis, or more
frequently as needed. Although OCC would retain the authority to

[[Page 15287]]

adjust any of these items, such adjustments would be subject to an
analysis of the activity generating peak intraday margin numbers, the
number of breaches above the monitoring thresholds, and overall market
activity and trends within the lookback period. The review would be
presented to the MRWG, which must review and would be authorized to
escalate any recommended changes to the Office of the Chief Executive
Officer, which in turn must review and would be authorized to approve
or disapprove the recommended changes. OCC's Risk Committee would be
notified of all changes.
One commenter expressed uncertainty regarding whether the proposed
monitoring and escalation criteria for Clearing Members whose intraday
activity may exceed certain thresholds relative to its Intraday Risk
Charge is properly designed.\149\ The commenter stated that such
monitoring may impact participants performing similar roles
differently, without explaining the basis for this concern.\150\ As a
general response, OCC stated that it ``believes it reasonably designed
the proposed rule using its existing tools to address the increasing
risks presented by the trading of SDO and 0DTE.'' \151\ OCC responded
further that, given the accelerating pace of change in the options
markets, ``OCC believes it is imperative to address these risks now and
that leveraging its existing technology to account for intraday risks
is essential to support OCC's core risk management mission.'' \152\ As
part of this approach, ``OCC also intends to implement enhanced tools
to measure and monitor intraday risk increases presented by Clearing
Member trading activities so that it may call for additional margin
when it deems necessary and appropriate.'' \153\
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\149\ See STA Letter at 3.
\150\ Id.
\151\ See OCC I at 5.
\152\ Id. at 2.
\153\ Id.
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Together, the proposed discretion to issue margin calls and related
governance processes relating to the Intraday Risk Charge and Intraday
Monitoring Thresholds are consistent with OCC's established internal
policies and procedures.\154\ Additionally, the Proposed Rule Change
would clearly document the multi-layered decision-making process and
explicitly specify parties and their responsibilities, thus helping to
foster accountability and aiding OCC in fulfilling its risk management
obligations.
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\154\ OCC provided its Margin Policy as a confidential Exhibit
5B to File No. SR-OCC-2024-010.
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Accordingly, the proposed changes to further detail OCC's processes
for governing its Intraday Risk Charge and the Intraday Monitoring
Thresholds are consistent with the requirements of Rule 17Ad-
22(e)(2)(v) under the Exchange Act.\155\
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\155\ 17 CFR 240.17ad-22(e)(2)(v).
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V. Conclusion

On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act and the rules and regulations thereunder.\156\
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\156\ In approving this Proposed Rule Change, the Commission has
considered the Proposed Rule Change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f); see also
supra Sections III.B and III.C.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\157\ that the Proposed Rule Change (SR-OCC-2024-010) be,
and hereby is, approved.
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\157\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\158\
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\158\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-06041 Filed 4-8-25; 8:45 am]
BILLING CODE 8011-01-P