[Federal Register Volume 84, Number 242 (Tuesday, December 17, 2019)]
[Notices]
[Pages 68985-68989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27081]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87717; File No. SR-OCC-2019-009]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Approving Proposed Rule Change Related to Proposed Changes to the
Options Clearing Corporation's Rules, Clearing Fund Methodology Policy,
and Clearing Fund and Stress Testing Methodology
December 11, 2019.
I. Introduction
On October 10, 2019, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2019-009 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to make changes to
OCC's Clearing Fund and stress testing rules and methodology.\3\ The
Proposed Rule Change was published for public comment in the Federal
Register on October 29, 2019.\4\ The Commission has received no
comments regarding the Proposed Rule Change.\5\ This order approves the
Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, at 84 FR 57911.
\4\ Securities Exchange Act Release No. 87386 (Oct. 23, 2019),
84 FR 57911 (Oct. 29, 2019) (SR-OCC-2019-009) (``Notice of
Filing''). OCC also filed a related advance notice (SR-OCC-2019-806)
(``Advance Notice'') with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b-4, respectively. The Advance Notice was published in the
Federal Register on November 12, 2019. Securities Exchange Act
Release No. 87475 (Nov. 6, 2019), 84 FR 61120 (Nov. 12, 2019) (SR-
OCC-2019-806).
\5\ Since the proposal contained in the Proposed Rule Change was
also filed as an advance notice, all public comments received on the
proposal are considered regardless of whether the comments are
submitted on the Proposed Rule Change or Advance Notice.
---------------------------------------------------------------------------
II. Background 6
---------------------------------------------------------------------------
\6\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
As noted above, OCC proposes to revise its Clearing Fund and stress
testing rules and methodology. Specifically, OCC proposes to: (1)
Incorporate a new set of stress test scenarios to be used in the
monthly sizing of OCC's Clearing Fund that are designed to capture the
risks of extreme moves in individual or small subsets of securities;
(2) revise OCC's stress testing methodology for modeling certain
volatility index futures; (3) modify OCC's methodology for allocating
Clearing Fund contribution requirements to standardize the margin risk
component of the allocation formula for all Clearing Members; and (4)
adopt an additional threshold for notifying senior management of intra-
day margin calls based on certain stress test results. OCC also
proposes to correct certain rules concerning OCC's cooling-off period
and replenishment/assessment powers.\7\
---------------------------------------------------------------------------
\7\ Additionally, OCC proposes clarifying and conforming changes
to its Rules, Clearing Fund Methodology Policy (``Policy''), and
Stress Testing and Clearing Fund Methodology Description
(``Methodology Description'').
---------------------------------------------------------------------------
A. Sizing Stress Test Scenarios
On a monthly basis, OCC establishes the size of its Clearing Fund
at the level it believes is necessary to maintain sufficient financial
resources to cover losses arising from the default of the two Clearing
Member Groups that would
[[Page 68986]]
potentially cause the largest aggregate credit exposure to OCC under
certain stress scenarios.\8\ OCC determines the size of its Clearing
Fund each month through an approach based on broad-based market and
systemic shocks (``Systemic Scenarios'').\9\ OCC proposes to
incorporate an additional set of stress test scenarios to be used in
the monthly sizing of OCC's Clearing Fund that are designed to capture
the risks of extreme moves in individual or small subsets of securities
(``Idiosyncratic Scenarios''). The Idiosyncratic Scenarios would be in
addition to the existing Systemic Scenarios. Because OCC's monthly
Clearing Fund sizing process is designed to cover OCC's largest
aggregate stress test exposures, the expansion of the set of Clearing
Fund sizing stress tests could not result in a smaller Clearing Fund
than would be the case without such an expansion.
---------------------------------------------------------------------------
\8\ See Notice of Filing, 84 FR at 57912.
\9\ See Notice of Filing, 84 FR at 57913. See also, Securities
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37857
(Aug. 2, 2019) (SR-OCC-2018-008) (describing OCC's Clearing Fund
sizing stress test scenarios as an approach based on hypothetical
stress scenarios that assume shocks to the Cboe S&P 500 Index
(``SPX'') associated with a 1-in-80-year market event).
---------------------------------------------------------------------------
In constructing the Idiosyncratic Scenarios, OCC would shock each
single-name equity (i.e., excluding exchange-traded funds, exchange-
traded notes, indices, and non-equity products). OCC would evaluate the
effects of such shocks on every Clearing Member Group's portfolios.
Within each Clearing Member Group's portfolio, OCC would identify the
four single-name equities for which such shocks would result in the
largest losses. OCC would then identify the two Clearing Member Groups
with the largest aggregate losses. The combined losses of the two
identified Clearing Member Groups would represent the loss that OCC
would seek to cover in its monthly Clearing Fund sizing process. OCC
believes that implementing the proposed Idiosyncratic Scenarios would
enhance OCC's stress testing methodology and overall resiliency by
providing a more comprehensive suite of sizing stress tests to ensure
that OCC maintains an appropriate level of financial resources to cover
its credit exposures under scenarios addressing both systemic market
risks and idiosyncratic risks.\10\
---------------------------------------------------------------------------
\10\ See Notice of Filing, 84 FR at 57913.
---------------------------------------------------------------------------
B. Volatility Index Futures
Under OCC's current stress testing methodology, prices shocks for
futures based on the Cboe Volatility Index (``VIX'') \11\ are
equivalent to a price shock for the underlying. Because the VIX has no
term structure, this process produces a uniform shock across
expirations of the VIX futures contracts. Futures contracts for
different expirations, however, generally trade at different prices
reflecting the differing future price expectations of the underlying
asset.\12\ OCC believes that applying a uniform shock across
expirations is unrealistic, and that it would lead to an overestimation
of VIX futures price shocks, particularly in market decline
scenarios.\13\ As noted above, OCC proposes to revise its stress
testing methodology for modeling certain volatility index futures.
Specifically, the proposed change would produce differing price shocks
for VIX futures across the term structure. The proposed methodology
would be based on SPX volatility shocks across different expirations,
as opposed to the current methodology's reliance on a single shock to
the VIX. OCC believes that implementation of the proposed methodology
would improve pricing for VIX futures as well as VIX options.\14\
---------------------------------------------------------------------------
\11\ The VIX is an index designed to measure the 30-day expected
volatility of the SPX.
\12\ When there is a large shock to the VIX it has consistently
been observed that the change in price of near-term VIX future
contracts is much larger than for further out expirations. See
Notice of Filing, 84 FR at 57913, n. 11.
\13\ See Notice of Filing, 84 FR at 57913.
\14\ See Notice of Filing, 84 FR at 57914. OCC uses VIX futures
to calculate theoretical values for VIX options.
---------------------------------------------------------------------------
C. Clearing Fund Allocation
OCC allocates Clearing Fund contribution requirements to individual
Clearing Members, in part, based on each Clearing Member's
proportionate share of risk margin, which OCC refers to as ``total
risk.'' \15\ The majority of Clearing Member margin requirements are
based on OCC's System for Theoretical Analysis and Numerical
Simulations (``STANS''), which is OCC's proprietary risk management
system. The margin requirement for certain Clearing Members' accounts,
however, is calculated using the Standard Portfolio Analysis of Risk
Margin Calculation System (``SPAN''), which reflects customer gross
margining.\16\ OCC proposes to define ``total risk'' as based on the
same margin model for all Clearing Members.\17\ OCC believes it is more
appropriate to use the same margin risk measurement for all Clearing
Members when allocating Clearing Fund contribution requirements to
allow for a more equitable comparison across all accounts.\18\
---------------------------------------------------------------------------
\15\ Currently, OCC uses the following weighting in its
allocation of clearing fund requirements: 70 percent total risk, 15
percent open interest, and 15 percent volume. See Securities
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37863
(Aug. 2, 2019) (SR-OCC-2018-008).
\16\ See Notice of Filing, 84 FR at 57914, n. 16 (stating that
``OCC calculates margin requirements for segregated futures accounts
using both SPAN on a gross basis and STANS on a net basis, and if at
any time OCC staff observes a segregated futures account where
initial margin calculated pursuant to STANS on a net basis exceeds
the initial margin calculated pursuant to SPAN on a gross basis, OCC
collateralizes this risk exposure by applying an additional margin
charge in the amount of such difference to the account'' (citation
omitted)).
\17\ Specifically, OCC proposes to use STANS plus certain add-on
charges as the basis for determining each Clearing Member's
proportionate share of total risk.
\18\ See Notice of Filing, 84 FR at 57914.
---------------------------------------------------------------------------
D. Margin Call Notification
On a daily basis, OCC evaluates the sufficiency of its financial
resources based on OCC's potential exposure to Clearing Member Groups
under certain stress test scenarios (``Sufficiency Stress Tests'').
Based on the results of the Sufficiency Stress Tests, OCC may call for
additional collateral to ensure that it maintains sufficient financial
resources to guard against potential losses. For example, OCC is
authorized to make an intra-day margin call against a Clearing Member
Group whose Sufficiency Stress Test exposures breach a pre-determined
threshold. Currently, OCC's rules require that written notification of
such intra-day margin calls in excess of $500 million be provided to
OCC's Executive Chairman, Chief Executive Officer, and Chief Operating
Officer (``Office of the CEO''). OCC proposes to revise its rules to
require that written notification of stress test-related intra-day
margin calls also be sent to the Office of the CEO when a stress test-
related intra-day margin call would exceed 75 percent of the Clearing
Member's excess net capital. OCC believes that this additional
notification requirement is appropriate because it would allow OCC's
senior management to be informed as soon as practicable of, and to
subsequently monitor, circumstances where a margin call may strain a
particular Clearing Member's ability to meet such requirements based on
its financial condition or the amount of collateral it has available to
pledge when certain pre-identified thresholds have been exceeded.\19\
---------------------------------------------------------------------------
\19\ See Notice of Filing, 84 FR at 57914.
---------------------------------------------------------------------------
E. Cooling-Off Period
In 2018, OCC implemented a set of recovery tools, including
revisions to OCC's authority to assess its Clearing Members for funds
to replenish OCC's
[[Page 68987]]
Clearing Fund.\20\ For example, OCC implemented a ``cooling-off
period'' during which its authority to levy such assessments is capped,
which provides certainty to Clearing Members regarding their potential
obligations to OCC. In proposing such revisions, OCC intended that the
cooling-off period would be triggered by any proportionate Clearing
Fund charges to Clearing Members related to the default of a Clearing
Member.\21\ OCC's current rules, however, do not provide for a cooling-
off period based on proportionate Clearing Fund charges arising out of
two specific sets of circumstances: (1) In connection with protective
transactions effected for the account of OCC pursuant to Chapter XI of
OCC's Rules and (2) as a result of a failure of any Clearing Member to
make any other required payment or render any other required
performance (as provided in clauses (v) and (vi) of OCC Rule 1006(a)).
OCC proposes to revise its rules such that any proportionate Clearing
Fund charges to Clearing Members related to the default of a Clearing
Member, including the two listed above, would trigger a cooling-off
period.
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release No. 83916 (Aug. 23,
2018), 83 FR 44076 (Aug. 29, 2018) (SR-OCC-2017-020).
\21\ See Notice of Filing, 84 FR at 57915. Such triggers include
the assessments arising out of a Clearing Member's failure to meet
its obligations regarding confirmed trades, exercised or assigned
contracts, stock loan transactions, or the liquidation of a Clearing
Member's open positions. See id. at n. 22.
---------------------------------------------------------------------------
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.\22\ 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
Section 17A(b)(3)(F) of the Exchange Act \23\ and Rules 17Ad-22(e)(2)
and (4) thereunder.\24\
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(2)(C).
\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
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 the rules of a clearing agency be designed to (i) promote
the prompt and accurate clearance and settlement of securities
transactions, and to the extent applicable, derivatives agreements,
contracts, and transactions; (ii) assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible; and (iii), in general, protect investors
and promote the public interest.\25\ Based on its review of the record,
the Commission believes that the proposed changes are designed to
promote prompt and accurate clearance and settlement, assure the
safeguarding of securities and funds which are in OCC's custody or
control or for which OCC is responsible, and, in general, protect
investors and promote the public interest for the reasons set forth
below.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission believes that the proposed changes to OCC's stress
testing methodology are designed to promote the prompt and accurate
clearance and settlement of securities transactions. As an initial
matter, OCC is the only clearing agency for standardized U.S.
securities options listed on Commission-registered national securities
exchanges (``listed options'').\26\ OCC provides central counterparty
services for the listed-options markets.\27\ OCC's role as the sole CCP
for all listed options contracts in the U.S. makes it an integral part
of the national system for clearance and settlement.\28\ As described
above, OCC proposes to expand the suite of stress tests it uses to size
the Clearing Fund each month, and to revise OCC's estimation of VIX
futures prices for stress testing. The introduction of the
Idiosyncratic Scenarios to the monthly sizing of OCC's Clearing Fund
would be in addition to the Systemic Scenarios OCC already uses to size
its Clearing Fund and would help OCC address risks not currently
contemplated by OCC's Systemic Scenarios, which in turn should enhance
OCC's ability to accurately and appropriately size its Clearing Fund.
Additionally, OCC proposes to revise its process for shocking VIX
futures prices to reflect the actual term structure dynamics of such
futures. OCC's current use of a uniform shock for VIX futures
contracts, regardless of tenure, is not consistent with OCC's
observation that futures contracts with different expirations generally
trade at different prices reflecting the differing future price
expectations of the underlying asset. By enhancing its methodology for
modeling price shocks for VIX futures, OCC should be able to produce
more appropriate VIX futures price shocks in its stress scenarios,
which in turn also should enhance OCC's ability to accurately and
appropriately size its Clearing Fund. OCC relies on the resources in
its Clearing Fund to manage the potential losses arising out of the
default of a Clearing Member under extreme but plausible market
conditions. Strengthening the methodology that OCC uses to manage its
financial resources by enhancing its ability to accurately and
appropriately size the Clearing Fund, therefore, would enhance OCC's
ability to manage Clearing Member defaults, which, in turn, facilitates
the continued clearance and settlement of listed options. The
Commission believes, therefore, that the proposed changes to OCC's
stress testing methodology, taken together, are consistent with the
promotion of prompt and accurate clearance and settlement of
derivatives contracts.
---------------------------------------------------------------------------
\26\ See Securities Exchange Act Release No. 85121 (Feb. 13,
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
\27\ See id., 84 FR at 5158.
\28\ See id.
---------------------------------------------------------------------------
The Commission believes that the proposed changes regarding notice
of intra-day margin requirements and allocation of Clearing Fund
requirements are consistent with assuring the safeguarding of
securities and funds. Currently, OCC notifies its Office of the CEO
when intra-day margin calls generated in response to OCC's daily stress
tests are large in absolute terms (i.e., in excess of $500 million).
OCC proposes to also notify its Office of the CEO when such margin
calls are large relative to the Clearing Member against which they are
made (i.e., in excess of 75 percent of the Clearing Member's excess net
capital). The Commission believes that such notification would provide
OCC's senior management with additional risk management information,
which in turn could be used to inform critical decisions related to
margin or other protective measures that could help OCC avoid drawing
on resources from surviving Clearing Members to manage a Clearing
Member default. In the Commission's view, such measures would be
consistent with assuring the safeguarding of securities and funds which
are in OCC's custody or control or for which OCC is responsible.
Additionally, OCC proposes to revise its method of allocating
Clearing Fund contribution requirements across
[[Page 68988]]
Clearing Members. OCC proposes to redefine the ``total risk'' component
of its Clearing Fund allocation formula such that it would rely on the
same underlying model for all Clearing Members when calculating total
risk (as opposed to using different models for different Clearing
Members depending on their cleared positions). The proposed change
would not alter the allocation weighting, but, in the Commission's
view, it would provide a more consistent metric by which to assess
risks across Clearing Members and determine how much risk each Clearing
Member should bear in terms of Clearing Fund requirements.\29\ The
Commission believes that these changes as well are consistent with
assuring the safeguarding of securities and funds which are in OCC's
custody or control or for which OCC is responsible.
---------------------------------------------------------------------------
\29\ While the proposed change would not affect the total size
of the Clearing Fund, it would result in changes to Clearing
Members' proportionate share of the Clearing Fund.
---------------------------------------------------------------------------
Finally, the Commission believes that the proposed expansion of
triggers for the cooling-off period is designed, in general, to protect
investors and promote the public interest. The Commission continues to
believe that the cooling-off period provides certainty and
predictability regarding Clearing Members' maximum liability for
Clearing Fund contributions.\30\ Currently, however, the cooling-off
period would be triggered by some, but not all proportionate Clearing
Fund charges to Clearing Members arising out of a Clearing Member's
failure to meet certain obligations under OCC's rules. OCC proposes to
expand the set of events that would trigger the cooling-off period to
include certain protective transactions and the failure of a Clearing
Member to meets its obligations under certain of OCC's rules. The two
events to be added as cooling-off period triggers are similar to the
current triggers in that they pertain to proportionate Clearing Fund
charges designed to manage the failure of a Clearing Member to meet its
obligations to OCC. The Commission believes that including these two
additional events as cooling-off period triggers would provide Clearing
Members with additional certainty and predictability regarding their
potential maximum liability for Clearing Fund contributions, which in
turn is consistent with the protection investors and promotion of the
public interest.
---------------------------------------------------------------------------
\30\ See Securities Exchange Act Release No. 83916 (Aug. 23,
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
---------------------------------------------------------------------------
The Commission believes, therefore, that the Proposed Rule Change
is consistent with the requirements of Section 17A(b)(3)(F) of the
Exchange Act.\31\
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act
Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that, among other things, specify clear and
direct lines of responsibility.\32\
---------------------------------------------------------------------------
\32\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
As described above, OCC proposes to add a new internal reporting
requirement regarding certain intra-day margin calls. OCC may call for
additional margin from Clearing Members based on the results of its
Sufficiency Stress Tests. In addition to notifying its Office of the
CEO when such margin calls are large in absolute terms (i.e., in excess
of $500 million), OCC now proposes to also notify to its Office of the
CEO when such margin calls are large relative to the Clearing Member
against which they are made (i.e., in excess of 75 percent of the
Clearing Member's excess net capital). The Commission believes that
such notification would inform OCC's senior management, who could then
monitor circumstances as appropriate, when an intra-day margin call
could strain the resources of a particular Clearing Member based on its
financial condition. Accordingly, the Commission believes that the
adoption of such a notification requirement is consistent with Rule
17Ad-22(e)(2)(v) under the Exchange Act.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(4) Under the Exchange Act
Rule 17Ad-22(e)(4) under the Exchange Act requires, in part, that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes.\34\ Based on its review of the record, the
Commission believes that the proposed rule change is consistent with
Rule 17Ad-22(e)(4) under the Exchange Act.
---------------------------------------------------------------------------
\34\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
1. Stress Testing
Rules 17Ad-22(e)(4)(i) and (iii) under the Exchange Act require
that a covered clearing agency's policies and procedures meet the
requirements of Rule 17Ad-22(e)(4) by maintaining financial resources
at the minimum to enable OCC to cover a wide range of foreseeable
stress scenarios that include, but are not limited to, the default of
the participant family that would potentially cause the largest
aggregate credit exposure for OCC in extreme but plausible market
conditions.\35\ Further, Rule 17Ad-22(e)(4)(vi) under the Exchange Act
requires that a covered clearing agency's policies and procedures meet
the requirements of Rule 17Ad-22(e)(4) by testing the sufficiency of a
covered clearing agency's total financial resources available to meet
the minimum financial resource requirements under Rules 17Ad-
22(e)(4)(i) through (iii).\36\
---------------------------------------------------------------------------
\35\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
\36\ 17 CFR 240.17Ad-22(e)(4)(vi).
---------------------------------------------------------------------------
As described above, OCC proposes to expand the set of stress tests
that it uses to size the Clearing Fund by adding the Idiosyncratic
Scenarios to its current suite of stress tests. The Idiosyncratic
Scenarios are designed to capture the risk of extreme moves in
individual securities or small subsets of securities, while the current
Systemic Scenarios are based on broad-based market and systemic shocks.
Consistent with the general view that expanding the types of scenarios
that a clearing agency uses in its monthly sizing process makes the
clearing agency's risk management robust to a broader range of shocks,
the Commission believes that OCC's proposal to add the Idiosyncratic
Scenarios to its suite of stress tests would be a strengthening
change--meaning it would enhance OCC's ability to accurately and
appropriately size its Clearing Fund--that is consistent with the
requirements of Rules 17Ad-22(e)(4)(i) and (iii) under the Exchange
Act.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
---------------------------------------------------------------------------
Additionally, OCC proposes to revise its stress testing methodology
to produce differing price shocks for VIX futures across the term
structure. The proposed methodology would be based on SPX volatility
shocks across different expirations, as opposed to the current
methodology's reliance on a single shock to the VIX. As discussed
above, these changes would help OCC produce VIX futures price shocks in
its stress scenarios that are consistent with OCC's observation that
futures contracts with different expirations generally trade at
different prices reflecting the differing future price expectations of
the underlying asset, which in turn should
[[Page 68989]]
enhance OCC's ability to accurately and appropriately size its Clearing
Fund, consistent with the requirements of Rule 17Ad-22(e)(4)(vi).
Accordingly, the Commission believes that, taken together, OCC's
proposed changes to its stress testing methodology would be consistent
with the requirements of Rules 17Ad-22(e)(4)(i), (iii), and (vi).\38\
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22(e)(4)(i); 17 CFR 240.17Ad-22(e)(4)(iii);
and 17 CFR 240.17Ad-22(e)(4)(vi).
---------------------------------------------------------------------------
2. Clearing Fund Allocation
As noted above, Rule 17Ad-22(e)(4) under the Exchange Act generally
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
effectively identify, measure, monitor, and manage its credit exposures
to participants and those arising from its payment, clearing, and
settlement processes.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
OCC relies on the Clearing Fund as a source of mutualized resources
available to manage losses arising out of a Clearing Member's default.
OCC's method for allocating contributions to the Clearing Fund among
Clearing Members is aligned primarily with the credit risk posed by
each Clearing Member.\40\ OCC proposes to redefine the margin risk
component of its Clearing Fund allocation formula such that it would
rely on the same underlying model--STANS--for all Clearing Members (as
opposed to relying on STANS for most Clearing Members and SPAN for
certain Clearing Members with segregated futures accounts). The
proposed change would not change the overall allocation weighting
(i.e., margin risk would still account for 70 percent of the Clearing
Fund allocation among Clearing Members), but the Commission believes it
would provide a more consistent metric by which to assess margin risk
across Clearing Members. Accordingly, the Commission believes that the
proposed change is reasonably designed to support the management of
OCC's credit exposures to its participants. The Commission believes,
therefore, that OCC's proposed change to its Clearing Fund allocation
methodology is consistent with the requirements of Rule 17Ad-
22(e)(4).\41\
---------------------------------------------------------------------------
\40\ Clearing Fund allocations are based on a weighting of 70
percent margin risk, what OCC refers to as the ``total risk''
component of its Clearing Fund allocation formula, with open
interest and cleared volume weighted at 15 percent each.
\41\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
3. Cooling-Off Period
Rule 17Ad-22(e)(4)(ix) under the Exchange Act requires, in part,
that a covered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to describe
its process to replenish any financial resources it may use following a
default or other event in which use of resources is contemplated.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------
As noted above, OCC's current recovery tools include a cooling-off
period, during which OCC's authority to assess Clearing Members for
funds to replenish OCC's Clearing Fund is limited. Recognizing the
limit that such a cooling-off period places on the financial resources
available to OCC, the Commission continues to believe that the cooling-
off period provides certainty and predictability regarding Clearing
Members' maximum liability for Clearing Fund contributions.\43\ OCC
proposes to expand the set of events that would start the cooling-off
period to include proportionate Clearing Fund charges to Clearing
Members triggered by certain protective transactions or the failure of
a Clearing Member to meet certain obligations under OCC's rules,
consistent with OCC's original intention with its prior filing. The two
events to be added as triggers for the cooling-off period are similar
to the current triggers in that they pertain to amounts paid out of the
Clearing Fund to manage the failure of a Clearing Member to meet its
obligations to OCC. Consistent with the Commission's statements
regarding the current formulation of the cooling-off period, the
Commission believes that the proposed expansion is consistent with
OCC's obligations to describe its process to replenish any financial
resources it may use following a default or other event in which use of
resources is contemplated as required under Rule 17Ad-22(e)(4)(ix).\44\
---------------------------------------------------------------------------
\43\ See Securities Exchange Act Release No. 83916 (Aug. 23,
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
\44\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------
Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Proposed Rule Change are
consistent with Rule 17Ad-22(e)(4) under the Exchange Act.\45\
---------------------------------------------------------------------------
\45\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
IV. 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 \46\ and the rules and regulations thereunder.
---------------------------------------------------------------------------
\46\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\47\ that the Proposed Rule Change (SR-OCC-2019-009) be,
and hereby is, approved.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78s(b)(2).
\48\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
---------------------------------------------------------------------------
pursuant to delegated authority.\48\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27081 Filed 12-16-19; 8:45 am]
BILLING CODE 8011-01-P