Notice2021-23021
Self-Regulatory Organizations; the Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Concerning the Interest Rates Used for Options Pricing in the STANS Methodology Description
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 22, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 202 (Friday, October 22, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 202 (Friday, October 22, 2021)]
[Notices]
[Pages 58704-58706]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-23021]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93371; File No. SR-OCC-2021-011]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Concerning the Interest Rates Used for Options Pricing in the STANS
Methodology Description
October 18, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on October 6, 2021, the Options Clearing
Corporation (``OCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by OCC. OCC filed the
proposed rule change pursuant to Section 19(b)(3)(A) \3\ of the Act and
Rule 19b-4(f)(1) \4\ thereunder so that the proposal was effective upon
filing with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
OCC is filing a proposed rule change to make clarifying changes to
OCC's System for Theoretical Analysis and Numerical Simulation
(``STANS'') Methodology Description concerning the interest rates used
for options pricing. The proposed changes to OCC's STANS Methodology
Description are contained in confidential Exhibit 5 of filing SR-OCC-
2021-011. Material proposed to be added to the STANS Methodology
Description as currently in effect is underlined and material proposed
to be deleted is marked in strikethrough text. All capitalized terms
not defined herein have the same meaning as set forth in the OCC By-
Laws and Rules.\5\
---------------------------------------------------------------------------
\5\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
Background
STANS is OCC's proprietary risk management system for calculating
Clearing Member margin requirements.\6\ The STANS methodology utilizes
large-scale Monte Carlo simulations to forecast price and volatility
movements in determining a Clearing Member's margin requirement.\7\
STANS margin requirements are calculated at the portfolio level of
Clearing Member accounts with positions in marginable securities and
consists of an estimate of two primary components: A base component and
a concentration/dependence stress test add-on component. The base
component is an estimate of a 99% expected shortfall \8\
[[Page 58705]]
over a two-day time horizon. The concentration/dependence stress test
add-on is obtained by considering increases in the expected margin
shortfall for an account that would occur due to (i) market movements
that are especially large and/or in which certain risk factors would
exhibit perfect or zero correlations rather than correlations otherwise
estimated using historical data or (ii) extreme and adverse
idiosyncratic movements for individual risk factors to which the
account is particularly exposed. OCC uses the STANS methodology to
measure the exposure of portfolios of options and futures cleared by
OCC and cash instruments in margin collateral.
---------------------------------------------------------------------------
\6\ See Exchange Act Release No. 91079 (Feb. 8, 2021), 86 FR
9410 (Feb. 12, 2021) (File No. SR-OCC-2020-016). OCC makes its STANS
Methodology description available to Clearing Members. An overview
of the STANS methodology is available at <a href="https://www.theocc.com/Risk-Management/Margin-Methodology">https://www.theocc.com/Risk-Management/Margin-Methodology</a>.
\7\ See OCC Rule 601.
\8\ The expected shortfall component is established as the
estimated average of potential losses higher than the 99% value at
risk threshold. The term ``value at risk'' or ``VaR'' refers to a
statistical technique that, generally speaking, is used in risk
management to measure the potential risk of loss for a given set of
assets over a particular time horizon.
---------------------------------------------------------------------------
In the STANS methodology, the interest rate discount curve is a
critical input for OCC's pricing models. OCC's pricing models are
developed using the Black-Scholes framework. OCC uses the interest rate
curve, which is constructed from market instruments, along with
dividends, implied borrow cost, and implied volatility to specify
underlying price dynamics. OCC uses this data along with exchange
listed option price data to calibrate the implied borrow cost and
implied volatility parameters used in the option pricing models. STANS
margins are computed using models to generate 10,000 scenarios on
underlying price and implied volatility, and those price and implied
volatility scenarios are used as inputs to the option pricing model
(along with the interest rate curve) to re-price the options. The
margin base component is then determined from the profit-and-loss
distribution of the scenario prices.
OCC currently constructs the interest rate discount curve using
instruments referencing the London Interbank Offered Rate (``LIBOR'').
LIBOR is a key benchmark interest rate at which major global banks lend
to one another in the international interbank market for short-term
loans. LIBOR is also commonly used by financial market participants
more broadly to gauge prevailing interest rates; however, financial
market participants are expected to largely transition away from the
use of LIBOR by the end of 2021.\9\ Accordingly, OCC intends to
transition to a new benchmark rate for constructing its interest rate
curve to align with this industry transition.
---------------------------------------------------------------------------
\9\ See <a href="https://www.sec.gov/news/public-statement/libor-transition">https://www.sec.gov/news/public-statement/libor-transition</a>.
---------------------------------------------------------------------------
The STANS Methodology Description currently provides a general
description of OCC's method for constructing the interest rate discount
curve but does not specify any particular benchmark rate.\10\ While the
STANS Methodology Description is intended to provide flexibility in the
benchmark rate used, the document contains certain details of the
interest rate curve construction process that more closely reflect the
use of LIBOR as the benchmark rate.
---------------------------------------------------------------------------
\10\ See supra note 6.
---------------------------------------------------------------------------
Proposed Changes
OCC proposes to revise its STANS Methodology Description to clean
up certain details regarding the interest rate curve construction
process. Section 3.2 of the STANS Methodology Description describes
OCC's method for constructing the interest rate discount curve used to
accurately price the options cleared by OCC. While the STANS
Methodology Description does not specify the interest rate used in this
process, the document contains certain details that more closely
reflect the use of LIBOR as the benchmark rate. As noted above, the
industry plans to transition away from using LIBOR as the benchmark for
short-term interest rates by the end of 2021. OCC therefore proposes
additional clarifying and clean up changes to the STANS Methodology
Description so that the methodology more accurately reflects the
potential use of different industry standard benchmark rates to
construct the interest rate discount curve in STANS.
(2) Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Act \11\ and the rules thereunder applicable to OCC. Section
17A(b)(3)(F) of the Act \12\ requires, in part, that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of derivative agreements, contracts, and
transactions and to assure the safeguarding of securities and funds
which are in its custody or control or for which it is responsible. The
proposed rule change would make minor changes to the STANS Methodology
Description to clarify the use of different industry benchmark interest
rates used for discounting options pricing. The proposed rule change
would ensure that OCC's STANS methodology documentation remains
accurate and is aligned with standard industry practice after the
industry transitions away from LIBOR. OCC uses the margin it collects
from a defaulting Clearing Member to protect other Clearing Members
from losses that may result from the default and ensure that OCC is
able to continue the prompt and accurate clearance and settlement of
its cleared products. Moreover, OCC believes that accurate calculation
of margin requirements is necessary to help OCC manage the risk of a
Clearing Member default without recourse to the assets of non-
defaulting Clearing Members, which supports the safeguarding of
securities and funds in OCC's custody or control. OCC believes that the
proposed rule change would result in more accurate documentation for
its margin methodology and is therefore consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\13\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78q-1.
\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ Id.
---------------------------------------------------------------------------
Exchange Act Rules 17Ad-22(e)(6)(i) and (iii) \14\ further require
that a covered clearing agency establish, implement, maintain and
enforce written policies and procedures reasonably designed to cover
its credit exposures to its participants by establishing a risk-based
margin system that, among other things: (1) Considers, and produces
margin levels commensurate with, the risks and particular attributes of
each relevant product, portfolio, and market and (2) calculates margin
sufficient to cover its potential future exposure to participants in
the interval between the last margin collection and the close out of
positions following a participant default. The proposed rule change
would result in more accurate documentation for OCC's STANS margin
methodology, particularly once the industry and OCC transition away
from LIBOR later this year. OCC therefore believes the proposed rule
change would result in more accurate policies and procedures that are
reasonably designed to produce margin levels commensurate with the
risks and particular attributes of its cleared options and calculate
margin sufficient to cover its potential future exposure to
participants in the interval between the last margin collection and the
close out of positions following a participant default. In this way,
OCC believes the proposed rule change is consistent with the
requirements of Rules 17Ad-22(e)(6)(i) and (iii).\15\
---------------------------------------------------------------------------
\14\ 17 CFR 240.17Ad-22(e)(6)(i) and (iii).
\15\ 17 CFR 240.17Ad-22(e)(6)(i) and (iii).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \16\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposed rule change
[[Page 58706]]
would have any impact or impose a burden on competition. The proposed
rule change would make clarifying and clean up changes to OCC's margin
methodology concerning the industry benchmark interest rates used for
discounting options pricing. OCC does not believe that the proposed
rule change would unfairly inhibit access to OCC's services or
disadvantage or favor any particular user in relationship to another
user. OCC therefore does not believe that the proposed rule change
would have any impact or impose a burden on competition.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A) of the Act,\17\ and Rule 19b-
4(f)(1) thereunder,\18\ the proposed rule change is filed for immediate
effectiveness because it constitutes a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.\19\
---------------------------------------------------------------------------
\19\ Notwithstanding its immediate effectiveness, implementation
of this rule change will be delayed until this change is deemed
certified under CFTC Rule 40.6.
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7e0c0b121b531d1113131b100a0d3e0d1b1d50191108"><span class="__cf_email__" data-cfemail="cdbfb8a1a8e0aea2a0a0a8a3b9be8dbea8aee3aaa2bb">[email protected]</span></a>. Please include
File Number SR-OCC-2021-011 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2021-011. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of OCC and on OCC's website at
<a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-OCC-2021-011 and
should be submitted on or before November 12, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23021 Filed 10-21-21; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on October 22, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.