Notice2022-10616
Self-Regulatory Organizations; Options Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Concerning the Options Clearing Corporation's Margin Methodology for Incorporating Variations in Implied Volatility
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
May 18, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 96 (Wednesday, May 18, 2022)</title>
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[Federal Register Volume 87, Number 96 (Wednesday, May 18, 2022)]
[Notices]
[Pages 30284-30286]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10616]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94900; File No. SR-OCC-2022-001]
Self-Regulatory Organizations; Options Clearing Corporation;
Order Instituting Proceedings To Determine Whether To Approve or
Disapprove a Proposed Rule Change Concerning the Options Clearing
Corporation's Margin Methodology for Incorporating Variations in
Implied Volatility
May 12, 2022.
I. Introduction
On January 24, 2022, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2022-001 (``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 change
quantitative models related to certain volatility products.\3\ The
Proposed Rule Change was published for public comment in the Federal
Register on February 11, 2022.\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\ See Notice of Filing infra note 4, at 87 FR 8072.
\4\ Securities Exchange Act Release No. 94165 (Feb. 7, 2022), 87
FR 8072 (Feb. 11, 2022) (File No. SR-OCC-2022-001) (``Notice of
Filing''). OCC also filed a related advance notice (SR-OCC-2022-801)
(``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 February 11, 2022. Securities Exchange Act
Release No. 94166 (Feb. 7, 2022), 87 FR 8063 (Feb. 11, 2022) (File
No. SR-OCC-2022-801).
\5\ Comments on the Proposed Rule Change are available at
<a href="https://www.sec.gov/comments/sr-occ-2022-001/srocc2022001.htm">https://www.sec.gov/comments/sr-occ-2022-001/srocc2022001.htm</a>. 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 the Advance Notice.
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On March 24, 2022, pursuant to Section 19(b)(2) of the Exchange
Act,\6\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\7\ This order
institutes proceedings, pursuant to Section 19(b)(2)(B) of the
[[Page 30285]]
Exchange Act,\8\ to determine whether to approve or disapprove the
Proposed Rule Change.
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\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 94165 (Feb. 7, 2022), 87
FR 8072 (Feb. 11, 2022) (File No. SR-OCC-2022-001).
\8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change
OCC is a central counterparty (``CCP''), which means it interposes
itself as the buyer to every seller and seller to every buyer for
financial transactions. As the CCP for the listed options markets in
the U.S., as well as for certain futures, OCC is exposed to the risk
that one or more of its members may fail to make a payment or to
deliver securities. OCC addresses such exposures, in part, by requiring
its members to provide collateral, including margin collateral. Margin
is the collateral that CCPs, like OCC, collect to cover potential
changes in a member's positions over a set period of time. Typically,
margin is designed to cover such exposures during normal market
conditions, which means that margin collateral should be sufficient to
exposures at least 99 out of 100 days.
Margin requirements may fluctuate from day to day; however, CCPs
seek to reduce fluctuations that could otherwise impose systemic risk.
For example, if a CCP collects too little margin during relatively
stable market conditions, then it would need to collect significantly
more margin during stressed market conditions. Margin requirements that
are strongly reactive to market movements are considered to be
``procyclical.'' By contrast, a CCP may collect slightly more margin
during quiet times to reduce the additional strain it places on members
during times of market stress.
OCC's process for setting margin requirements considers several
distinct risk factors, including volatility. OCC's current models for
estimating the impact of volatility on member positions have a number
of limitations that may result in procyclical margin requirements. OCC
is proposing to change its models to reduce the level of procyclicality
in its margin requirements caused by changes in volatility. The changes
OCC is proposing would also provide for offsets between products based
on the same underlying asset. Based on data provided by OCC, the
proposed model changes would likely increase margin requirements
slightly overall, which, in turn, would reduce the additional amount of
margin OCC would need to collect during periods of market stress.
The proposed changes to OCC's models are a continuation of
volatility model changes that OCC has implemented over the past several
years. In 2015, the Commission approved OCC's proposal to more broadly
incorporate variations in implied volatility in OCC's margin
methodology.\9\ In 2018, OCC modified its implied volatility model to
address issues highlighted by large spikes in volatility.
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\9\ See Securities Exchange Act Release No. 76781 (Dec. 28,
2015), 81 FR 135 (Jan. 4, 2016) (File No. SR-OCC-2015-016).
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As described in the Notice of Filing,\10\ OCC proposes to change
three quantitative models related to certain volatility products.
Specifically, OCC proposes the following changes:
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\10\ See Notice of Filing, supra note 4.
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(1) Implement a new model for incorporating variations in implied
volatility within OCC's margin methodology for products based on the
S&P 500 Index;
(2) implement a new model to margin futures on volatility indexes;
\11\ and
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\11\ A volatility index is an index designed to measure the
volatiles implied by the prices of options on an underlying index.
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(3) replace OCC's model to for margining variance futures.\12\
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\12\ A variance future is an exchange-traded futures contract
based on the expected realized variance of an underlying interest.
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III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act \13\ to determine whether the Proposed
Rule Change should be approved or disapproved. Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the Proposed Rule Change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule Change,
providing the Commission with arguments to support the Commission's
analysis as to whether to approve or disapprove the Proposed Rule
Change.
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\13\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\14\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of, and input from commenters with respect to, the
Proposed Rule Change's consistency with Section 17A of the Exchange
Act,\15\ and the rules thereunder, including the following provisions:
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\14\ Id.
\15\ 15 U.S.C. 78q-1.
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<bullet> Section 17A(b)(3)(F) of the Exchange Act,\16\ which
requires, among other things, that the rules of a clearing agency must
be 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; and
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
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<bullet> Rule 17Ad-22(e)(2) under the Exchange Act,\17\ which
requires a covered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to provide
for governance arrangements that, among other things, (1) are clear and
transparent,\18\ (2) clearly prioritize the safety and efficiency of
the covered clearing agency,\19\ and (3) support the public interest
requirements in Section 17A of the Exchange Act (15 U.S.C. 78q-1)
applicable to clearing agencies, and the objectives of owners and
participants.\20\
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\17\ 17 CFR 240.17Ad-22(e)(2).
\18\ 17 CFR 240.17Ad-22(e)(2)(i).
\19\ 17 CFR 240.17Ad-22(e)(2)(ii).
\20\ 17 CFR 240.17Ad-22(e)(2)(iii).
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<bullet> Rule 17Ad-22(e)(3) under the Exchange Act,\21\ which
requires a covered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to maintain
a sound risk management framework for comprehensively managing legal,
credit, liquidity, operational, general business, investment, custody,
and other risks that arise in or are borne by the covered clearing
agency, which, among other things, includes risk management policies,
procedures, and systems designed to identify, measure, monitor, and
manage the range of risks that arise in or are borne by the covered
clearing agency, that are subject to review on a specified periodic
basis and approved by the board of directors annually.\22\
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\21\ 17 CFR 240.17Ad-22(e)(3).
\22\ 17 CFR 240.17Ad-22(e)(3)(i).
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<bullet> Rule 17Ad-22(e)(4) under the Exchange Act,\23\ which
requires 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.
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\23\ 17 CFR 240.17Ad-22(e)(4).
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<bullet> Rule 17Ad-22(e)(6) under the Exchange Act,\24\ which
requires a covered clearing agency establish, implement, maintain, and
enforce
[[Page 30286]]
written policies and procedures reasonably designed to cover, if the
covered clearing agency provides central counterparty services, 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 \25\ (2) calculates
sufficient margin 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; \26\ and uses
an appropriate method for measuring credit exposure that accounts for
relevant product risk factors and portfolio effects across
products.\27\
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\24\ 17 CFR 240.17Ad-22(e)(6).
\25\ 17 CFR 240.17Ad-22(e)(6)(i).
\26\ 17 CFR 240.17Ad-22(e)(6)(iii).
\27\ 17 CFR 240.17Ad-22(e)(6)(v).
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<bullet> Rule 17Ad-22(e)(23) under the Exchange Act,\28\ which
requires a covered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to provide
for, among other things, sufficient information to enable participants
to identify and evaluate the risks, fees, and other material costs they
incur by participating in the covered clearing agency.\29\
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\28\ 17 CFR 240.17Ad-22(e)(23).
\29\ 17 CFR 240.17Ad-22(e)(23)(ii).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposed Rule Change. In particular, the Commission invites
the written views of interested persons concerning whether the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Exchange
Act,\30\ Rule 17Ad-22(e)(6) under the Exchange Act,\31\ or any other
provision of the Exchange Act, or the rules and regulations thereunder.
Although there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4(g) under the Exchange Act,\32\ any request for an opportunity to
make an oral presentation.\33\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 17 CFR 240.17Ad-22(e)(6).
\32\ 17 CFR 240.19b-4(g).
\33\ Section 19(b)(2) of the Exchange Act grants to the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the Proposed Rule Change should be approved
or disapproved by June 8, 2022. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
June 22, 2022.
The Commission asks that commenters address the sufficiency of
OCC's statements in support of the Proposed Rule Change, which are set
forth in the Notice of Filing,\34\ in addition to any other comments
they may wish to submit about the Proposed Rule Change.
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\34\ See Notice of Filing, supra note 4.
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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#f082859c95dd939f9d9d959e8483b0839593de979f86"><span class="__cf_email__" data-cfemail="2e5c5b424b034d4143434b405a5d6e5d4b4d00494158">[email protected]</span></a>. Please include
File Number SR-OCC-2022-001 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-2022-001. 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-2022-001 and
should be submitted on or before June 8, 2022. Rebuttal comments should
be submitted by June 22, 2022.
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\35\ 17 CFR 200.30-3(a)(31).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10616 Filed 5-17-22; 8:45 am]
BILLING CODE 8011-01-P
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