Notice2024-11078
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Amendments to Its Rules and Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity Risk Management 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
May 21, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 99 (Tuesday, May 21, 2024)</title>
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[Federal Register Volume 89, Number 99 (Tuesday, May 21, 2024)]
[Notices]
[Pages 44752-44757]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-11078]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100147; File No. SR-OCC-2024-006]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by The Options Clearing
Corporation Concerning Amendments to Its Rules and Comprehensive Stress
Testing & Clearing Fund Methodology, and Liquidity Risk Management
Description
May 15, 2024.
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 May 2, 2024, The Options Clearing Corporation
(``OCC'') filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared primarily by OCC. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would (1) implement additional stress
scenarios designed to test the sufficiency of its prefunded financial
resources and (2) amend OCC's Rules to provide greater context and
detail on margin collection and Clearing Fund sizing that may result
from this type of sufficiency stress testing. The proposed changes to
OCC's (A) Comprehensive Stress Testing & Clearing Fund Methodology, and
Liquidity Risk Management Description (``Methodology Description'');
and (B) Rules are included in Exhibits 5A and 5B [sic] to filing SR-
OCC-2024-006. Material proposed to be added 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.\3\
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\3\ 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>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
As the sole clearing agency for standardized equity options listed
on a national securities exchange registered with the Commission, and
for the other products it clears, OCC is exposed to certain risks,
including credit risk and liquidity risk arising from its Clearing
Members' cleared contracts, for which OCC becomes the buyer to every
seller and the seller to every buyer. The management of credit and
liquidity risks are essential elements of OCC's risk management
framework. Given the critical role OCC plays within the U.S. financial
markets, it is vital that OCC maintains sufficient financial resources
to cover its exposures under normal and stressed conditions and
adequate resources to satisfy liquidity needs
[[Page 44753]]
arising from its settlement obligations. OCC manages its credit risk
related to Clearing Members by collecting margin and Clearing Fund
resources based on a Clearing Member's risk profile. OCC manages its
liquidity risk by maintaining a reliable and diverse set of committed
resources and liquidity providers, establishing a contingent funding
plan for additional resources, and performing stress testing that
covers a wide range of scenarios.
OCC performs daily stress testing of its financial resources using
a wide range of scenarios. OCC's stress testing inventory contains,
among others, scenarios \4\ designed to measure the potential exposures
that Clearing Member Group portfolios present relative to OCC's credit
and liquidity resources and determine potential calls for additional
collateral, either as margin or as Clearing Fund collateral, or adjust
the forms of collateral on deposit (``Sufficiency Scenarios''); and
monitor and assess the size of OCC's prefunded financial resources
against a wide range of stress scenarios for informational and risk
monitoring purposes (``Informational Scenarios''). OCC's stress tests
are used for evaluating both credit and liquidity risk, and the output
of these scenarios is also used for liquidity resource evaluation.
Informational Scenarios are not used directly to size the Clearing Fund
or drive calls for additional financial resources from OCC's Clearing
Members. Informational Scenarios may be re-categorized as Adequacy,
Sufficiency, or Sizing scenarios upon the approval of OCC's Risk
Committee.
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\4\ OCC's stress testing inventory also contains scenarios
designed to assess whether the resources collected are adequate to
cover OCC's risk tolerance of a 1-in-50 year statistical market
event over a two-year lookback period (``Adequacy Scenarios'') and
to inform the size of OCC's financial resources (``Sizing
Scenarios'').
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As part of the regular review of stress scenario output, OCC
identified two of its existing Informational Scenarios that generated
exposures that were consistently higher than those generated by the
corresponding Sufficiency Scenarios. Such Informational Scenarios are
variations of existing Sufficiency Scenarios representing the most
extreme market rally and decline moves in 2008. The proposed scenarios
differ from the existing scenarios in terms of how individual risk
factor price shocks are determined, as further described below. OCC
proposes to elevate these Informational Scenarios to Sufficiency
Scenarios by amending a list in the Methodology Description,\5\ which
is filed as a rule with the Commission.\6\ Such list represents a
subset of Adequacy, Sizing, and Sufficiency Scenarios that have been
implemented in OCC's stress testing system. OCC believes that the
proposed rule change would enhance its ability to manage risks by
considering a different approach to the determination of price shocks
to evaluate how such an event could occur under current market
conditions. While the proposed change to implement additional
Sufficiency Scenarios could have an impact on Clearing Members if OCC
called for additional financial resources based on the results of the
new Sufficiency Scenarios in accordance with OCC's Rules, OCC believes
the proposed Sufficiency Scenarios would generate stress test exposures
that are generally in line with its current, most impactful Sufficiency
Scenarios.\7\
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\5\ The Methodology Description describes the Comprehensive
Stress Testing & Clearing Fund Methodology, and Liquidity Risk
Management that OCC uses to analyze the adequacy of its financial
resources and to challenge its risk management framework.
\6\ See Exchange Act Release Nos. 90827 (Dec. 30, 2020), 86 FR
659 (Jan. 6, 2021) (SR-OCC-2020-015); 89014 (June 4, 2020), 85 FR
35446 (June 10, 2020) (SR-OCC-2020-003); 87718 (Dec. 11, 2019), 84
FR 68992 (Dec. 17, 2019) (SR-OCC-2019-010); 87717 (Dec. 11, 2019),
84 FR 68985 (Dec. 17, 2019) (SR-OCC-2019-009); 83735 (July 27,
2018), 83 FR 37855 (Aug. 2, 2018) (SR-OCC-2018-008).
\7\ See infra note 17 and accompanying text.
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Based on the results of the Sufficiency Scenarios, OCC may call for
additional financial resources from its Clearing Members. For example,
the results of OCC's Sufficiency Stress Tests may require the
collection of intra-day margin from a Clearing Member Group under OCC
Rule 609 \8\ or an intra-month resizing of the Clearing Fund under OCC
Rule 1001(c).\9\ While these Rules provide the authority or requirement
to call for additional resources based on the Sufficiency Stress Tests,
details about how the calculations related to the relevant thresholds
are made are documented in OCC's Clearing Fund Methodology Policy,\10\
which is itself filed as a rule with the Commission.\11\ Based on
feedback received from staff of the Commission, OCC proposes to amend
Rules 609 and 1001(c) to provide additional context and detail about
the circumstances in which OCC would exercise this authority to call
for additional resources. OCC does not believe the proposed changes to
the Rules would have any effect on Clearing Members because the changes
would merely incorporate additional detail already in effect under the
Commission-approved Clearing Fund Methodology Policy.
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\8\ See OCC Rule 609(a)(5) (providing that OCC may require the
deposit of intra-day margin when a Sufficiency Stress Test
identifies an exposure that exceeds 75% of the current Clearing Fund
requirement less deficits).
\9\ See OCC Rule 1001(c) (providing that if a Sufficiency Stress
Test identifies a breach that exceeds 90% of the size of the
Clearing Fund requirement (less any margin collected as a result of
a Sufficiency Stress Test breach pursuant to Rule 609), the
calculated size of the Clearing Fund shall be increased by the
greater of $1 billion or 125% of the difference between the relevant
risk exposure and the then-current Clearing Fund size).
\10\ OCC's Clearing Fund Methodology Policy summarizes the
manner in which OCC determines the level of financial resources
necessary to satisfy the regulatory requirements and the Board's
direction with respect to the additional financial resources
necessary to withstand a wide range of foreseeable stress scenarios
including, but are not limited to, the default of the two Clearing
Member Groups that would potentially cause the largest aggregate
credit exposure in extreme but plausible market conditions.
\11\ See Exchange Act Release Nos. 96566 (Dec. 22, 2022), 87 FR
80207 (Dec. 29, 2022) (SR-OCC-2022-010); 94950 (May 19, 2022), 87 FR
31916 (May 25, 2022) (SR-OCC-2022-004); 93436 (Oct. 27, 2021), 86 FR
60499 (Nov. 2, 2021) (SR-OCC-2021-010); 92038 (May 27, 2021), 86 FR
29861 (June 3, 2021) (SR-OCC-2021-003); 89037 (June 10, 2020), 85 FR
36442 (June 16, 2020) (SR-OCC-2020-006); 89014 (June 4, 2020), 85 FR
35446 (June 10, 2020) (SR-OCC-2020-003); 87718 (Dec. 11, 2019), 84
FR 68992 (Dec. 17, 2019) (SR-OCC-2019-010); 86436 (July 23, 2019),
84 FR 36632 (July 29, 2019) (SR-OCC-2019-006); 83735 (July 27,
2018), 83 FR 37855 (Aug. 2, 2018) (SR-OCC-2018-008).
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(1) Purpose
OCC is proposing to (1) take two of its existing informational
stress scenarios and add them to the list of stress scenarios designed
to test the sufficiency of OCC's prefunded financial resources in the
Methodology Description and (2) amend Rules 609 and 1001(c) to provide
greater context and detail in the Rules on margin collection and
Clearing Fund sizing that may result from this type of sufficiency
stress testing.
Proposed Changes to the Methodology Description
OCC proposes to elevate two of its existing Informational Scenarios
to Sufficiency Scenarios. OCC's inventory of Sufficiency Scenarios
under the Methodology Description consists of historical scenarios
designed to replicate historical events, including the most extreme
market rally and decline moves (``Largest Rally/Decline'') in 2008 and
2020, under current market conditions. The proposed Sufficiency
Scenarios are a variation of the existing Largest Rally/Decline
Sufficiency Scenarios from 2008.
Price shocks are applied to individual securities or risk factors
to replicate historical events under the Methodology Description. The
existing Sufficiency Scenarios are historically based scenarios that
employ a waterfall approach to determine which price
[[Page 44754]]
shocks to apply to risk factors.\12\ To start, the actual return of the
risk factor during the historical event is utilized as the price shock,
if available. If unavailable,\13\ a proxy market return from a
corresponding sector is utilized as the price shock. Finally, if data
is unavailable for both actual and sector returns, the price shock is
determined by the ``beta'' \14\ of the risk factor to its assigned risk
driver \15\ multiplied by the corresponding risk driver shock (the
``risk driver beta derived price shock''). The risk driver shock is the
actual return of a given risk driver from the historical event. For
example, the risk driver beta derived price shock for equity security
ABC would be derived by multiplying ABC's historical beta to SPX (its
risk driver) by the SPX risk driver shock.
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\12\ A ``risk factor'' is a product or attribute whose
historical data is used to estimate and simulate the risk for an
associated product. Risk factors include the returns on individual
equity securities, returns on equity indexes, and returns on implied
volatility risk factors, among others.
\13\ An actual return may be unavailable as not all current risk
factors existed during a given historical period. For example, TSLA,
a current risk factor, was not a risk factor in 2008.
\14\ The ``beta'' is the sensitivity of a security with respect
to its corresponding risk driver (i.e., the sensitivity of the price
of the security relative to the price of the risk driver).
\15\ The main risk drivers are price and volatility for equity
securities. For example, the Cboe S&P 500 Index (``SPX'') and Cboe
Volatility Index (``VIX'') are the main risk drivers for shocks of
the equity risk factors. Other relevant risk drivers are utilized,
including but not limited to, risk drivers to cover U.S. and
Canadian Government Security collateral positions, risk drivers to
cover commodity-based exchange traded funds and risk drivers to
cover commodity-based futures products.
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The proposed Sufficiency Scenarios, which are currently classified
as Informational, are a variation of the existing Largest Rally/Decline
from 2008 Sufficiency Scenarios, the only difference being the
determination of price shocks applied to individual risk factors.
Namely, unlike the existing Largest Rally/Decline from 2008 Sufficiency
Scenarios, the proposed Sufficiency Scenarios would not utilize the
waterfall approach described above to apply price shocks. Instead, the
proposed scenarios would directly apply the risk driver beta derived
price shock. This approach is consistent with other statistical
scenarios, including the Sizing Scenarios, which directly apply risk
driver beta derived price shocks. Given that these existing
Informational Scenarios generated exposures that were consistently
higher than those generated by the corresponding Sufficiency
Scenarios,\16\ OCC proposes to elevate these Informational Scenarios to
Sufficiency Scenarios. To effect such changes, OCC would update the
list of scenarios contained in the Methodology Description to include
the proposed Sufficiency Scenarios. Additionally, OCC proposes to make
minor typographical edits to correct the formatting of footnotes
throughout the text of the Methodology Description.
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\16\ See infra note 17.
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Elevating the subject Informational Scenarios to Sufficiency
Scenarios will serve to enhance the existing suite of Sufficiency
Scenarios by considering a different determination of price shocks to
evaluate how such an event could occur under current market conditions.
In their current state as Informational Scenarios, these scenarios do
not drive the size of the Clearing Fund or calls for additional
resources. However, as Sufficiency Scenarios, they would be used to
measure the exposure of OCC's Clearing Fund to the portfolios of
individual Clearing Member Groups and determine whether any such
exposure is sufficiently large as to necessitate OCC calling for
additional resources in the form of margin or an intra-month resizing
of the Clearing Fund. The proposed rule change would enable OCC to test
the sufficiency of its financial resources under a wider range of
relevant stress scenarios and respond quickly when OCC believes
additional financial resources are necessary. The proposed rule change
would thereby improve OCC's ability to measure, monitor and manage its
exposures to its participants and enhance OCC's ability to manage risks
in its role as a systemically important financial market utility. OCC's
analysis indicates that the proposed Sufficiency Scenarios generate
stress test exposures that are generally in line with its current, most
impactful Sufficiency Scenarios.\17\
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\17\ OCC has provided data and analysis concerning the proposed
rule change in Confidential Exhibit 3A [sic] to SR-OCC-2024-006,
including the performance of the proposed scenarios relative to the
existing 2008 scenarios, an assessment of the risk drivers for which
the proposed scenarios produce more conservative results, and an
evaluation of the impact the proposed scenarios would have had on
collection of additional financial resources.
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Proposed Changes to the Rules
OCC proposes to provide further context and detail in the Rules on
current Sufficiency Stress Test practices. As described above,
Sufficiency Stress Tests are run through OCC's Sufficiency Scenarios,
which, under the proposal, would include the proposed Sufficiency
Scenarios. The results of OCC's Sufficiency Stress Tests may require
the collection of intra-day margin from a Clearing Member Group or an
intra-month resizing of the Clearing Fund. For example, pursuant to OCC
Rule 609(a)(5),\18\ if any of OCC's Sufficiency Scenarios identify
exposures that exceed 75% of the current Clearing Fund requirement less
deficits, OCC may require additional margin deposits (``intra-day
margin'') from the Clearing Member Group(s) driving the breach.
Additionally, pursuant to Rule 1001(c),\19\ if a Sufficiency Scenario
identifies a breach that exceeds 90% of the current Clearing Fund
requirement (after subtracting any margin collected in accordance with
a breach of the 75% threshold), OCC will promptly take action to
initiate an increase in the size of the Clearing Fund on an intra-month
basis to ensure that it continues to maintain sufficient prefunded
financial resources.\20\
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\18\ See Exchange Act Release No. 83406 (June 11, 2018), 83 FR
28018, 28025 (June 15, 2018).
\19\ Id. at 28025-26.
\20\ In addition to these Rules, which provide OCC authority to
call for additional financial resources to mitigate credit risk
identified under the Sufficiency Scenarios, OCC also may address
liquidity risk identified under such Sufficiency Scenarios. See,
e.g., OCC Rules 601(g) & 609(b) (providing OCC authority to require
the Clearing Member Group to provide additional cash collateral
(``Required Cash Deposits'') if OCC forecasts that a Clearing
Member's potential settlement obligations, including potential
settlement obligations under stressed market conditions, could be in
excess of OCC's liquidity resources to satisfy such obligations).
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OCC proposes to amend Rule 609 to address the case where a Clearing
Member is subject to multiple intra-day margin calls over the course of
a month (i.e., between resizing of the Clearing Fund, which is
typically conducted monthly). Under OCC Rule 609(a)(5), if any of OCC's
Sufficiency Scenarios identify exposures that exceed 75% of the current
Clearing Fund requirement less deficits, OCC may require intra-day
margin deposits from the Clearing Member Group(s) driving the breach.
Currently, prior to the issuance of such margin call, OCC confirms the
margin call amount against any existing intra-day margin call amounts
for the monthly period under OCC Rule 609(a)(5). If the margin call
amount is greater, a new margin call is issued for that amount.\21\ The
new margin call remains in effect until the next monthly resizing of
the Clearing Fund or it is superseded by a larger margin call amount.
Accordingly, OCC proposes language in the Rule to specify that, if a
Clearing Member Group is subject to intra-day margin calls under more
than one Sufficiency Stress Test, the largest call will be applied and
remain in effect until the next monthly resizing. This
[[Page 44755]]
proposed language is consistent with the language in OCC's Clearing
Fund Methodology Policy.\22\
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\21\ For the avoidance of doubt, a new margin call is not issued
if the margin call amount is equal to, or smaller than, an existing
margin call amount for the monthly period.
\22\ The Clearing Fund Methodology Policy states that, if a
Clearing Member Group's Clearing Fund draws exceed the 75% threshold
in more than one Sufficiency Stress Test scenario, the Clearing
Member Group ``shall be subject to the largest margin call.'' See
supra note 18 at 28025.
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OCC also proposes minor changes for clarity and readability in Rule
609(a)(5). For example, OCC proposes replacing ``such that'' with
``from.'' Additionally, OCC proposes to remove ``less deficits'' in
reference to OCC's Sufficiency Scenarios identifying exposures that
exceed 75% of the current Clearing Fund requirement less deficits. Such
language was relevant when OCC's Rules provided a two-day period for
Clearing Members to deposit additional required Clearing Fund
assets.\23\ OCC has since shortened this collection period following
Clearing Fund resizing from two business days to the next Settlement
Time, making the reference to ``less deficits'' unnecessary as OCC
considers such deficits covered.\24\ The removal of such language is
also consistent with the Commission-approved Clearing Fund Methodology
Policy.\25\ OCC believes such changes would provide additional
transparency in the Rules by including greater context and detail,
would not change current practices, and would promote consistency
between OCC Rules and related policies.
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\23\ See Exchange Act Release No. 94950 (May 19, 2022), 87 FR
31916, 31918 (May 25, 2022) (File No. SR-OCC-2022-004) (describing
the then-current process that allows members two business days to
meet routine funding obligations related to the Clearing Fund).
\24\ Id. (describing the changes designed to require funding by
the next Settlement Time, effectively requiring funding by the
business day following notice of an obligation).
\25\ A conforming reference to remove ``less deficits'' was made
to OCC's Clearing Fund Methodology Policy in reference to OCC's
Sufficiency Scenarios identifying exposures that exceed 75% of the
current Clearing Fund requirement as part of File No. SR-OCC-2022-
004. Id. (``These changes are intended to conform the Clearing Fund
Methodology Policy with the proposed changes to OCC's Rules and
support the reduced operational complexity that OCC expects to
achieve by creating a more uniform settlement time.'').
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OCC also proposes to amend Rule 1001(c) to provide additional
transparency and clarity regarding intra-month Clearing Fund sizing
adjustments. Under OCC Rule 1001(c), if a Sufficiency Scenario
identifies a breach that exceeds 90% of the size of the Clearing Fund
requirement (after subtracting any margin ``collected'' in accordance
with a breach of the 75% threshold), OCC will promptly take action to
initiate an increase in the size of the Clearing Fund on an intra-month
basis. OCC proposes to amend the parenthetical to more clearly include
amounts to be collected from a breach of the 75% threshold by adding
``or to be collected.'' This change would provide greater clarity to
reflect that any margin calls issued pursuant to Rule 609(a)(5) are
also subtracted in the calculation in Rule 1001(c).\26\ Such change
would conform with OCC's current practices set out in the Clearing Fund
Methodology Policy, which does not limit the parenthetical in Rule
1001(c) to previously collected margin call amounts.\27\
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\26\ In practice deficits due to an intra-month resizing are due
by the first Settlement Time following notification or such later
time as provided by OCC pursuant to Rule 1005(b).
\27\ The current Commission-approved Clearing Fund Methodology
Policy, which OCC has provided as Exhibit 3B [sic] to File No. SR-
OCC-2024-006, states that, if a Sufficiency Stress Test identifies a
Clearing Fund draw that exceeds 90% of the current Clearing Fund
requirement ``after subtracting margin calls resulting from a breach
of [the 75% threshold],'' OCC will promptly act to initiate an
intra-month increase in the Clearing Fund size.
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OCC believes the proposed changes are intended to better align the
descriptions in the Rules with OCC's current practices for the
collection of intra-day margin or an intra-month resizing of the
Clearing Fund resulting from OCC's Sufficiency Stress Tests. These
changes would have no impact on Clearing Members and would not affect
the Clearing Fund size, as they are consistent with the Commission-
approved Clearing Fund Methodology Policy.
Implementation Timeframe
OCC expects to implement the proposed changes no later than sixty
days from the date that OCC receives all necessary regulatory approvals
for the filing in light of the technical system changes that are
required to implement the additional stress scenarios. OCC will
announce the implementation date of the proposed changes by an
Information Memorandum posted to its public website at least seven days
prior to implementation.\28\
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\28\ Implementation of this rule change will be delayed until
this change is deemed certified under CFTC Regulation 40.6.
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(2) Statutory Basis
OCC believes the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, OCC believes
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \29\ and Rule 17Ad-22(e)(4) \30\ and Rule 17Ad-22(e)(7) \31\
thereunder, for the reasons described below.
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 17 CFR 240.17Ad-22(e)(4).
\31\ 17 CFR 240.17Ad-22(e)(7).
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Section 17A(b)(3)(F) of the Exchange Act \32\ requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and accurate clearance and settlement of securities and
derivatives transactions and, in general, protect investors and the
public interest. OCC proposes to (1) implement additional Sufficiency
Scenarios in the Methodology Description and (2) provide greater
context and detail in the OCC Rules on margin collection and Clearing
Fund sizing that may result from this type of sufficiency stress
testing. The proposed rule change would enhance OCC's framework for
measuring, monitoring, and managing its credit risks. Implementation of
the additional Sufficiency Scenarios would enable OCC to test the
sufficiency of its prefunded financial resources under a wider range of
stress scenarios and respond quickly when OCC believes the collection
of additional financial resources is necessary. The ability to
appropriately size and test the sufficiency of prefunded financial
resources is critical to ensuring that OCC can continue to provide
prompt and accurate clearance and settlement of securities and
derivatives transactions in the event of a Clearing Member default and
manage the risks associated with its role as a systemically important
financial market utility. Amending the Methodology Description to
incorporate the proposed Sufficiency Scenarios and make minor
typographical edits would help ensure that such document remains clear
and effective so that the requirements under this document continue to
be carried out properly. Additionally, the proposed changes to the OCC
Rules would enhance clarity and transparency regarding OCC practices on
intra-day margin collection and intra-month Clearing Fund sizing
adjustments resulting from Sufficiency Stress Tests. Such changes would
promote understanding of the Rules by market participants and ensure
consistency of the Rules with existing policies to reduce potential
confusion, which would promote the prompt and accurate clearance and
settlement of securities and derivatives transactions and, in general,
protect investors and the public interest. Accordingly, OCC believes
the proposed rule change is
[[Page 44756]]
consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\33\
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\32\ 15 U.S.C. 78q-1(b)(3)(F).
\33\ Id.
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Rule 17Ad-22(e)(4)(iii) \34\ 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,
including by maintaining additional financial resources (beyond those
collected as margin) at the minimum to enable it 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 the covered clearing agency in
extreme but plausible market conditions. Rule 17Ad-22(e)(4)(vi)(A) \35\
further requires, in part, that such policies and procedures are
reasonably designed to test the sufficiency of the covered clearing
agency's total financial resources available to meet the minimum
financial resource requirements under Rule 17Ad-22(e)(4)(iii) \36\ by
conducting stress testing of its total financial resources once each
day using standard predetermined parameters and assumptions. As
described above, OCC's Sufficiency Stress Tests are run through OCC's
Sufficiency Scenarios, which, under the proposal, would include the
proposed Sufficiency Scenarios. The results of Sufficiency Stress Tests
may require collection of intra-day margin from a Clearing Member Group
or an intra-month resizing of the Clearing Fund. The proposed changes
would thus enable OCC to test the sufficiency of its prefunded
financial resources under a wider range of stress scenarios, respond
quickly to collect additional financial resources from its Clearing
Members if the Sufficiency Scenario exposures breach the predetermined
thresholds established in OCC's Rules and Clearing Fund Methodology
Policy, and promote clarity and transparency on its Sufficiency Stress
Tests in the OCC Rules. Moreover, the proposed Sufficiency Scenarios
were constructed in accordance with OCC's existing Methodology
Description using standard predetermined parameters and assumptions. As
a result, OCC believes the proposed rule change is designed to further
OCC's compliance with the requirements of Rules 17Ad-22(e)(4)(iii) and
(vi)(A).\37\
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\34\ 17 CFR 240.17Ad-22(e)(4)(iii).
\35\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
\36\ 17 CFR 240. 17Ad-22(e)(4)(iii).
\37\ 17 CFR 240.17Ad-22(e)(4)(iii) and (vi)(A).
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Rule 17Ad-22(e)(7)(vi) \38\ requires, in part, that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively measure,
monitor, and manage the liquidity risk that arises in or is borne by
the covered clearing agency, including measuring, monitoring, and
managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by determining the amount and
regularly testing the sufficiency of the liquid resources held for
purposes of meeting the minimum liquid resource requirement. The
proposed changes would allow OCC to test the sufficiency of its liquid
resources under a wider range of stress scenarios and respond quickly
to collect additional liquid resources from its Clearing Members if the
Sufficiency Scenario output breaches the predetermined threshold
established in OCC's Liquidity Risk Management Framework. The inclusion
of the proposed scenarios as Sufficiency Scenarios would increase the
likelihood that OCC maintains sufficient liquid resources at all times.
OCC thus believes the proposed rule change is consistent with the
requirements of Rules 17Ad-22(e)(7)(vi).\39\
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\38\ 17 CFR 240.17Ad-22(e)(7)(vi).
\39\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Exchange Act \40\ 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 Exchange
Act. The proposed changes to the OCC Rules would have no impact on
Clearing Members and would not affect the Clearing Fund size as they
are consistent with current OCC policies, as described above. Such
changes would enhance clarity and transparency regarding OCC practices
for the collection of intra-day margin and intra-month resizing of the
Clearing Fund resulting from Sufficiency Stress Tests by providing
further detail and context in the Rules. While the proposed change to
implement additional Sufficiency Scenarios could have an impact on
certain Clearing Members, OCC does not believe that the proposed rule
change would impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC's analysis
indicates that the proposed Sufficiency Scenarios generate stress test
exposures that are generally in line with its current, most impactful
Sufficiency Scenarios.\41\ OCC notes, however, that the results of
these proposed scenarios may vary depending on the composition of each
individual Clearing Member's portfolio at a given point in time. As a
result, the proposed scenarios could from time to time result in more
frequent or larger sufficiency stress test margin calls.
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\40\ 15 U.S.C. 78q-1(b)(3)(I).
\41\ OCC has provided data and analysis concerning the proposed
rule change in Confidential Exhibit 3A [sic] to SR-OCC-2024-006.
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The implementation of the new Sufficiency Scenarios would enable
OCC to test the sufficiency of its financial resources under a wider
range of relevant stress scenarios and respond quickly when OCC
believes additional financial resources are required. The proposed
changes are designed to improve OCC's ability to measure, monitor and
manage its credit exposures to its participants consistent with its
regulatory requirements under Rule 17Ad-22(e)(4),\42\ to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by OCC under Rule 17Ad-22(e)(7),\43\ and to enhance OCC's ability
to manage risks in its role as a systemically important financial
market utility. Moreover, the proposed Sufficiency Scenarios were
constructed in accordance with OCC's approved stress testing
methodology using standard predetermined parameters and assumptions.
These scenarios provide diversification in terms of how price shocks
are applied to individual risk factors and would help capture risks
that OCC's current inventory of Sufficiency Scenarios may not capture.
Accordingly, OCC believes that any impact on competition or OCC's
Clearing Members would be necessary and appropriate in furtherance of
the protection of investors and the public interest under the Act. For
the foregoing reasons, OCC believes that the proposed rule change is in
the public interest, would be consistent with the requirements of the
Exchange Act applicable to clearing agencies, and would not impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\44\
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\42\ 17 CFR 240.17Ad-22(e)(4).
\43\ 17 CFR 240.17Ad-22(e)(7).
\44\ 15 U.S.C. 78s(b)(1).
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[[Page 44757]]
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change, and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of the notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#245651484109474b4949414a5057645741470a434b52"><span class="__cf_email__" data-cfemail="1b696e777e36787476767e756f685b687e78357c746d">[email protected]</span></a>. Please include
file number SR-OCC-2024-006 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2024-006. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of OCC and on OCC's
website at <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>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2024-006 and
should be submitted on or before June 11, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-11078 Filed 5-20-24; 8:45 am]
BILLING CODE 8011-01-P
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