Notice2024-17847
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by the Options Clearing Corporation To Establish a Margin Add-On Charge That Would Be Applied to All Clearing Member Accounts To Help Mitigate the Risks Arising From Intraday and Overnight Trading Activity
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
August 12, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 155 (Monday, August 12, 2024)</title>
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[Federal Register Volume 89, Number 155 (Monday, August 12, 2024)]
[Notices]
[Pages 65695-65700]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-17847]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100664; File No. SR-OCC-2024-010]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by the Options Clearing
Corporation To Establish a Margin Add-On Charge That Would Be Applied
to All Clearing Member Accounts To Help Mitigate the Risks Arising From
Intraday and Overnight Trading Activity
August 6, 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 July 25, 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 establish a margin add-on charge
that would be applied to all Clearing Member accounts to help mitigate
the risks arising from intraday and overnight trading activity.
Proposed changes to OCC's Rules are contained in Exhibit 5A that
OCC provided as part of File No. SR-OCC-2024-010. Proposed changes to
OCC's Margin Policy are contained in confidential Exhibit 5B that OCC
provided as part of File No. SR-OCC-2024-010. Material proposed to be
added is marked by underlining and material proposed to be deleted is
marked with strikethrough text. All terms with initial capitalization
that are not otherwise 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
OCC is the sole clearing agency for standardized equity options
listed on national securities exchanges registered with the Commission.
OCC also clears stock loan and futures transactions. In its role as a
clearing agency, OCC guarantees the performance of its Clearing Members
for all transactions cleared by OCC by becoming the buyer to every
seller and the seller to every buyer (or the lender to every borrower
and the borrower to every lender, in the case of stock loan
transactions). These clearing activities could expose OCC to financial
risks if a Clearing Member fails to fulfil its obligations to OCC. In
its role as guarantor for all transactions cleared through OCC, one of
the more material risks related to a Clearing Member's failure to
perform is credit risk arising from the activity of the Clearing
Members whose performance OCC guarantees. OCC manages these financial
risks through financial safeguards, including the collection of margin
collateral from Clearing Members designed to, among other things,
address the market risk associated with a Clearing Member's positions
during the period of time OCC has determined it would take to liquidate
those positions.
At the start of each business day, OCC collects margin requirements
for each marginable account calculated by OCC's proprietary System for
Theoretical Analysis and Numerical Simulation (``STANS'') based on the
account's end-of-day positions from the previous business day. OCC also
makes intraday margin calls in defined circumstances. For example,
pursuant to OCC Rule 609 and OCC's Margin Policy, which has been filed
with and approved as a rule by the Commission,\4\ OCC requires the
deposit of intraday margin to reflect changes in the value of
securities deposited by the Clearing Member as margin when certain
defined thresholds are breached.\5\ OCC also issues intraday margin
calls when unrealized losses observed for an account based on positions
from extended trading hours (``ETH'') \6\ exceed certain thresholds.\7\
In addition, OCC maintains broad authority under OCC Rule 609 to issue
intraday margin calls or otherwise set a Clearing Member's margin
requirement in other circumstances, including as a protective measure
pursuant to Rule 307.\8\
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\4\ See Exchange Act Release Nos. 99169 (Dec. 14, 2023), 88 FR
88163 (Dec. 20, 2023) (SR-OCC-2023-008); 98101 (Aug. 10, 2023), 88
FR 55775 (Aug. 16, 2023) (SR-OCC-2022-012); 96566 (Dec. 22, 2022),
87 FR 80207 (Dec. 29, 2022) (SR-OCC-2022-010); 91079 (Feb. 8, 2021),
86 FR 9410 (Feb. 12, 2021) (SR-OCC-2020-016); 90797 (Dec. 23, 2020),
85 FR 86592 (Dec. 30, 2020) (SR-OCC-2020-014); 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); 86119
(June 17, 2019), 84 FR 29267 (June 21, 2019) (SR-OCC-2019-004);
83799 (Aug. 8, 2018), 83 FR 40379 (Aug. 14, 2018) (SR-OCC-2018-010);
82658 (Feb. 7, 2018), 83 FR 6646 (Feb. 14, 2018) (SR-OCC-2017-007).
\5\ See OCC Rule 609(a) (``[OCC] may require the deposit of
additional margin (`intra-day margin') by any Clearing Member in any
account at any time during any business day to reflect changes in: .
. . (3) the value of securities deposited by the Clearing Member as
margin . . . .''); Exchange Act Release No. 82658, supra note 4, 83
FR at 6648 (``Pursuant to the Margin Policy, OCC issues margin calls
during standard trading hours when unrealized losses exceeding 50%
of an account's total risk charges are observed for that account
based on start-of-day positions.'').
\6\ ETH refers to trades executed in extended and overnight
trading sessions offered by exchanges for which OCC provides
clearance and settlement services. See Exchange Act Release No.
73343 (Oct. 14, 2014), 79 FR 62684 (Oct. 20, 2014) (SR-OCC-2014-
805).
\7\ See Exchange Act Release No. 82355 (Dec. 19, 2017), 82 FR
61060, 61064 (Dec. 26, 2017) (SR-OCC-2017-007) (codifying in the
Margin Policy the ETH intraday margin call OCC would issue prior to
9:00 a.m. Central Time when: (1) unrealized losses observed for an
account, based on new ETH positions, exceed 25% of that account's
total risk charges and (2) the overall Clearing Member portfolio is
also experiencing losses).
\8\ See OCC Rule 307C(b) (providing for protective measures in
the form of requiring Clearing Members to adjust the amount or
composition of margin, including but not limited to requiring the
deposit of additional margin).
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Since the time these existing margin collection processes were
established, OCC has observed a significant increase in contract volume
and, in particular, volume in option contracts traded on the day of
their expiration--so-called ``zero-days-to-expiration'' or ``0DTE''
options.\9\ Currently, 0DTE option trading volume can spike to up to
40% of total trading volume on Friday expirations.\10\ This increase in
0DTE options trading has coincided with the proliferation of option
expiries. Traditionally, listed options expired on the third Friday of
the month.\11\ In 2005,
[[Page 65696]]
the Chicago Board Options Exchange (``Cboe''), one of the participant
exchanges for which OCC provides clearance and settlement services,
began listing weekly options on the S&P 500 Index (``SPX'') expiring
each Friday of the month, and subsequently introduced Monday and
Wednesday weekly SPX expirations in 2016 before adding Tuesday and
Thursday weekly SPX expirations in 2022.\12\ Weekly and daily
expiration cycles were introduced to options on other indexes, single-
name stocks, and exchange traded products (e.g., ETFs). As a result,
options now expire every trading day of the year.
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\9\ OCC has provided a confidential Exhibit 3A to File No. SR-
OCC-2024-010 a 2023 study it conducted of its risk exposure to
short-dated options.
\10\ Id. at 3-4.
\11\ Originally, options expiries occurred on the Saturday
following the third Friday before the industry moved to Friday
expirations in 2013. See Exchange Act Release No. 69772 (June 17,
2013), 78 FR 37645 (June 21, 2013) (File No. SR-OCC-2013-04).
\12\ See Cboe, The Rise of SPX & 0DTE Options, at 5 (July 27,
2023), available at <a href="https://go.cboe.com/l/77532/2023-07-27/ffc83k">https://go.cboe.com/l/77532/2023-07-27/ffc83k</a>.
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The increase in 0DTE options trading poses challenges to OCC's risk
management, particularly with respect to the management of OCC's
overnight and intraday risk exposure to its Clearing Members in between
the collections of margin at the start of each business day. Because
OCC's STANS margin calculation is based on end-of-day positions, the
margin requirement may not account for 0DTE options trading activity,
since the Clearing Member would have either traded out of or exercised
the options position, or the option would have expired by the end of
the day. In addition, OCC's portfolio revaluation process for purposes
of determining intraday margin calls to address the change in value of
margin collateral is based on a Clearing Member's start-of-day
collateral deposits, which would not include margin for 0DTE options
positions.
In order to mitigate OCC's overnight and intraday risk exposures,
OCC proposes to implement a margin add-on charge (the ``Intraday Risk
Charge''). OCC would calculate this charge using the system currently
employed to monitor Clearing Members' overnight trading activity.
Through OCC's Watch Level surveillance under its Third-Party Risk
Management Framework, OCC has also used this system to identify
patterns of risk increasing activity in 0DTE options for purposes of
considering and calculating protective measures in the form of
additional margin for particular Clearing Members when certain
thresholds have been breached relative to a Clearing Member's net
capital. This filing would extend that approach to all Clearing Members
(without regard to net capital thresholds) and with respect to all
products OCC clears.
(1) Purpose
Proposed Changes
OCC proposes to capture the risks associated with overnight and
intraday activity by: (1) establishing an Intraday Risk Charge add-on,
and (2) establishing monitoring and escalation criteria for Clearing
Members whose intraday activity exceeds certain thresholds relative to
its Intraday Risk Charge (``Intraday Monitoring Thresholds'').
1. Intraday Risk Charge Add-On
OCC proposes to establish the Intraday Risk Charge to help mitigate
the increased credit exposure presented by the intraday and overnight
trading activities of its Clearing Members. OCC would calculate the
charge based on the increased risk identified through OCC's current
intraday margin system, which recalculates the STANS margin risk using
portfolio position sets updated every 20 minutes between 8:30 a.m. and
6:30 p.m. Central Time, and at-least every hour during ETH
sessions.\13\ OCC considers that 20 minutes is sufficient time under
OCC's current system capabilities to provide consistent and reliable
snapshot results at a steady cadence during regular trading hours with
heavy trading activity. Outside of regular trading hours and during
overnight trading, hourly intervals between snapshots were deemed more
appropriate because of the significantly lower trading activity.\14\
OCC currently employs and will continue to use this system for ETH
monitoring, including to determine when to issue an ETH margin call.
This system calculates a forecasted margin requirement as if the
positions at that point in time were present during the previous
night's margin calculation. Results that show an increase to the prior
night's margin requirement based on the STANS expected shortfall \15\
and stress test components \16\ are considered risk increasing.
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\13\ OCC's current ETH monitoring captures snapshots every hour
for purposes of determining whether a Clearing Member's overnight
activity exceeds certain defined thresholds relative to certain
dollar values and a Clearing Member's net capital. See Exchange Act
Release No. 74268, 8919 (Feb. 12, 2015), 80 FR 8917 (Feb. 19, 2015)
(SR-OCC-2014-24) (describing the escalation thresholds for overnight
monitoring).
\14\ In relation to this proposed rule change, OCC also proposes
to revise its ETH monitoring schedule to capture snapshots every 20
minutes to align risk capture intervals over the entire trading day.
Specifically, when the proposal is implemented, snapshots will run
every 20 minutes throughout a 24-hour cycle beginning on Sunday
afternoon at approximately 4:00 p.m. and ending on Friday evening at
approximately 5:50 p.m. Central Time, with no snapshots taken in
between Friday evening and the following Sunday afternoon due to the
lack of any clearing activity.
\15\ The STANS expected shortfall component is established as
the estimated average of potential losses higher than the 99% value-
at-risk (``VaR'') threshold. The term ``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.
\16\ The STANS stress test component includes additional
calculations related to (i) concentration, which is intended to
consider extreme idiosyncratic moves in concentrated positions, and
(ii) dependence, in which the expected shortfall calculations
described above are performed twice again, once assuming perfect
correlation among the various risk factors and once assuming no
correlation among the various risk factors. After performing these
concentration and dependence calculations, STANS takes the higher of
the two factors and combines it with the empirical expected
shortfall to create a more conservative margin requirement for the
account.
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OCC proposes to use outputs from the previous night's daily STANS
methodology calculation, incorporating current portfolio changes, to
monitor that day's peak intraday risk increases (i.e., an average of
the largest risk increase calculated on each business day of the
lookback period). The Intraday Risk Charge would be calculated monthly
as at least the average of the peak intraday risk increases; provided
however, that OCC may adjust the Intraday Risk Charge as described
further below. The Intraday Risk Charge would be calculated on the
first business day of the month and would be based on data and STANS
outputs generated over the lookback period, which will be set as the
previous month. OCC considers the one-month lookback period, a
timeframe that includes one monthly and multiple weekly standard
expirations, to be a conservative approach that would react faster to
recent changes in the risk behavior of Clearing Members compared to a
more extended lookback period and produces more relevant forecasts for
the next monitoring cycle.
OCC proposes to use the average of the peak intraday risk increases
as the baseline charge to help address certain limitations of the
present system, the most impactful of which is the use of the previous
day's theoretical scenarios that do not take into account new
underlying prices. The calculation of the peak intraday activity would
capture all products that OCC clears, including 0DTE options. The
Intraday Risk Charge would apply to all margin accounts other than
cross-margin accounts for OCC's cross-margining program with the
Chicago Mercantile Exchange (``CME''), which do not currently support
intraday position feeds. OCC would retain authority to increase the
amount of the charge for a particular Clearing Member beyond the
average of the peaks, either when adjusting the Intraday Risk Charge on
a monthly basis or on an intra-month
[[Page 65697]]
basis, when conditions would warrant a different approach consistent
with maintaining sufficient financial resources to cover OCC's intraday
credit exposure. Conditions that would cause OCC to increase the
Intraday Risk Charge above the minimum amount include when OCC
determines it maintains insufficient margin resources to cover the
pattern or distribution of risk increases over the previous lookback
period, or in cases of an account's business expansion. OCC would also
have authority to decrease the amount of the charge, which would be
limited to a Clearing Member's business reduction, termination of
account(s), transfer of positions to different account(s), or the
imposition of protective measures under Rule 307B. Such charge
adjustments may apply to particular or all Clearing Members.
OCC has reviewed the potential impact of the proposed changes on
all Clearing Members over a one (1) year period. OCC has observed that
the proposed add-on would have generated an average margin increase of
less than 5% in the aggregate.\17\ Of the ten firms that would have
been most impacted, which collectively represent approximately 68% of
the additional margin that would have been assessed, the average daily
margin percentage increases range from approximately 3% to 35%, based
on data from October 2023.
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\17\ OCC has included as confidential Exhibit 3C to File No. SR-
OCC-2024-010 assessment of the impact of the Intraday Risk Charge on
OCC's Clearing Members.
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To establish this new charge, OCC proposes to amend Rule 601 by
adding a new paragraph (i). OCC proposes to define the Intraday Risk
Charge under proposed Rule 601(i)(1) to mean the additional margin
assets required from a Clearing Member to mitigate any increased risk
exposure to OCC not otherwise covered by the margin requirements
already calculated in accordance with Rule 601 and OCC's policies and
procedures. OCC would assess this add-on charge as needed to cover
uncollateralized risk from overnight and intraday trading activities.
Proposed Rule 601(i)(2) would provide the method of calculation for the
proposed Intraday Risk Charge add-on, which would generally be set as
the average of the peak intraday risk increases from overnight and
intraday positions over the preceding month.\18\ Under proposed Rule
601(i)(3), OCC would retain authority to adjust the Intraday Risk
Charge if OCC determines that circumstances particular to a Clearing
Member's activity would warrant a different approach consistent with
maintaining sufficient financial resources to cover OCC's intraday
credit exposure. Any adjustment under this Rule to decrease the amount
of the Intraday Risk Charge calculated from the previous month's
intraday risk increases would be limited to a Clearing Member's
business reduction, termination of account(s), transfer of positions to
different account(s), or the imposition of protective measures under
Rule 307B. Rule 601(i)(3) would also provide that OCC retains the
authority to adjust the Intraday Risk Charge more frequently than
monthly.
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\18\ A lookback of one month was selected to represent a
complete monthly options expiration cycle.
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OCC would also amend its Margin Policy to describe material aspects
of the Intraday Risk Charge. The new charge would be added to the
``Add-On Charges'' section. That addition would provide that
periodically throughout each trading day and during extended trading
hours, OCC's systems measure the intraday exposure to each margin
account for which intraday position information is available to
identify intraday risk increases above the baseline STANS risk
measurement. The Margin Policy would define ``risk increases'' in this
context as results that show an increase to a portfolio's prior night
calculated risk measurement based on the STANS expected shortfall and
stress test components. Clearing Members trading during ETH hours will
still be obligated to pay an ETH margin add-on charge, and any ETH
related risk controls will continue to operate independently from the
proposed Intraday Risk Charge changes.\19\
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\19\ Under OCC's current ETH procedures, any Clearing Member
that clears overnight activity must pay an ETH margin add-on equal
to the lesser of $10 million or 10% of the firm's net capital. See
Exchange Act Release No. 74268, supra note 13, 80 FR at 8918.
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The Margin Policy would further provide that on at least a monthly
basis, OCC's Financial Risk Management department (``FRM'') reviews and
verifies the daily peak increases based on a referenced procedure
maintained by FRM's Market Risk business unit.\20\ This verification of
risk-increasing activity is intended to address certain known
limitations in OCC's existing intraday system.\21\ For example, the
system does not take into account options affected by corporate action
adjustments and newly listed option series or strikes, which do not
receive adjusted metrics until the next overnight margin calculation
process. In addition, the 20-minute snapshot generated by the system
may not capture a complete trade in a single snapshot, which may result
in a misalignment of the peak calculation for an account. The snapshot
timing may also cause collateral movements to be recorded as risk-
increasing deposits instead of being risk-reducing movements. Pursuant
to the referenced procedures, Market Risk would verify the peak daily
results to prevent erroneous results from affecting the calculation of
the Intraday Risk Charge. This verification process is similar to, and
would proceed in a similar manner as, Market Risk's long-standing
process for verifying results from OCC's system for monitoring a
portfolio's unrealized losses based on current prices and start-of-day
positions for purposes of charging intraday margin calls.\22\
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\20\ OCC has provided as confidential Exhibit 3B to File No. SR-
OCC-2024-010 a copy of the referenced procedure, the Market Risk
Monitoring Procedure, marked to indicate changes that OCC intends to
implement upon regulatory approval of this proposal.
\21\ As addressed in the Market Risk Monitoring Procedure, if a
peak generated by the system is determined to represent non-trade
activity, it would be excluded. For example, if a peak was
determined to be the result of a Reg SCI system disruption, the
previous month's average peak would be used as that day's peak daily
increase. As another example, peaks could be excluded if they were
the result of position and collateral transfers between accounts,
which the system assumes are risk increasing (e.g., the transfer of
positions from E*Trade to Morgan Stanley resulting from the merger
of those Clearing Members).
\22\ OCC has provided as confidential Exhibit 3D to File No. SR-
OCC-2024-010 a copy of OCC's current Portfolio Revaluation
Monitoring Procedure, evidencing Market Risk's process for verifying
results prior to issuing intraday margin calls when an account
exhibits unrealized losses exceeding 50% of that account's total
risk charges based upon start-of-day positions.
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With respect to governance related to imposing the monthly Intraday
Risk Charge, the Margin Policy would provide that OCC may impose the
Intraday Risk Charge in the amount of the average of the verified peak
daily risk increases over the prior month with FRM Officer \23\
approval. Adjustments to the charge can occur at the time of the
monthly review or on an intramonth basis, e.g., in response to the
intraday monitoring thresholds discussed below. Reductions would be
limited to persistent changes in clearing activity that would reduce
the risk profile of the account, e.g., business reduction, account
terminations transfer of positions to different account(s), or the
imposition of protective measures under Rule 307B. Any changes that
would
[[Page 65698]]
increase the charge over the minimum calculated may result from changes
in the pattern or distribution of risk increases over the previous
lookback period or persistent changes in clearing activity that would
increase the risk profile of the account, e.g. business expansions. If
the FRM Officer recommends any changes to an Intraday Risk Charge, the
Model Risk Working Group (``MRWG'') must review and is authorized to
escalate the recommendation to the Office of the Chief Executive
Officer, who must review and is authorized to approve the changes.\24\
The Margin Policy vests review responsibility and escalation authority
to the MRWG because it is a cross-functional group responsible for
assisting OCC's management in overseeing OCC's model-related risk
comprised of representatives from relevant OCC business units. OCC
believes that the MRWG is the appropriate decisionmaker to consider
whether a higher Intraday Risk Charge is warranted because it is
composed of the subject matter experts most familiar with the
performance of and risks associated with OCC's margin models, including
personnel in OCC's Model Risk Management business unit, who, under
OCC's Risk Management Framework, are responsible for evaluating model
parameters and assumptions and providing effective and independent
challenge through OCC's model lifecycle.\25\
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\23\ Officers are identified in OCC's By-Laws. See OCC By-Law
Art IV. In this context, an FRM Officer would include any member of
FRM appointed by the Chief Executive Officer or Chief Operating
Officer, including a Managing Director, Executive Director or
Executive Principal. Id., at Sec. 9.
\24\ Such changes to the Intraday Risk Charge must be based on
the current charge being insufficient as defined in Exhibit 5A and
confidential Exhibit 5B provided as part of File No. SR-OCC-2024-
010.
\25\ See Exchange Act Release No. 95842, 87 FR at 58416 (File
No. SR-OCC-2022-010) (filing to establish OCC's Risk Management
Framework). OCC Risk Management Framework is available on OCC's
public website: <a href="https://www.theocc.com/risk-management/risk-management-framework">https://www.theocc.com/risk-management/risk-management-framework</a>.
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2. Intraday Monitoring Thresholds
OCC also proposes to establish monitoring and escalation criteria
when a Clearing Member's intraday risk increase departs significantly
from the activity that set the Intraday Risk Charge. This new
monitoring regime would be separate and independent from any existing
ETH-related risk controls and would be run in parallel. OCC proposes to
add the new approach to the section of the Margin Policy that currently
addresses margin calls and adjustments. The Margin Policy would provide
that FRM would establish and maintain ``Intraday Risk Charge Monitoring
Thresholds'' in referenced market risk procedures for verified intraday
risk increases that are greater than statistical measures above a
Clearing Member's Intraday Risk Charge. Generally, the new credit risk
thresholds would be specified as a set of levels based on standard
deviations from a Clearing Member's Intraday Risk Charge. The Margin
Policy would further provide that on an at-least daily basis, FRM would
review the intraday risk increases generated by the intraday risk
system against the Intraday Risk Change Monitoring Thresholds. If a
verified intraday risk increase breach is greater than the thresholds,
the Margin Policy would provide that an FRM Officer may issue a margin
call,\26\ make a margin adjustment to lock up excess collateral, or
recommend protective measures under Rule 307. The Margin Policy would
further provide that any margin call would be calculated as the
difference between the reviewed intraday risk increase and the Intraday
Risk Charge.\27\ The intraday margin calls would only be increasing
financial resources to OCC. Generally, the intraday margin call would
be released the next business day. Based upon a review of intraday
margin runs during 2023, OCC estimates collections of approximately
$80.5 million per day and issuing on average five margin calls each day
for $16.1 million.
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\26\ Margin calls in this context are demands by OCC to Clearing
Members for the deposit of additional margin in immediately
available funds to increase their margin resources to meet increased
margin requirements. Margin calls are issued subject to OCC's
policies and procedures.
\27\ OCC may issue an intraday margin call if the account
remains in breach of the thresholds at or around 12:00 p.m. based on
the risk increase that is the difference between the reviewed
intraday risk increase and the Intraday Risk Charge. OCC may
determine that a margin call is not warranted if the risk increase
can be attributed to one or more intraday events or actions
including but not limited to portfolio level changes resulting from
positive offsetting P&L amounts or positive offsetting asset values
for options and collateral, or from non-risk increasing events such
as the substitution of collateral or the pledging of additional
valued securities within the same account. In addition, OCC may
determine that a margin call is not warranted if the risk increase
in the account is the result of a corporate action, or the result of
position transfers between accounts such as delayed CMTA's from
execution only accounts, or when a P&L unrealized loss generates a
margin call that exceeds the intraday margin call.
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With respect to governance related to the Intraday Risk Charge
Monitoring Thresholds, the Margin Policy would also provide that FRM
coordinates a review of those thresholds, as well as the calculation
and lookback period, on an at least annual basis, or on an ad-hoc
basis, as needed. OCC retains the authority to adjust the Intraday Risk
Charge Monitoring Thresholds, as well as the calculation and lookback
period, based on the review of intraday risk posed by that Clearing
Member's portfolio changes. Any such adjustment to the Intraday Risk
Charge Monitoring Thresholds, calculation, or lookback period may apply
to particular or all Clearing Members depending on an analysis of the
activity generating peak intraday margin numbers, the number of
breaches above the monitoring thresholds, and overall market activity
and trends within the lookback period. The review would be presented to
the MRWG, which must review and is authorized to escalate any
recommended changes to the Office of the Chief Executive Officer, who
must review and is authorized to approve them. OCC's Risk Committee
will be notified of all changes. As discussed above,\28\ OCC believes
that the MRWG is the appropriate decisionmaker to consider any changes
to the Monitoring Thresholds because it is composed of the subject
matter experts most familiar with the performance of and risks
associated with OCC's margin models.
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\28\ See supra note 25 and accompanying text.
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Implementation Timeframe
OCC will release and implement the proposed changes into production
within one hundred and twenty (120) days after the date that OCC
receives all necessary regulatory approvals for the proposed changes.
OCC will announce the implementation date of the proposed change by an
Information Memorandum posted to its public website at least 2 weeks
prior to implementation.
(2) Statutory Basis
OCC believes that the proposed changes are consistent with Section
17A(b)(3)(F) of the Exchange Act \29\ and SEC Rule 17Ad-22(e)(6)(ii)
thereunder.\30\ Section 17A(b)(3)(F) of the Act \31\ 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 introduce a new Intraday Risk Charge
add-on with certain associated monitoring procedures and establish new
risk-based credit risk monitoring thresholds. The proposed rule change
as described above would enhance OCC's framework for measuring,
monitoring, and managing its credit risk. Currently, OCC may be exposed
to increased credit exposure from uncollateralized overnight and
intraday trading activity, including that of 0DTE options that is not
otherwise collateralized and
[[Page 65699]]
captured by OCC's current margin system at the start of each business
day. OCC believes the proposed changes would enable OCC to mitigate the
credit exposure resulting from the increased risk of overnight and
intraday trading that includes 0DTE option contracts by using the
system it currently operates to monitor overnight trading activity. The
Intraday Risk Charge would provide OCC with additional margin resources
to help mitigate this risk and allow OCC to continue to provide prompt
and accurate clearance and settlement services of securities and
derivatives transactions without disruption in the event of a Clearing
Member default. Given OCC's designation as a systemically important
financial market utility,\32\ OCC believes that changes that promote
the prompt and accurate clearance and settlement thereby is in the
public interest and the interests of investors. For these reasons, OCC
believes the proposed changes are designed to promote the prompt and
accurate clearance and settlement of securities transactions in
accordance with Section 17A(b)(3)(F) of the Exchange Act.\33\
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 17 CFR 240.17Ad-22(e)(6)(ii).
\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ The Financial Stability Oversight Council designated OCC as
a SIFMU under Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, 12 U.S.C. 5463.
\33\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17Ad-22(e)(6)(ii) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to cover its credit exposures to its participants by
establishing a risk-based margin system that, at a minimum, marks
participant positions to market and collects margin, including
variation margin or equivalent charges if relevant, at least daily and
includes the authority and operational capacity to make intraday margin
calls in defined circumstances.\34\ As discussed above, the Intraday
Risk Charge would be applied daily to each marginable account based on
that account's intraday risk increases from the previous month. Through
the proposed Intraday Monitoring Thresholds, OCC would monitor accounts
for intraday and overnight activity that deviates from the risk
increasing activity that set the Intraday Risk Charge the previous
month and would be authorized to issue a margin call or take other
action to protect OCC in such defined circumstances. Accordingly, OCC
believes that the proposal is consistent with Rule 17Ad-
22(e)(6)(ii).\35\
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\34\ 17 CFR 240.17Ad-22(e)(6)(ii).
\35\ Id.
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For the above reasons, OCC believes that the proposed rule change
is consistent with Section 17A of the Exchange Act \36\ and the rules
and regulations thereunder applicable to OCC.
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\36\ 15 U.S.C. 78q-1.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) requires that the rules of a clearing agency
do not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\37\ The proposed introduction
of the new Intraday Risk Charge add-on and establishment of new credit
risk monitoring thresholds would be used by OCC to manage its credit
risk across all Clearing Members. Accordingly, OCC does not believe
that the proposed rule change would unfairly hinder access to OCC's
services.
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\37\ 15 U.S.C. 78q-1(b)(3)(I).
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While the proposed rule change may impact different accounts to a
greater or lesser degree depending on each Clearing Member's trading
activity, including portfolios containing a greater volume of 0DTE
option positions, 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 Exchange Act. As discussed above,
OCC is obligated under the Exchange Act and the regulations thereunder
to 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, (i) considers, and produces margin levels commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market, and (ii) marks participant positions to market
and collects margin, including variation margin or equivalent charges
if relevant, at least daily and includes the authority and operational
capacity to make intraday margin calls in defined circumstances.\38\
Overall, the impact analysis from the proposed baseline approach
indicates there would be on average a small add-on included across all
Clearing Member margin requirements, with the more significant add-on
charges attributed to Clearing Members in a manner that ties with their
overnight and intraday trading activities and the increased risk they
present to OCC.
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\38\ See 17 CFR 240.17Ad-22(e)(6)(i)-(ii).
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Moreover, the proposed rule change relates to risk management
changes designed to mitigate OCC's credit exposure from the increased
risk generated from Clearing Member trading activities during the
overnight session and intraday trading that includes 0DTE option
contracts. As noted above, the risk exposure from the significant
increase in intraday trading activity of 0DTE options may not be
adequately captured under OCC's current margin system. OCC believes the
Intraday Risk Charge would be a risk-based approach suitable to
capturing the increased intraday risk exposure presented to OCC from
such trading activities. Furthermore, the proposed rule change would be
applied uniformly across all Clearing Members and affect all cleared
products, including 0DTE option contracts and ETH eligible products,
and provide greater clarity to all market participants on margin
requirements for overnight and intraday trading. Accordingly, OCC
believes that the proposed rule change would not impose any burden or
impact on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
(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 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 this 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:
[[Page 65700]]
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#aad8dfc6cf87c9c5c7c7cfc4ded9ead9cfc984cdc5dc"><span class="__cf_email__" data-cfemail="d0a2a5bcb5fdb3bfbdbdb5bea4a390a3b5b3feb7bfa6">[email protected]</span></a>. Please include
file number SR-OCC-2024-010 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-2024-010. 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-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</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-2024-010 and
should be submitted on or before September 3, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-17847 Filed 8-9-24; 8:45 am]
BILLING CODE 8011-01-P
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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.