Notice2024-26413
Self-Regulatory Organizations; the Options Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Partial Amendment No. 1, 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
November 14, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 220 (Thursday, November 14, 2024)</title>
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[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90155-90157]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-26413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101551; File No. SR-OCC-2024-010]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Instituting Proceedings To Determine Whether To Approve or
Disapprove a Proposed Rule Change, as Modified by Partial Amendment No.
1, 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
November 7, 2024.
I. Introduction
On July 25, 2024, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2024-010 pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder to establish a margin add-on charge that would be
applied to all Clearing Member accounts to assist with mitigating the
risks arising from intraday and overnight trading activity,
particularly activity attributable to short-dated options trading.
Proposed rule change SR-OCC-2024-010 was published for public comment
in the Federal Register on August 12, 2024.\3\ The Commission has
received comments regarding the proposed rule change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 100664 (Aug. 6, 2024),
89 FR 65695 (Aug. 12, 2024) (File No. SR-OCC-2024-010) (``Notice of
Filing'').
\4\ Comments on the proposed rule change are available at
<a href="https://www.sec.gov/comments/sr-occ-2024-010/srocc2024010.htm">https://www.sec.gov/comments/sr-occ-2024-010/srocc2024010.htm</a>.
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On September 4, 2024, OCC amended the proposed rule change to
include as Exhibit 2 an information memorandum OCC published on its
website informing OCC's membership of the details of the margin add-on
charge.\5\ On September 25, 2024, pursuant to Section 19(b)(2) of the
Exchange Act,\6\ the Commission issued a Notice of Filing of Partial
Amendment No. 1 and 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 Exchange Act,\8\ to
determine whether to approve or disapprove the proposed rule change, as
modified by Partial Amendment No. 1 (hereinafter ``Proposed Rule
Change'').
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\5\ See OCC Info Memo #55123, Intraday Risk Monitoring (dated
Aug. 30, 2024), available at <a href="https://infomemo.theocc.com/infomemos?number=55123">https://infomemo.theocc.com/infomemos?number=55123</a>. The amendment did not change the purpose or
basis of the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 101193 (Sept. 25, 2024),
89 FR 79977 (Oct. 1, 2024) (File No. SR-OCC-2024-010).
\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 that as part
of its function as a clearing agency, it interposes itself as the buyer
to every seller and the seller to every buyer for certain financial
transactions. As the CCP for the listed options markets in the United
States,\9\ as well as for certain futures and stock loans, OCC is
exposed certain risks arising from providing clearing and settlement
services to its Clearing Members.\10\ Because OCC is obligated to
perform on the contracts it clears, even where one of its Clearing
Members defaults, one such risk to which OCC is exposed is credit risk
in the form of exposure to a Clearing
[[Page 90156]]
Member's trading activities. OCC manages such credit risk, in part, by
collecting collateral from its Clearing Members in the form of margin,
which may include certain add-on charges designed to address specific
risks.
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\9\ OCC describes itself as ``the sole clearing agency for
standardized equity options listed on a national securities exchange
registered with the Commission (`listed options').'' See Securities
Exchange Act Release No. 96533 (Dec. 19, 2022), 87 FR 79015 (Dec.
23, 2022) (File No. SR-OCC-2022-012).
\10\ Capitalized terms have the same meaning as provided in
OCC's By-Laws and Rules, which 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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At the start of each business day, OCC collects the required margin
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
has broad authority to require additional margin deposits and to make
intraday margin calls if, for example, the value of securities
deposited as margin collateral does not accurately address changes in a
Clearing Member's account during the business day,\11\ circumstances
warrant protective measures in the form of adjusting the amount or
composition of margin,\12\ and when unrealized losses exceed a certain
threshold of an account's total risk charges \13\ during standard
trading hours or extended trading hours (``ETH'').\14\
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\11\ 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 . . .'').
\12\ 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).
\13\ See Securities Exchange Act Release No. 82658 (Feb. 7,
2018), 83 FR 6646, 6648 (Feb. 14, 2018) (File No. SR-OCC-2017-007)
(``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.''). See also Securities Exchange Act Release
No. 82355 (Dec. 19, 2017), 82 FR 61060, 61064 (Dec. 26, 2017) (File
No. SR-OCC-2017-007) (codifying in the Margin Policy the extended
trading hour 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).
\14\ ETH refers to trades executed in extended and overnight
trading sessions offered by exchanges for which OCC provides
clearance and settlement services. See Securities Exchange Act
Release No. 73343 (Oct. 14, 2014), 79 FR 62684 (Oct. 20, 2014) (File
No. SR-OCC-2014-805).
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Since these margin collection processes were established, OCC
observed a significant increase in the volume of contracts it clears,
particularly of short-dated option (``SDO'') contracts, including those
traded on the day of their expiration (``zero-days-to-expiration'' or
``0DTE'' options).\15\ According to OCC, the average daily cleared
volume increased steadily after 2018 and doubled by 2022, reaching more
than 40 million cleared contracts, of which a significant portion were
SDO contracts.\16\ OCC conducted a study that reflects the evolution of
SDOs and 0DTE options in the broader market, which evolved from weekly
options in 2005 being listed on the S&P 500 Index (``SPX'') and
expiring each Friday of the month, to options now expiring on every
trading day of the year.\17\
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\15\ According to OCC, the average daily cleared volume
increased steadily after 2018 and doubled by 2022, reaching more
than 40 million cleared contracts, of which a significant portion
were SDO contracts. See Notice of Filing, 89 FR at 65695-96.
Additionally, OCC has provided a confidential Exhibit 3A to File No.
SR-OCC-2024-010, which is a 2023 study OCC conducted of its risk
exposure to short-dated options.
\16\ As an example, daily option trading volume transactions
examined between February 2023 and July 2023 show that options with
less than a one-month time-to-expiration contributed around 30
percent of daily trading volume across the days examined. See Notice
of Filing, 89 FR at 65695-96. For 0DTE options during that time on
the expiration dates (e.g., Fridays or third Fridays of a month),
the daily trading volume increased to 40 percent. Id.
\17\ In 2005, 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 SPX
expiring each Friday of the month. See Notice of Filing, 89 FR at
65695-96. Then, in 2016, Cboe introduced Monday and Wednesday weekly
SPX expirations, and in 2022 it added Tuesday and Thursday weekly
SPX expirations. Id.
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The proliferation of SDOs and 0DTE options has increased OCC's
exposure to risks from its Clearing Members' intraday and ETH trading
activity. OCC collects margin at the start of each business day using
the STANS margin calculation, which is based on end-of-day positions
from the previous trading session. This margin collection does not
account for overnight trading activity. Nor does it encompass intraday
trading activity, including any possible increases in the clearance of
SDOs or 0DTE options. Although OCC's current portfolio revaluation
process captures changes related to price movements, it does not
capture the intraday credit risk related to position changes that
exists between the point of margin collection at the beginning of each
business day and the point of margin collection at the beginning of the
next business day, resulting in a margin requirement that may not be
sufficient to cover any additional risk arising from intraday trading
activity during the trading session. Such intraday credit risk could be
a result of Clearing Member(s) trading in and out of SDOs and 0DTE
options, exercising these options positions, or the options expiring by
the end of the day.
To help address such credit risk exposure, OCC proposes to
implement (1) a margin add-on charge (the ``Intraday Risk Charge'');
and (2) monitoring and escalation criteria to facilitate margin calls
for any Clearing Member whose intraday activity exceeds certain
thresholds relative to its Intraday Risk Charge (``Intraday Risk Charge
Monitoring Thresholds''). The monitoring, escalation, and calculation
of the Intraday Risk Charge would be conducted through OCC's current
Watch Level surveillance system, which is governed by OCC's Third-Party
Risk Management Framework.\18\ Specifically, OCC would utilize its
Watch Level surveillance to track Clearing Members' overnight trading
activity and identify patterns of risk-increasing activity in SDOs and
0DTE options. Under the current monitoring system, if OCC observes that
certain thresholds are breached relative to a Clearing Member's net
capital, OCC will calculate, and potentially impose, protective
measures in the form of additional margin. The Intraday Risk Charge
would extend this monitoring and surveillance approach to all products
cleared by OCC and to all Clearing Members, regardless of net capital
thresholds.
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\18\ See Securities Exchange Act Release No. 90797 (Dec. 23,
2020), 85 FR 86592 (Dec. 30, 2020) (File No. SR-OCC-2020-014).
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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 \19\ 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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\19\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\20\ 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,\21\
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and the rules thereunder, including the following provisions:
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\20\ Id.
\21\ 15 U.S.C. 78q-1.
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<bullet> Section 17A(b)(3)(E) of the Exchange Act, which requires,
among other things, that the rules of a clearing agency do not impose
any schedule of prices, or fix rates or other fees, for services
rendered by its participants; \22\
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\22\ 15 U.S.C. 78q-1(b)(3)(E).
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<bullet> Section 17A(b)(3)(F) of the Exchange Act, which requires,
among other things, that the rules of a clearing agency are 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; \23\
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
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<bullet> Rule 17Ad-22(e)(2) of the Exchange Act, which requires,
among other things, that a covered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to provide for governance arrangements that specify
clear and direct lines of responsibility; \24\ and
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\24\ 17 CFR 240.17Ad-22(e)(2)(v).
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<bullet> Rule 17Ad-22(e)(4) of the Exchange Act, which requires,
among other things, 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
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence.\25\
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\25\ 17 CFR 240.17Ad-22(e)(4)(i).
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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 Sections 17A(b)(3)(E) and 17A(b)(3)(F)
of the Exchange Act,\26\ and Rules 17Ad-22(e)(2) \27\ and 17Ad-22(e)(4)
\28\ thereunder, 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,\29\ any request for an opportunity to make an oral
presentation.\30\
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\26\ 15 U.S.C. 78q-1(b)(3)(E) and 15 U.S.C. 78q-1(b)(3)(F).
\27\ 17 CFR 240.17Ad-22(e)(2).
\28\ 17 CFR 240.17Ad-22(e)(4).
\29\ 17 CFR 240.19b-4(g).
\30\ 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 November 29, 2024. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 13, 2024.
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,\31\ in addition to any other comments
they may wish to submit about the Proposed Rule Change.
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\31\ See Notice of Filing, supra note 3.
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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="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#7002051c155d131f1d1d151e0403300315135e171f06"><span class="__cf_email__" data-cfemail="d3a1a6bfb6feb0bcbebeb6bda7a093a0b6b0fdb4bca5">[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: 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 November 29, 2024. Rebuttal comments
should be submitted by December 13, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26413 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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