Notice2024-31610
Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change, as Modified by Partial Amendment No. 1, by The Options Clearing Corporation Concerning Its Process for Adjusting Certain Parameters in Its Proprietary System for Calculating Margin Requirements During Periods When the Products It Clears and the Markets It Serves Experience High Volatility
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 6, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 3 (Monday, January 6, 2025)</title>
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[Federal Register Volume 90, Number 3 (Monday, January 6, 2025)]
[Notices]
[Pages 710-714]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-31610]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102057; File No. SR-OCC-2024-014]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change, as Modified by Partial
Amendment No. 1, by The Options Clearing Corporation Concerning Its
Process for Adjusting Certain Parameters in Its Proprietary System for
Calculating Margin Requirements During Periods When the Products It
Clears and the Markets It Serves Experience High Volatility
December 30, 2024.
I. Introduction
On October 1, 2024, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2024-014, pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder, to codify OCC's process for adjusting certain
parameters in its proprietary system for calculating margin
requirements during periods when the products OCC clears and the
markets it serves experience high volatility.\3\ The proposed rule
change, as modified by Partial Amendment No. 1 (hereinafter, the
``Proposed Rule Change'') was published for public comment in the
Federal Register on October 9, 2024.\4\ The Commission has received no
comments regarding the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, at 89 FR 81958.
\4\ See Securities Exchange Act Release No. 101246 (Oct. 3,
2024), 89 FR 81958 (Oct. 9, 2024) (File No. SR-OCC-2024-014)
(``Notice of Filing'').
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On November 21, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\5\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
disapprove the Proposed Rule Change.\6\ For the reasons discussed
below, the Commission is approving the Proposed Rule Change.
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\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 101684 (Nov. 21,
2024), 89 FR 93693 (Nov. 27, 2024) (File No. SR-OCC-2024-014).
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II. Background \7\
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\7\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at <a href="https://www.theocc.com/about/publications/bylaws.jsp">https://www.theocc.com/about/publications/bylaws.jsp</a>.
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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 financial
transactions. As the CCP for the listed options markets and for certain
futures in the United States, OCC is exposed to the risk that one or
more of its Clearing Members may fail to make a payment or to deliver
securities. OCC addresses such risk exposure, in part, by requiring its
Clearing Members to provide collateral, including margin collateral.
Margin is the collateral that CCPs collect to cover potential changes
in a member's positions over a set period of time. Typically, margin is
designed to cover such exposures during normal market conditions, which
means that margin collateral should be sufficient to cover exposures at
least 99 out of 100 days.\8\ OCC's methodology for calculating margin
collateral--including daily and intra-day margin requirements for
Clearing Members--is a collection of margin models collectively called
the System for Theoretical Analysis and Numerical Simulations
(``STANS''). The STANS Methodology Description is a document that
comprehensively describes the material aspects of OCC's risk-based
margin system, including its approach for calculating daily and intra-
day margin requirements for its Clearing Members.\9\
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\8\ See Securities Exchange Act Release No. 78961 (Sep. 28,
2016), 81 FR 70786, 70819 (Oct. 13, 2016) (``Standards for Covered
Clearing Agencies'') (stating that a covered clearing agency
generally should consider, among other things, ``whether initial
margin meets an established single-tailed confidence level of at
least 99 percent with respect to the estimated distribution of
future exposure[.]'').
\9\ See Securities Exchange Act Release No. 91079 (Feb. 8,
2021), 86 FR 9410 (Feb. 12, 2021) (File No. SR-OCC-2020-016)
(``STANS Methodology Approval'').
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As a collection of models, STANS is subject to assumptions and
limitations that are incorporated into STANS as margin model
parameters. For example, OCC has a price return model that employs
bounds, or ``control sets'' that are implemented under either regular
or high volatility settings, for certain parameters that are calculated
daily based on current market data.\10\ OCC maintains authority under
its rules to adjust member margin requirements to protect the
respective interests of OCC, its Clearing Members, and the public. OCC
has established an exception process for implementing, changing, and
terminating certain of these margin model parameters in STANS to
control margin requirements where such parameters cause STANS to
produce inappropriate margin requirements
[[Page 711]]
during periods of heightened volatility (the ``high-volatility
parameter controls''). While the STANS Methodology Description
currently includes a brief discussion of the high-volatility parameter
controls that OCC uses,\11\ it does not provide a detailed description
of OCC's actual process and governance for implementing, changing, and
terminating the high-volatility parameter controls. As such, OCC is
filing the Proposed Rule Change to codify and describe more fully in
the STANS Methodology Description its process and governance
surrounding the high-volatility parameter controls.
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\10\ See Notice of Filing, notes 25-28 (describing the
parameters to which bounds are applied).
\11\ In the initial rule filing to introduce the STANS
Methodology Description, OCC included a brief description of the
high-volatility parameter controls discussion. See Securities
Exchange Act Release No. 90763 (Dec. 21, 2020), 85 FR 85788, 85793
(Dec. 29, 2020) (File No. SR-OCC-2020-016) (``The STANS Methodology
Description would also describe the controls that may be placed on
the GJR-GARCH parameters after their initial calibration. GARCH
volatility forecasting models can be very reactive in certain market
environments. As a result, OCC may implement parameter controls for
risk factors and classes of risk factors, which are subject to
periodic review and approval by the [Model Risk Working Group].'').
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More specifically, OCC proposes to amend its existing Margin Policy
to include material details regarding its high-volatility parameter
control setting process.\12\ Although the Proposed Rule Change would
amend OCC's Margin Policy, OCC states that the proposal does not
significantly change OCC's existing high-volatility parameter control
setting practices,\13\ which OCC indicates have been in use since at
least 2020.\14\
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\12\ OCC also intends to update its internal Margin Setting and
Maintenance procedure (Exhibit 3F to the Proposed Rule Change) to
provide greater detail about its high-volatility parameter control
process.
\13\ See Notice of Filing, 89 FR 81959.
\14\ See id. at 81961-62 (describing an instance when OCC
applied the idiosyncratic control settings in 2021). Additionally,
various exhibits to File No. SR-OCC-2024-014 indicate OCC's use of
high-volatility parameter control settings since 2020. For example,
confidential Exhibit B to that filing, which is an internal OCC
memorandum addressing high-volatility parameter control settings,
describes an instance on March 9, 2020 when OCC implemented the
global control settings.
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Proposed additions to the Margin Policy describing OCC's exception
process for setting high-volatility parameter controls include the
following: (1) setting and reviewing regular and high-volatility
parameter control settings; (2) monitoring the volatility of products
being cleared and markets served, and establishing thresholds to
escalate the results of such monitoring to senior decisionmakers; and
(3) internal governance for implementing and terminating high-
volatility parameter control settings. The three sets of changes to
OCC's Margin Policy are described in further detail below.
A. Setting and Reviewing Regular and High-Volatility Parameter Control
Settings
STANS uses large-scale Monte Carlo simulations to calculate the
margin requirements of OCC's Clearing Members. The methodology includes
econometric models that incorporate a number of risk factors.\15\ One
of these econometric models, GARCH, is used to estimate the volatility
of equity securities based on historical data. Over time, OCC has
observed that the margin requirements produced by its GARCH model are
strongly reactive to market movements and are considered to be
``procyclical''--meaning that changes in margin requirements produced
by the GARCH model may be positively correlated with the overall state
of the market. OCC states that such procyclicality could inflate the
margin requirements of OCC's Clearing Members beyond the related risk
posed by Clearing Members' positions if it is not addressed during
high-volatility periods in the market, and would potentially threaten
the operational stability of those Clearing Members.\16\
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\15\ OCC defines a risk factor in STANS as a product or
attribute whose historical data is used to estimate and simulate the
risk for an associated product. The majority of risk factors
utilized in STANS are the returns on individual equity securities.
\16\ See Notice of Filing, 89 FR 81960. For example, OCC states
that its GARCH model produced forecasts for particular S&P 500 Index
(``SPX'') options that were four-fold larger than the comparable
market index, leading to margin requirement increasing by 80%
overnight, with some margin requirements increasing ten-fold. Id.
OCC has attempted a number of approaches to mitigate the impact of
procyclicality, including changes to its GARCH model. See Securities
Exchange Act Release No. 84879 (Dec. 20, 2018), 83 FR 67392, 67393
(Dec. 28, 2018) (File No. SR-OCC-2018-014). OCC has also developed a
new model to replace GARCH for simulating implied volatility for
SPX-based options and volatility index futures. See Securities
Exchange Act Release No. 95319 (July 19, 2022), 87 FR 44167 (July
25, 2022) (File No. SR-OCC-2022-001).
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As part of its current practice, OCC applies high-volatility
parameter control settings to constrain the GARCH parameters
temporarily during periods of high market volatility. OCC's price
return model uses upper and lower bounds for parameters calculated
daily based on market data. OCC's high-volatility parameter control
settings consist of parameters that are bounded differently than
regular control settings. These high-volatility parameter control
settings, when applied to GARCH parameters after their initial
calibration, mitigate the reactivity of the model volatility forecast
and, in turn, generally prevent significant overestimation of Clearing
Members' margin requirements.\17\ Depending on the circumstances, OCC
may apply control settings to individual risk factors (i.e.,
``idiosyncratic control settings''), or to all or a class of risk
factors (i.e., ``global control settings'').\18\
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\17\ See Notice of Filing, 89 FR 81959. OCC also provides
detailed examples in which high-volatility parameter control
settings were implemented. Id. at 81962, notes 41-42.
\18\ When OCC implements global control settings for a class or
sector of risk factors, it is OCC's practice to blend the high
volatility and regular control settings based on a weighted
percentage between them. See Notice of Filing, 89 FR 81961. Such a
``blended'' or ``weighted'' approach allows OCC's risk managers,
when appropriate, to select bounds that provide more conservative
margin coverage when applying high volatility control settings
globally across multiple risk factors. See id.
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As part of the Proposed Rule Change, OCC proposes to amend its
Margin Policy to describe the current exception process for setting and
reviewing both regular and high-volatility parameter control settings.
Specifically, the proposed addition to the Margin Policy would state
that GARCH parameters may be temporarily constrained through the
application of idiosyncratic or global control settings. The added
language would state that OCC's Financial Risk Management team
(``FRM'') maintains both regular and high-volatility parameter control
sets, which it reviews on an at-least annual basis. FRM's review of the
high-volatility parameter control sets assesses whether they
effectively mitigate procyclicality while remaining appropriately risk-
based. The new Margin Policy language would further state that OCC's
Model Risk Working Group (``MRWG'') must approve any changes to the
regular or high-volatility sets. The Proposed Rule Change would also
provide further detail on the review of both regular and high-
volatility parameter control sets.\19\ These proposed changes to the
Margin Policy describe current OCC processes that will remain
unchanged.
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\19\ The proposed language states that in the case of the
regular control set, the review assesses whether the GARCH parameter
bounds are appropriately risk-based, including but not limited to
assessing whether they align with the 95th percentile of the
parameter calibrations over the prior review period; and, in the
case of the high-volatility parameter control sets, the review
assesses whether they effectively mitigate procyclicality while
remaining appropriately risk-based, including but not limited to
whether the bounds keep the day-over-day change in 2-day expected
shortfall coverage within a factor of approximately 1.5, assuming
price shocks based on observed returns for top risk factors.
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[[Page 712]]
B. Monitoring Volatility of Products and Markets Served
As part of the Proposed Rule Change, OCC proposes to amend the
Margin Calls and Adjustments section of the Margin Policy to include
details about how OCC currently sets volatility controls. Specifically,
the new Control Setting details would include information about OCC's
current use of certain monitoring thresholds related to high market
volatility, low market liquidity, and significant increases in position
size or concentration (``CCA Monitoring Thresholds'').\20\ The new
details would state that the Quantitative Risk Management (``QRM'')
team,\21\ in collaboration with Stress Testing and Liquidity Risk
Management, will perform a review of the CCA Monitoring Thresholds to
ensure that they remain adequate to identify periods of high market
volatility, low market liquidity, and significant increases in position
size or concentration. Moreover, the new language would state that any
changes to the CCA Monitoring Thresholds must be approved by the MRWG
and the Stress Testing Working Group.
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\20\ The establishment of these CCA Monitoring Thresholds is
described in OCC's internal Clearing Fund Methodology Policy and its
internal Stress Test Reporting Procedure.
\21\ FRM is the parent department of QRM, which is responsible
for, among other things, monitoring the use and performance of risk
models according to relevant procedures, maintaining risk tolerances
and associated key risk indicators to measure and monitor risk
models. See Securities Exchange Act Release No. 97484 (May 11,
2023), 88 FR 31549, 31550 (May 17, 2023) (File No. SR-OCC-2023-004).
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OCC also proposes to amend the Margin Calls and Adjustments section
to state that QRM shall perform a monthly sensitivity analysis of the
margin model, but may review more frequently when CCA Monitoring
Thresholds are breached.
These proposed changes to the Margin Policy describe current OCC
processes that will remain unchanged.
C. Internal Governance for Implementing and Terminating High-Volatility
Parameter Controls
As part of the Proposed Rule Change, OCC proposes to amend its
Margin Policy to include details about its current internal governance
process for implementing and terminating high-volatility parameter
control settings. The new Margin Policy details would include
descriptions of both idiosyncratic and global control settings, and the
circumstances under which these settings may be used.
For example, for global control settings, FRM monitors market
volatility on a daily basis, and escalates to the MRWG if a market
volatility threshold is exceeded. As part of the escalation to the
MRWG, FRM recommends whether global control settings should be applied
to all risk factors or to a class of risk factors. MRWG approval is
required for OCC to implement global control settings, and for OCC to
revert back to regular control settings.\22\
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\22\ When OCC implements global control settings, MRWG evaluates
and selects a control setting with different weightings between the
regular control set and high-volatility parameter control set based
on an assessment of which blended approach generates a coverage
level that converges with the implied volatility of the SPX. Factors
that the MRWG considers when determining whether to revert to
regular control settings include, but are not limited to, whether
SPX coverage rates produced under regular control settings have
converged with the initial coverage rates when the global control
settings were first implemented. See Notice of Filing, 89 FR 81961.
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Meanwhile, for idiosyncratic control settings, FRM monitors
securities against thresholds for idiosyncratic price moves.\23\ These
thresholds may be a tiered structure that takes into account the type
and magnitude of OCC's risk exposure to the security, the value of the
security, the magnitude of the price move, and the coverage rates. When
an idiosyncratic threshold is breached, FRM Officer approval is
required for any implementation of idiosyncratic control settings for
an individual risk factor. An FRM Officer may also approve
idiosyncratic control settings based on additional considerations,
including market moves, expected shortfall risk contribution, and
changes in Clearing Member positions. Generally, the FRM Officer will
approve the reversion back to regular control settings once market
volatility lessens, but in exceptional circumstances, the FRM Officer
has the discretion to apply the idiosyncratic control settings for a
longer or shorter period of time.
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\23\ These ``idiosyncratic thresholds'' are defined in OCC's
internal Margin Setting and Maintenance Procedure. OCC included a
copy of this procedure as Exhibit 3F for the Proposed Rule Change.
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The new language in the Margin Policy would also state that changes
to the idiosyncratic thresholds require MRWG approval.
These proposed changes to the Margin Policy describe current OCC
processes that will remain unchanged.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\24\ Under the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \25\
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\24\ 15 U.S.C. 78s(b)(2)(C).
\25\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\26\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\27\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\28\
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\26\ Id.
\27\ Id.
\28\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to OCC. More specifically, the Commission finds
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F)
of the Exchange Act \29\ and Rules 17Ad-22(e)(2) \30\ and 17Ad-22(e)(6)
\31\ thereunder, as described in detail below.
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 17 CFR 240.17Ad-22(e)(2).
\31\ 17 CFR 240.17Ad-22(e)(6).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\32\
Based on the review of the record, and for the reasons described below,
OCC's proposed update to its Margin Policy in the manner described
above is consistent with the safeguarding of securities and funds which
are in OCC's custody or control or for which it is responsible.
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\32\ 15 U.S.C. 78q-1(b)(3)(F).
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[[Page 713]]
OCC's high-volatility parameter control settings provide an
exception handling process for OCC to correct for procyclicality
effects on the GARCH model calculation that may unreasonably inflate
Clearing Members' margin requirements during periods of high market
volatility.\33\ The idiosyncratic control settings allow OCC to adjust
Clearing Member margin requirements to be commensurate with the risk of
the products, portfolios, or markets when an individual risk factor
becomes volatile (e.g., reflecting genuine changes in the risk of the
Clearing Member's products or portfolio, or the markets), rather than
allowing the Clearing Member's margin requirement to diverge from
observed market dynamics based on the reactivity of OCC's GARCH model.
The global control settings offer the same benefit for periods during
which all or a class of risk factors becomes volatile. Therefore, by
setting and reviewing high-volatility parameter control settings, OCC
is able to reduce the likelihood that Clearing Members would become
operationally unstable or, potentially, default as the result of
unreasonably high margin calls. This in turn further assures the
safeguarding of Clearing Members' collateral by reducing the likelihood
that OCC would be forced to charge losses from a defaulting Clearing
Member to the Clearing Fund.
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\33\ Examples of unreasonably inflated margin requirements were
included in backtesting data and analysis provided as part of OCC's
confidential Exhibit 3C to File No. SR-OCC-2024-014. See Notice of
Filing, 89 FR 81962, note 43.
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OCC's use of CCA Monitoring Thresholds to monitor for market
volatility is also consistent with the safeguarding of securities and
funds which are in OCC's custody or control or for which it is
responsible. The CCA Monitoring Thresholds are set and used for FRM to
detect both high market volatility generally and high volatility of
individual risk factors. When FRM observes that any of these thresholds
are exceeded, FRM determines whether or not to recommend that OCC's
high-volatility parameter control settings be implemented--either to
MRWG that global controls should be implemented for market-wide
volatility, or to the FRM Officer that idiosyncratic controls should be
implemented for idiosyncratic volatility. OCC's monitoring and proper
setting of these thresholds helps to lower the chances of a Clearing
Member default resulting from margin calls that are significantly
higher than necessary to account for the risk presented by the Clearing
Member's products, portfolio, or the market, and thus assures the
safeguarding of Clearing Members' collateral from any loss charges to
OCC's Clearing Fund.
The high-volatility parameter control setting practices described
in the Proposed Rule Change are designed to ensure that Clearing Member
margin requirements remain commensurate with market risk in
circumstances when the margin model reacts unreasonably to high market
volatility. Indeed, the confidential backtesting data that OCC provided
to the Commission \34\ shows that no account level exceedance has been
attributed to OCC's implementation of high-volatility parameter control
settings. Thus, the application of the high-volatility parameter
control settings does not appear to have reduced OCC's ability to cover
the risk posed by Clearing Members' positions. Additionally, the
confidential information regarding model backtesting provided by OCC
and reviewed by the Commission demonstrates that, overall, the use of
high-volatility parameter control settings has not prevented OCC from
maintaining a 2-day expected shortfall coverage level of 99%.\35\ This
demonstrates that, even with the use of the high-volatility parameter
control settings, OCC's margin collateral remains sufficient to cover
exposures at least 99 out of 100 days, as discussed above.\36\
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\34\ As stated in the Margin Policy, OCC monitors margin
sufficiency by using its ``business backtesting'' process for
monitoring account exceedances. OCC has provided responses to
Commission requests for backtesting data and analysis as part of its
confidential Exhibit 3C to File No. SR-OCC-2024-014. See Notice of
Filing, 89 FR 81962, note 43.
\35\ Notice of Filing, 89 FR 81962.
\36\ See supra note 8.
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For the foregoing reasons, the Proposed Rule Change is consistent
with the requirements of Section 17A(b)(3)(F) of the Exchange Act.\37\
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\37\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency with Rule 17Ad-22(e)(2) under the Exchange Act
Rule 17Ad-22(e)(2) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable, provide
for governance arrangements that, among other things, specify clear and
direct lines of responsibility.\38\ Based on the review of the record,
and for the reasons described below, OCC's proposed update to its
Margin Policy in the manner described above is consistent with Rule
17Ad-22(e)(2)(v).
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\38\ 17 CFR 240.17Ad-22(e)(2)(v).
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OCC's amendments to its Margin Policy describe the the arrangements
governing the implemention, modification, and termination of high-
volatility parameter controls. Defining the MRWG, QRM, FRM, and FRM
Officer's roles and responsibilities in these processes specifies clear
and direct lines of responsibility. Specifically, the added language to
the Margin Policy describes the role of FRM in monitoring for both
market and idiosyncratic volatility. It also describes the FRM's direct
line of responsibility to either the MRWG for global control settings
or the FRM Officer for idiosyncratic control settings, as well as the
roles of MRWG and the FRM Officer in approving the eventual reversion
back to regular control settings.
For the foregoing reasons, the Proposed Rule Change is consistent
with Rule 17Ad-22(e)(2) under the Exchange Act.\39\
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\39\ 17 CFR 240.17Ad-22(e)(2).
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C. Consistency With Rule 17Ad-22(e)(6) Under the Exchange Act
Rule 17Ad-22(e)(6) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, among other things, (1) considers, and produces margin
levels commensurate with, the risks and particular attributes of each
relevant product, portfolio, and market \40\ and (2) calculates
sufficient margin to cover its potential future exposure to
participants in the interval between the last margin collection and the
close out of positions following a participant default.\41\ Based on
the review of the record, and for the reasons described below, OCC's
proposed update to its Margin Policy in the manner described above is
consistent with Rule 17Ad-22(e)(6).
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\40\ 17 CFR 240.17Ad-22(e)(6)(i).
\41\ 17 CFR 240.17Ad-22(e)(6)(iii).
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As described above, the high-volatility parameter control settings
provide a necessary exception process allowing OCC to mitigate a
limitation of its GARCH models that have demonstrated extreme
sensitivity to sudden spikes in volatility. Such reactivity can produce
instability, and in certain instances, over- or underestimation of
margin
[[Page 714]]
requirements.\42\ The confidential backtesting data that OCC provided
to the Commission has shown that during instances of market volatility
where OCC has employed either the idiosyncratic control settings or the
global control settings, the control settings have limited Clearing
Member margin requirements to be commensurate with market risk by
countering procyclicality effects, while still ensuring that OCC is
collecting appropriate margin to cover its exposure to relevant
products, portfolios, and markets.\43\ Ensuring that OCC maintains
processes to counter procyclicality, in turn, allows for reduced margin
requirements that, as described above, do not degrade backtesting
coverage. Therefore, OCC is still able to calculate sufficient margin,
while limiting the need for ``destabilizing, procyclical changes.''
\44\ Further, including such high-volatility parameter control settings
reduces the likelihood that Clearing Members would be required to
provide additional financial resources unnecessarily, which, in turn,
could reduce the strain on such Clearing Members during stressed market
conditions.
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\42\ For example, OCC's 2018 model would have increased
aggregate margin requirements by 80 percent overnight in response to
increased volatility observed on February 5, 2018. OCC stated that
it believed that these margin requirements were unreasonable and
procyclical. See Notice of Filing, 89 FR 81960; Securities Exchange
Act Release No. 84879, at 83 FR 67392, 67393.
\43\ OCC has provided responses to Commission requests for
backtesting data and analysis as part of its confidential Exhibit 3C
to File No. SR-OCC-2024-014. See Notice of Filing, 89 FR 81962, note
43.
\44\ See Standards for Covered Clearing Agencies, 81 FR 70819.
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Accordingly, the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(6) under the Exchange Act.\45\
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\45\ 17 CFR 240.17Ad-22(e)(6).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \46\ and the rules and regulations thereunder.
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\46\ In approving the Proposed Rule Change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\47\ that the proposed rule change, as modified by Partial
Amendment No. 1 (SR-OCC-2024-014), be, and hereby is, approved.
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\47\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-31610 Filed 1-3-25; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 6, 2025.
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