Notice2025-01412
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Amendment No. 3 to 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
January 22, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 13 (Wednesday, January 22, 2025)</title>
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[Federal Register Volume 90, Number 13 (Wednesday, January 22, 2025)]
[Notices]
[Pages 7722-7731]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-01412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102202; File No. SR-OCC-2024-010]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Amendment No. 3 to 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
January 15, 2025.
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 January 14, 2025, The Options Clearing
Corporation (``OCC'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') This amendment (``Amendment No. 3'') to 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
On July 25, 2024, OCC filed the proposed rule change File No. SR-
OCC-2024-010 (``Initial Filing'').\3\ On January 8, 2025, OCC filed
Amendment No. 2 to the Initial Filing (``Amendment No. 2''). This
Amendment No. 3 to the Initial Filing is identical in substance to
Amendment No. 2 but includes changes to references and table format to
facilitate publication of the notice of filing in the Federal Register
and supersedes Amendment No. 2. Amendment No. 3 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. Through this amendment OCC is incorporating certain
modifications to its proposal to address comments from industry
participants. OCC also intends to conform the proposed rule change to
the Commission's final rule \4\ amending the Covered Clearing Agency
(``CCA'') Standards concerning intraday margin calls, and to extend the
implementation timeframe to address industry concerns and participants'
desire for additional time to prepare for the proposed changes. This
Amendment No. 3 would modify those aspects of the proposal as further
described below and amend and restate the Initial Filing.
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\3\ See Exchange Act Release No. 100664 (Aug.6, 2024), 89 FR
65695 (Aug. 12, 2024) (File No. SR-OCC-2024-010).
\4\ See Exchange Act Release No. 101446 (Oct. 25, 2024), 89 FR
91000 (Nov 18, 2024) (File No. S7-10-23).
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Proposed changes to OCC's Rules are contained in Exhibit 5A to
Amendment No. 3 to File No. SR-OCC-2024-010. Proposed changes to OCC's
Margin Policy are contained in confidential Exhibit 5B to Amendment No.
3 to File No. SR-OCC-2024-010. Material proposed to be added is marked
by italicizing 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.\5\
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\5\ 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),
[[Page 7723]]
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
On July 25, 2024, OCC filed with the Commission a proposed rule
change, SR-OCC-2024-010 to establish a margin add-on charge (the
``Intraday Risk Charge'') that would be applied to all Clearing Member
accounts to assist with mitigating the risks arising from intraday and
overnight trading activity. On September 4, 2024, OCC amended the
filing 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. The Commission received comments regarding the proposed
rule change \6\ and on November 7, 2024, issued an order instituting
proceedings, pursuant to Section 19(b)(2)(B) of the Exchange Act, to
determine whether to approve or disapprove the proposed rule change.
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\6\ Comments on the proposed rule change are available at <a href="http://www.sec.gov/comments/sr-occ-2024-010/srocc2024010.htm">http://www.sec.gov/comments/sr-occ-2024-010/srocc2024010.htm</a>.
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Based on the comments the Commission received and a recent release
of the Commission's October 25, 2024, final rule amending the CCA
Standards,\7\ OCC is filing this amendment to the Initial Filing.
Material changes to the Initial Filing and the rationale for such
amendments are summarized in the following table:
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\7\ See Exchange Act Release No. 101446 (Oct. 25, 2024), 89 FR
91000 (Nov. 18, 2024) (amending 17 CFR 240.17Ad-22-22(e)(6)(ii)).
Table 1--Summary of Changes Proposed by Amendment No. 3
[Footnotes at end of table.]
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Rationale for
Initial filing Amendment amendment
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The Intraday Risk Charge would The Intraday Risk Industry
be calculated based on the Charge would be participants
average of the previous month's calculated based commented that 20-
daily peak intraday risk on the average of minute snapshots
increases observed from 20- the previous during trading
minute snapshots in overnight month's daily hours were too
and regular trading hours, peak intraday frequent, and
between 12:30 a.m. through 3:15 risk increases suggested the OCC
p.m. Central Time. observed from 20- use fewer
minute snapshots snapshots at
between 11:00 predictable
a.m. through intervals.\a\
12:30 p.m. OCC would continue
Central Time. to manage the
intraday risk
associated with
overnight trading
activity through
its existing
extended trading
hour
procedures.\b\
An OCC Officer may issue a An OCC Officer may The single
margin call if a verified issue a margin collection
intraday risk increase during call at a single timeframe aligns
regular trading hours is intraday with (1) the
greater than 3 standard collection time timeframe in
deviations of a Clearing if a Clearing which the
Member's Intraday Risk Charge. Member's verified observations for
intraday risk the Intraday Risk
increase at or Charge are
around 12:00 p.m. measured, and (2)
Central Time is OCC's current
greater than 3 scheduled
standard Portfolio
deviations of the Revaluation
previous month's margin calls
daily peak previous approved
intraday risk by the
increases, Commission.\c\
observed from 20- Measuring against
minute snapshots the Clearing
between 12:30 Member's peak
a.m. through 3:15 intraday risk
p.m. Central Time. increases from
both overnight
and regular
trading hours
would result in a
manageable number
of potential risk
increases to
investigate for
purposes of
issuing margin
calls, allowing
OCC to focus on
intraday activity
presenting the
most risk.
OCC would continue This amendment
to monitor for aligns with (1)
breaches of the 3 Commission
standard guidance in the
deviation above-referenced
threshold in 20- final rule that
minute snapshots schedule intraday
throughout the margin calls may
trading day, and not be sufficient
would continue to and that CCAs
have authority to need to have the
issue an intraday ability to make
margin call under unscheduled
Rule 609, as it intraday margin
does today. calls,\d\ and (2)
Margin calls OCC's current
issued outside of Portfolio
the single Revaluation
intraday margin call
collection time process in
must be approved allowing margin
by the Chief calls to be
Financial Risk issued outside
Officer, Chief the single
Executive intraday
Officer, Chief collection time
Operation with escalated
Officer, or Chief approvals
Risk Officer.
120-day implementation period OCC would Industry
following receipt of all implement the participants have
necessary regulatory approval. changes in commented that
September 2025. 120 days is
insufficient for
them to prepare
for the changes.
The proposed
implementation
dates are within
the compliance
period for the
Commission's
above-referenced
final rule, which
requires a CCA to
implement rule-
filed changes by
December 15,
2025.\e\
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\a\ See, e.g., letter from Kimberly Unger, CEO and Executive Director,
The Security Traders Association of New York, Inc. dated October 30,
2024, 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>.
\b\ See Exchange Act Release No. 74268 (Feb. 12, 2015), 80 FR 8917 (Feb.
19, 2015) (SR-OCC-2014-24) (SR-OCC-2014-24) (requiring Clearing
Members qualified to participate in overnight trading sessions to
provide an additional margin requirement in an amount of the lesser of
$10 million or 10% of the Clearing Member's net capital).
\c\ See Exchange Act Release No. 82658 (Feb. 7, 2018), 83 FR 6646, 6648
(SR-OCC-2017-007).
\d\ See Exchange Act Release No. 101446, supra note 7, 89 FR 91005.
\e\ Id. at 91037.
[[Page 7724]]
(1) Purpose
Background
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.\8\ 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,\9\ 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.\10\ OCC also issues intraday margin
calls when unrealized losses observed for an account based on positions
from extended trading hours (``ETH'') \11\ exceed certain
thresholds.\12\ 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.\13\
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\8\ OCC makes its STANS Methodology Description available to
Clearing Members. An overview of the STANs methodology is posted to
OCC's public website: <a href="https://www.theocc.com/Risk-Management/Margin-Methodology">https://www.theocc.com/Risk-Management/Margin-Methodology</a>.
\9\ See Exchange Act Release Nos. 100998 (Sept. 11, 2024), 89 FR
76171 (Sept. 17, 2024) (SR-OCC-2024-009); 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).
\10\ 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 9, 83
FR 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.'').
\11\ 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).
\12\ 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).
\13\ 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.\14\ Currently, 0DTE option trading volume can spike to up to
40% of total trading volume on Friday expirations.\15\ 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.\16\ 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 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.\17\ 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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\14\ OCC has provided a confidential Exhibit 3A to Amendment No.
3 to File No. SR-OCC-2024-010 a 2023 study it conducted of its risk
exposure to short-dated options.
\15\ Id. at 3-4.
\16\ 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).
\17\ 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 combined with increased
intraday trading activity across other products 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. Similarly, in the current system the
risk increase from intraday trading activity across other products
would only be captured once end-of-day positions are established, which
when margin calculations are applied would not account for the intraday
risk increase from any positions that were traded out of. 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 or intraday
positions. For these reasons OCC proposes to establish the Intraday
Risk Charge add-on to capture such risk increases, and the associated
Intraday Monitoring Thresholds regime to observe and measure risk
increasing activity.
Proposed Changes
Based on industry and participant feedback and to conform to the
recent release of the Commission's final rule amending the CCA
Standards concerning intraday margin calls, and in order to mitigate
OCC's intraday risk exposures, OCC proposes to: (i) narrow the window
over which the Intraday Risk Charge would be calculated to between
11:00 a.m. to 12:30 p.m. Central Time, (ii) to remove any
[[Page 7725]]
reference to the Intraday Risk Charge with respect to the Intraday
Monitoring Thresholds and limit the issuance of a margin calls to a
single intraday collection time at or around 12:00 p.m. Central Time,
(iii) clarify that intraday margin calls would be issued at a single
intraday collection time, and any margin calls outside of the
collection time must be approved by the Chief Financial Risk Officer,
Chief Executive Officer, Chief Operations Officer, or Chief Risk
Officer, (iv) provide FRM Officers with discretion on whether to issue
or not issue a margin call based on certain facts and circumstances,
while also requiring the documentation of such decisions, and (v)
extend the implementation time frame from within 120 days of approval
to September of 2025 to align with the projected Ovation release date,
and provide more time for industry participants to prepare for the
proposed rule change.
1. Intraday Risk Charge Add-On
In the Initial Filing,\18\ OCC had proposed a margin add-on charge
(the ``Intraday Risk Charge''), which would be calculated 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. OCC proposed to extend that approach to all Clearing Members
(without regard to net capital thresholds) and with respect to all
products OCC clears.
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\18\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65696-98.
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OCC's current intraday margin system 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. 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. OCC
currently employs and will continue to use the intraday margin system
for ETH monitoring, including to determine when to issue an ETH margin
call.\19\ 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 and
stress test components are considered risk increasing. OCC would use
the outputs from the previous night's daily STANS methodology
calculation, incorporating current portfolio changes, to monitor that
day's peak intraday risk increases. Under the Initial Filing,\20\ the
Intraday Risk Charge would have been calculated monthly as at least the
average of the peak intraday risk increases (i.e., an average of the
largest risk increase calculated on each business day of the lookback
period) as measured throughout overnight and regular trading hours
(i.e., between 12:30 a.m. through 3:15 p.m.).
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\19\ See Exchange Act Release No. 74268, supra Table 1 note b,
80 FR 8919 (describing the thresholds for overnight monitoring and
potential margin calls).
\20\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65696.
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OCC proposes to amend the proposed Intraday Risk Charge so that it
is determined based on a narrower monitoring interval. Specifically,
OCC would calculate the Intraday Risk Charge based on the average daily
increased risk identified through OCC's current intraday margin system
between the hours of 11:00 a.m. and 12:30 p.m. Central Time; provided
however, that OCC may adjust the Intraday Risk Charge as described
further below. This change would address comments that the 20-minute
snapshots during overnight and intraday trading hours were too frequent
and suggested that OCC use fewer snapshots at predictable intervals. In
particular, by narrowing the window, Execution-Only Clearing Members
\21\ that are able to allocate trades prior to that window may
eliminate or significantly reduce their intraday risk exposure for
purposes of determining an Intraday Risk Charge.
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\21\ OCC's By-Laws define ``Execution-Only Clearing Members'' to
mean a Clearing Member approved to act only as a Clearing Member
that transfers confirmed trades or allocates position so other
Clearing Members, and not to carry positions in its accounts with
the OCC on a routine basis.
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As under the Initial Filing,\22\ 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. The Intraday Risk Charge would be
calculated monthly as at least the average of the peak intraday risk
increases over the shorter duration. 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.\23\
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\22\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65696.
\23\ OCC also considered lookback periods of less than one-
month, including a one-week period, and observed that any lookback
period less than one-month was operationally intensive to implement.
Establishing a monthly cadence allows OCC to investigate and exclude
results from the intraday risk system that are not attributable to
actual risk increasing activity, such as results caused by corporate
actions. In any case, using a one-week lookback period would result
in procyclical effects. Intraday Risk Charge moves for Clearing
Members from one week to another would reduce the predictability of
the add-on charge on Clearing Member margin requirements. As
described above, OCC believes the one-month lookback provides a more
conservative and relevant forecasts.
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As under the Initial Filing,\24\ 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 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.
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\24\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65696-97.
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To effect the proposed changes, OCC proposes to amend Rule 601 by
adding
[[Page 7726]]
a new paragraph (i) as described above to incorporate the shorter time
frame involved in the calculation of the Intraday Risk Charge. As in
the Initial Filing,\25\ 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. To reflect the narrower time from which the observations
that determine the Intraday Risk Charge would be drawn, Rule 601(i)(1)
would further provide that OCC may assess the Intraday Risk Charge as
part of the Clearing Member's daily margin required, as needed, to
mitigate exposure and cover uncollateralized risk resulting from
``intraday trading activities,'' as opposed to ``overnight and intraday
trading activities'' as proposed in the Initial Filing.\26\ In the
amended proposal, OCC would similarly remove other references to
overnight trading activity from the OCC Rules and Margin Policy as
proposed in the Initial Filing.
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\25\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65697.
\26\ As discussed above, OCC would continue to address intraday
risk exposure from overnight trading activity as it currently does
under its ETH procedures. See supra Table 1 note b and accompanying
text. 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.
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Proposed Rule 601(i)(2) would be modified to provide the method of
calculation for the Intraday Risk Charge add-on, which would generally
be set as the average of the peak intraday risk increases from
portfolio position changes between 11:00 a.m. and 12:30 p.m. Central
Time over the preceding month.\27\ Proposed Rule 601(i)(3), would
remain unchanged from the Initial Filing.\28\ Specifically, that Rule
would provide that OCC retains 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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\27\ A lookback of one month was selected to represent a
complete monthly options expiration cycle.
\28\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65697.
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OCC would also amend its Margin Policy to describe material aspects
of the Intraday Risk Charge as discussed herein. As under the Initial
Filing,\29\ the new charge would be added to the ``Add-On Charges''
section. That proposed addition, as amended, would provide that between
11:00 a.m. through 12:30 p.m., OCC measures 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 proposed amendments to the Margin Policy would
define this time window as the ``Intraday Risk Charge Measurement
Time.'' As under the Initial Filing,\30\ 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.
---------------------------------------------------------------------------
\29\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65697.
\30\ Id.
---------------------------------------------------------------------------
As under the Initial Filing,\31\ 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 in the Intraday Risk Charge Measurement Time based on a
referenced procedure maintained by FRM's Market Risk business unit.\32\
This verification of risk-increasing activity is intended to address
certain known limitations in OCC's existing intraday system.\33\ 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.\34\ Upon completion of the verification process, OCC would apply
the Intraday Risk Charge to Clearing Members for the upcoming month.
---------------------------------------------------------------------------
\31\ Id.
\32\ OCC has provided as confidential Exhibit 3B to Amendment
No. 3 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.
---------------------------------------------------------------------------
As under the Initial Filing,\35\ 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 in the Intraday Risk
Charge Measurement Time over the prior month with FRM Officer \36\
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 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.\37\ 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
[[Page 7727]]
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.\38\
---------------------------------------------------------------------------
\35\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65697-98.
\36\ 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.
\37\ 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 to Amendment No. 3 to File No. SR-OCC-2024-
010.
\38\ See Exchange Act Release No. 95842, 87 FR 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>.
---------------------------------------------------------------------------
OCC has reviewed the potential impact of the proposed add-on charge
on all Clearing Members over a thirteen-month period.\39\ OCC has
observed that the proposed add-on would have generated a margin
increase of less than 1.1% in the aggregate on average,\40\
representing almost $1.099 billion across all Clearing Members out of
margin requirements. For comparison, under the Initial Filing, the
proposed add-on would have generated an average margin increase of
approximately $1.968 billion, less than a 1.9% increase. Of the ten
firms that would be most impacted, which collectively represent
approximately 73% of the additional margin that would have been
assessed, the average daily margin percentage increases ranges from
approximately 1% to less than 15%, based on data from September 2023 to
September 2024, or between $22 million and $315 million.
---------------------------------------------------------------------------
\39\ This impact assessment does not account for potential
changes in Clearing Member behavior that might further reduce the
impact. To the extent a Clearing Member allocates trades to other
Clearing Members under OCC's Clearing Member Trade Assignment
(``CMTA'') Rules or otherwise reduces its intraday risk in advance
of the Intraday Risk Measurement Time, the actual impact of the
Intraday Risk Charge may be less.
\40\ OCC has included as confidential Exhibit 3C to Amendment
No. 3 to File No. SR-OCC-2024-010 an assessment of the impact of the
Intraday Risk Charge on OCC's Clearing Members. Exhibit 3C to the
Initial Filing used data from 2023. Exhibit 3C to Amendment No. 3
uses data from September 2023 through September 2024.
---------------------------------------------------------------------------
As compared to the Initial Filing, that aggregate amount of the
additional margin would be distributed across market-maker, firm and
customer accounts as follows:
Table 2--Impact by Account Type
------------------------------------------------------------------------
Proposed
Initial filing amendment
------------------------------------------------------------------------
Market-Maker Accounts............ $392.1 million.... $276.6 million.
Firm Accounts.................... $590.5 million.... $306.3 million.
Customer Accounts................ $986.1 million.... $516.7 million.
All Accounts................. $1.9686 billion... $1.0996 billion.
------------------------------------------------------------------------
With respect to firms classified as Execution-Only Clearing
Members, the add-on charge would generate approximately $23.4 million
of additional margin in the aggregate, down from $39.4 million under
the Initial Filing, assuming that Execution-Only Clearing Members made
no changes to allocate trades prior to the Intraday Risk Charge
Measurement Time.
2. Intraday Monitoring Thresholds
Under the Initial Filing,\41\ OCC proposed 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 (``Intraday Monitoring Thresholds''). Generally, the new credit
risk thresholds would have been specified as a set of levels based on
standard deviations from a Clearing Member's Intraday Risk Charge.
While OCC has narrowed the window of time for purposes of calculating
the Intraday Risk Charge, OCC intends to continue to monitor for
intraday risk increases throughout regular trading hours.
---------------------------------------------------------------------------
\41\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65698.
---------------------------------------------------------------------------
OCC proposes to establish the Intraday Monitoring Thresholds as
statistical measures (e.g., one, two or three standard deviations)
above a Clearing Member's peak intraday risk increases over the prior
month. OCC would measure the Intraday Monitoring Threshold for each
Clearing Member against the average over the lookback period of the
verified peak intraday risk increases determined between 12:30 a.m. and
3:15 p.m. (i.e., the same window as for the Intraday Risk Charge under
the Initial Filing). OCC believes that measuring the thresholds using
this longer window, rather than against the Intraday Risk Charge as
proposed to be amended above,\42\ would result in a more manageable
number of potential risk increases for escalation, allowing OCC
decisionmakers to focus on potential changes in activity that present
the most risk. As under the Initial Filing,\43\ OCC proposes to amend
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 Monitoring Thresholds in referenced
market risk procedures for verified intraday risk increases that are
greater than statistical measures above a Clearing Member's average
over the lookback period determined between 12:30 a.m. and 3:15 p.m.
Central Time. This average would be determined separately and
independently of the Intraday Risk Charge across Clearing Member
accounts.
---------------------------------------------------------------------------
\42\ As indicated in the impact assessment above, the proposed
amendments to the Intraday Risk Charge would have the effect of
reducing the charge, which would make breaches of the Intraday
Monitoring Thresholds more likely if measured against the Intraday
Risk Charge as proposed to be amended.
\43\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65698.
---------------------------------------------------------------------------
As under the Initial Filing,\44\ 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 Monitoring Thresholds, as well as the calculation and lookback
period, based on the review of intraday risk posed by Clearing Member's
portfolio changes. Any such adjustment to the Intraday 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
[[Page 7728]]
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,\45\ OCC believes
that the MRWG is the appropriate decision-maker 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.
---------------------------------------------------------------------------
\44\ Id.
\45\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------
3. Intraday Margin Calls
In the Initial Filing,\46\ OCC proposed to issue margin calls on
individual Clearing Member accounts if the verified intraday risk
increases for those accounts breach and exceed the Intraday Risk
Monitoring thresholds (e.g., in excess of three standard deviations).
Under the proposed amendments, OCC would maintain the proposed margin
call, but would specify a scheduled, single collection time in which
such a margin call would be collected in the ordinary course while
maintaining authority to issue an unscheduled margin call outside that
timeframe in extraordinary circumstances with additional escalations.
As discussed below, these amendments are intended to align with OCC's
existing intraday margin call processes and the Commission's October
25, 2024, final order amending the CCA Standards.
---------------------------------------------------------------------------
\46\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65698.
---------------------------------------------------------------------------
As under the Initial Filing,\47\ the Margin Policy would provide
that on at least a daily basis, FRM would review the intraday risk
increases generated by the intraday risk system against the Intraday
Monitoring Thresholds. As proposed to be amended, the Margin Policy
would provide that if a verified intraday risk increase breach at or
around 12:00 p.m. Central Time is greater than the Intraday Monitoring
Thresholds, the Margin Policy would provide that an FRM Officer may
issue a margin call,\48\ make a margin adjustment to lock up excess
collateral, or recommend protective measures under Rule 307. The Margin
Policy would further be amended to provide that any such margin call
issued by an FRM Officer would be collected as a single intraday
collection time. Accordingly, the Margin Policy as amended would now
provide a single, scheduled time for the issuance and collection of
such intraday margin calls. This collection timeframe aligns with the
timeframe during which the observations for the Intraday Risk Charge
are measured, and gives Clearing Members greater certainty about when
the activity that would inform the call would be measured and the call
imposed. The timing also aligns with the timing for OCC's current
Portfolio Revaluation margin calls, which are generally collected at a
single time based on a measurement of a portfolio's profit and loss at
or around noon.\49\ As with OCC's existing margin calls, the proposed
margin call would be subject to a price minimum below which OCC
generally would not issue a call.\50\ Specifically, OCC has established
a $500,000 price minimum for issuing margin calls, which aligns with
the minimum Clearing Fund deposit required of each Clearing Member.\51\
---------------------------------------------------------------------------
\47\ Id.
\48\ 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.
\49\ See Exchange Act Release No. 82658, supra Table 1 note c,
83 FR 6648 (approving OCC's Margin Policy, including the timing of
margin calls).
\50\ Id. (approving OCC's Margin Policy, including the price
minimum for margin calls).
\51\ See OCC Rule 1002(d).
---------------------------------------------------------------------------
The Margin Policy would further provide that any margin calls
issued outside of the standard processing time window must be approved
by the Chief Financial Risk Officer, Chief Executive Officer, Chief
Operating Officer, or Chief Risk Officer. This change aligns with OCC's
current Portfolio Revaluation margin call process in allowing margin
calls to be issued outside the single intraday collection time in
exceptional circumstances with escalated approval. OCC believes that
margin calls issued outside the single intraday collection time would
be the exception, rather than the rule. This change also aligns with
Commission guidance from its October 25, 2024, final rule amending the
CCA Standards, suggesting that scheduled intraday margin calls may not
be sufficient and that CCAs would need to have the ability to make
unscheduled intraday margin calls.\52\
---------------------------------------------------------------------------
\52\ See supra Table 1 note d and accompanying text.
---------------------------------------------------------------------------
The Margin Policy would be further revised to state that any margin
call would be calculated as the difference between the reviewed
intraday risk increase at the single intraday collection time at or
around 12:00 p.m. Central Time and the Intraday Risk Charge. Intraday
margin calls would only be increasing financial resources to OCC.
Generally, an intraday margin call would be released the next business
day.
Data from September 2023 to September 2024 indicates there would
have been approximately 1024 potential margin calls issued under the
proposed changes, as amended. The number of potential margin calls
would not change as a result of the amendments to the Initial Filing.
As amended, the average daily margin call amount would have been $27
million, as opposed to $25.1 million under the Initial Filing. This
increase is attributable to the decrease in the pre-funded Intraday
Risk Charge resulting from the proposed amendments to the Initial
Filing.
4. Discretion To Issue Margin Calls
OCC also proposes to modify the Margin Policy to add a provision
whereby an FRM Officer will have the discretion to decide whether to
issue or not issue a margin call, if in their judgement the call is not
necessary to effectively manage the risk posed to OCC based on the
specific facts and circumstances. As under the Initial Filing, such
circumstances would include instances where OCC's intraday risk system
may produce results that may not indicate actual risk increasing
activity,\53\ such as (i) when the intraday 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, or (ii) 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. In addition, as proposed to be amended, the
Margin Policy would provide that such circumstances also, including but
not limited to, circumstances in which issuing a call would not align
with broader systemic objectives such as minimizing potential
procyclical effects and potential participant defaults.
---------------------------------------------------------------------------
\53\ The Initial Filing discussed certain limitations of the
intraday risk system that may result in erroneous intraday risk
increases. See Exchange Act Release No. 100664, supra note 3, 89 FR
65697.
---------------------------------------------------------------------------
In all such cases, the FRM Officer would be required to document
the basis for their decision not to issue a margin call at the single
intraday collection time for an account breaching the Intraday Risk
Monitoring Threshold
[[Page 7729]]
at or around 12:00 p.m. Central Time.\54\ These proposed change from
the Initial Filing are aligned with the Commission's guidance on
intraday margin calls issued in its October 25, 2024, final rule
amending the CCA Standards, concerning intraday margin calls.\55\ The
change is also aligned with the documentation requirement in new SEC
Rule 17Ad-22(e)(6)(ii)(D), which requires a CCA to document when it
determines not to issue an intraday call pursuant to its written
policies and procedures.\56\
---------------------------------------------------------------------------
\54\ For the avoidance of doubt, this documentation requirement
would not extend to monitoring of Intraday Risk Monitoring Threshold
breaches outside of the single intraday collection period,
notwithstanding OCC's authority to make an exception to its written
policies and procedures to issue a margin call for activity falling
outside that period.
\55\ See Exchange Act Release No. 101446, supra note 4, 89 FR
91009-10 (discussing factors for CCAs to consider when determining
whether to issue an intraday margin call).
\56\ 17 CFR 240.17Ad-22(e)(6)(ii)(D).
---------------------------------------------------------------------------
5. Implementation Timeframe
In the Initial Filing,\57\ OCC proposed a 120-day implementation
timeframe based on the amount of time OCC believed it would need to
deploy system changes following receipt of all necessary regulatory
approval. Industry participants have commented on the proposal that
more time is required for them to prepare for the changes. Accordingly,
OCC proposes to extend the implementation period. Subject to regulatory
approval of the proposal, OCC plans to implement the proposed changes
in September of 2025. OCC will announce the implementation date of the
proposed changes by an Information Memorandum posted to its public
website at least 4 weeks prior to implementation. This proposed
implementation is designed to align with, but is not contingent on,
OCC's planned replacement of its core clearance and settlement system,
ENCORE, with a new system, Ovation. The proposed implementation dates
are within the compliance period for the Commission's October 25, 2024,
final rule, which requires a CCA to implement rule-filed changes by
December 15, 2025.\58\
---------------------------------------------------------------------------
\57\ See Exchange Act Release No. 100664, supra note 3, 89 FR
65698.
\58\ See supra Table 1 note e and accompanying text.
---------------------------------------------------------------------------
(2) Statutory Basis
OCC believes that the proposed changes are consistent with Section
17A(b)(3)(F) of the Exchange Act \59\ and SEC Rule 17Ad-22(e)(6)(ii)
thereunder.\60\ Section 17A(b)(3)(F) of the Act \61\ 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 intraday trading
activity, including that of 0DTE options that is not otherwise
collateralized and 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 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,\62\ 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.\63\
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78q-1(b)(3)(F).
\60\ 17 CFR 240.17Ad-22(e)(6)(ii).
\61\ 15 U.S.C. 78q-1(b)(3)(F).
\62\ 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.
\63\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(ii), as recently amended, 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:
(A) Marks participant positions to market and collects margin
(including variation margin or equivalent charges if relevant) at least
daily;
(B) Monitors intraday exposures on an ongoing basis;
(C) Includes the authority and operational capacity to make
intraday margin calls, as frequently as circumstances warrant,
including (1) when risk thresholds specified by OCC are breached, or
(2) when the products cleared or markets served display elevated
volatility; and
(D) Documents when OCC determines not to make an intraday call
pursuant to its written policies and procedures required under Rule
17Ad-22(e)(6)(ii)(C).\64\
---------------------------------------------------------------------------
\64\ 17 CFR 240.17Ad-22(e)(6)(ii).
---------------------------------------------------------------------------
OCC's existing margin processes are already designed to mark
positions to market and collect margin at least daily, consistent with
Rule 17Ad-22(e)(6)(ii)(A).\65\ Under the proposed changes, OCC would
monitor accounts intraday activity in 20 minute intervals and would
have the authority and operational capacity under OCC's existing Rule
609 to issue a margin call or take other action under Rule 307 to
protect OCC based on the result of such monitoring, consistent with new
Rule 17Ad-22(e)(6)(ii)(B).\66\ Specifically, the Margin Policy would
define risk thresholds--the Intraday Monitoring Threshold--for
monitoring intraday exposure for purposes of issuing potential margin
calls, consistent with Rule 17Ad-22(e)(6)(ii)(C).\67\
---------------------------------------------------------------------------
\65\ 17 CFR 240.17Ad-22(e)(6)(ii)(A).
\66\ 17 CFR 240.17Ad-22(e)(6)(ii)(B).
\67\ 17 CFR 240.17Ad-22(e)(6)(ii)(C).
---------------------------------------------------------------------------
In general, OCC would issue a Clearing Member a margin call during
the scheduled intraday collection time in the event that Clearing
Member's intraday risk increase, as measured at or around 12:00 p.m.
Central Time breached the proposed Intraday Monitoring Threshold. The
scheduled intraday margin call aligns with the timing of OCC's existing
intraday margin calls when unrealized losses exceeding 50% of an
account's total risk charges are observed for that account based on
start-of-day positions, which were previously approved by the
Commission.\68\ However, as the Commission has noted, covered clearing
agencies also need the authority and operational capacity to issue
unscheduled margin calls.\69\ Accordingly, OCC would maintain authority
to make an exception to its general policy of issuing scheduled
intraday margin calls with escalated
[[Page 7730]]
approvals from OCC's most senior Officers.
---------------------------------------------------------------------------
\68\ See supra Table 1 note c and accompanying text.
\69\ See supra Table 1 note d and accompanying text.
---------------------------------------------------------------------------
In addition, consistent with Commission guidance from its October
25, 2024, final rule,\70\ OCC's policies and procedures would preserve
OCC's authority to determine not to issue an intraday margin call at
the scheduled time, notwithstanding a breach of the Intraday Monitoring
Thresholds, if OCC determines that the call is not necessary to
effectively manage the risk posed to OCC based on the specific facts
and circumstances, including, but not limited to, in circumstances in
which the intraday risk system may not reflect actual intraday risk
increases,\71\ or in circumstances in which issuing a call would not
align with broader systemic objectives such as minimizing potential
procyclical effects and potential participant defaults. In cases in
which OCC does not issue a margin call at the single collection time
under its policies and procedures when the Intraday Monitoring
Thresholds are breached, the Margin Policy would require that an FRM
Officer document that decision, consistent with, consistent with Rule
17Ad-22(e)(6)(ii)(D).\72\ Accordingly, OCC believes that the proposal
is consistent with Rule 17Ad-22(e)(6)(ii).\73\
---------------------------------------------------------------------------
\70\ See supra note 55 and accompanying text.
\71\ See, e.g., supra notes 32-46 and accompanying text.
\72\ 17 CFR 240.17Ad-22(e)(6)(ii)(D).
\73\ Id.
---------------------------------------------------------------------------
For the above reasons, OCC believes that the proposed rule change
is consistent with Section 17A of the Exchange Act \74\ and the rules
and regulations thereunder applicable to OCC.
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
(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.\75\ 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.
---------------------------------------------------------------------------
\75\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
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, (ii) monitor intraday exposures on an ongoing
basis, and (iii) maintain the authority and operational capacity to
make intraday margin calls, as frequently as circumstances warrant,
including when thresholds specified by the CCA are breached or when the
products cleared or markets served display elevated volatility.\76\
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
intraday trading activities and the increased risk they present. OCC
notes that while the impact analysis is based on prior activity, OCC
expects that the impact of the add-on charge when released in
production may be less than predicted. This is because OCC expects
Clearing Members may adjust their behaviors through different means
such as allocating their trades earlier and more often throughout the
day, or working to better understand their customers trading and
allocation strategies, in order to minimize the effects of the Intraday
Risk Charge on their portfolios.
---------------------------------------------------------------------------
\76\ See 17 CFR 240.17Ad-22(e)(6)(i)-(ii).
---------------------------------------------------------------------------
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 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 mitigate 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. In
response to feedback from industry participants, the amendments to the
proposal would provide additional clarity to participants by shortening
the time horizon for assessing the Intraday Risk Charge, while also
designating a singular intraday margin issue collection time for
potential margin calls in the ordinary course. These changes are
designed to address feedback from industry participants to provide them
with the necessary predictability they need to allocate trades within
their portfolio more often throughout the day while also allowing
Clearing Members to actively manage their exposure to the Intraday Risk
Charge. 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:
Electronic Comments
<bullet> Use the Commission's internet comment form (https://
www.sec.gov/
[[Page 7731]]
rules-regulations/self-regulatory-organization-rulemaking); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d1a3a4bdb4fcb2bebcbcb4bfa5a291a2b4b2ffb6bea7"><span class="__cf_email__" data-cfemail="e795928b82ca84888a8a82899394a7948284c9808891">[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 February 12, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
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\77\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-01412 Filed 1-21-25; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 22, 2025.
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