Notice2025-19104
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Methodology To Allocate Clearing Fund Deposit Requirements Among Its Clearing Members To Better Align the Allocation With The Sizing of The Clearing Fund so Stress Based Risk Is Fairly Allotted to Market Participants That Expose OCC to Such Stress Risk
Primary source
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Published
October 1, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 188 (Wednesday, October 1, 2025)</title>
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[Federal Register Volume 90, Number 188 (Wednesday, October 1, 2025)]
[Notices]
[Pages 47383-47390]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-19104]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104111; File No. SR-OCC-2025-018]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by The Options Clearing
Corporation Concerning Methodology To Allocate Clearing Fund Deposit
Requirements Among Its Clearing Members To Better Align the Allocation
With The Sizing of The Clearing Fund so Stress Based Risk Is Fairly
Allotted to Market Participants That Expose OCC to Such Stress Risk
September 26, 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 September 26, 2025, The Options Clearing
Corporation (``OCC'' or ``Corporation'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by OCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule
Change
This proposed rule change would allocate Clearing Fund deposit
requirements in connection with its methodology among its Clearing
Members to better align the allocation with the sizing of the Clearing
Fund so that stress based risk is fairly allotted to those market
participants that expose OCC to such stress risk. Specifically, the
proposed changes would: (1) modify OCC's allocation weighting formula
for allocating Clearing Fund Contribution requirements by introducing a
70% Clearing Fund risk-based shortfall allocation based on stress loss
in excess of margin (the ``shortfall''); changing the weighting
percentages by reducing the margin allocation from 70% to 15%; removing
the open interest component; extending the lookback period from 1-month
to 3-months of data to align with the Clearing Fund size lookback; and
reflect a new weighting scheme of 70% shortfall, 15% margin, and 15%
cleared volume; (2) provide authority in the rules for OCC to hold
constant allocation weights month-over-month in light of volatile
market conditions; and (3) make other minor clarifying and conforming
changes to the Clearing Fund Methodology Policy (``Policy''), and
Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity
Risk Management Description (``Methodology Description'').
Proposed changes to the OCC Rules are filed as Exhibit 5A to File
Number SR-OCC-2025-018. Proposed changes to the Methodology Description
are filed as confidential Exhibit 5B to File Number SR-OCC-2025-018.
Proposed changes to the Policy are filed as confidential Exhibit 5C to
File Number SR-OCC-2025-018. Material proposed to be added to the
Rules, Methodology Description, and Policy as currently in effect is
marked by underlining and material proposed to be deleted is marked
with strikethrough text. All terms with initial capitalization that are
not otherwise defined herein have the same meaning as set forth in the
OCC By-Laws and Rules.\3\
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\3\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
OCC is the sole clearing agency for standardized equity options
listed on national securities exchanges registered with the Commission.
OCC also clears certain stock loan and futures transactions. In its
role as a clearing agency, OCC is the guarantor for all contracts
cleared through OCC; that is, OCC becomes 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). As a
central counterparty (``CCP''), OCC is exposed to certain risks because
OCC is obligated to perform pursuant to its By-Laws and Rules even when
one of its members defaults, including credit risk, which is the risk
that OCC would not maintain sufficient financial resources to cover
exposures.
OCC manages its credit risk through various safeguards to ensure
that it has sufficient financial resources in the event of a Clearing
Member failure. For example, OCC periodically collects margin
collateral from its Clearing Members, which is designed to cover the
credit exposures they individually present to OCC with a high degree of
confidence. In order to ensure that OCC maintains sufficient qualifying
liquid resources to manage its liquidity risk, and to address the tail
risk that the margin collateral it collects from each Clearing Member
might be insufficient to cover OCC's credit exposure to a defaulting
member, OCC also maintains a Clearing Fund, which is a mutualized pool
of financial resources to which each Clearing Member is required to
contribute. OCC may borrow against or charge losses to the Clearing
Fund under circumstances set forth in OCC's rules, including when
managing a default of a Clearing Member. Subject to OCC's rules, non-
defaulting Clearing Members would be obligated to replenish the
Clearing Fund if OCC
[[Page 47384]]
were to charge a loss to the Clearing Fund.
OCC rules also provide for how the Clearing Fund is sized and
allocated amongst OCC's membership. With respect to sizing, OCC's rules
require OCC to size the Clearing Fund monthly based on stress test
scenarios that present extreme but plausible market conditions in order
to ensure that: (i) OCC has sufficient pre-funded financial resources
to withstand a default of the two Clearing Member Groups that would
potentially cause the largest aggregate credit exposure in such
conditions; \4\ and (ii) OCC has sufficient liquid resources to settle
payment obligations under a wide range of foreseeable stress scenarios
that include the default of the Clearing Member Group that would
generate the largest aggregate payment obligation in such
conditions.\5\ However, the current allocation methodology does not
include a component that takes into account the same stressed losses
used to size the fund when determining each Clearing Member's required
Clearing Fund deposit and creates inconsistency between the sizing and
allocation across the membership. By including such a component in the
allocation methodology OCC could distribute individual Clearing Fund
requirements based on the directional stressed risk that Clearing
Members present to OCC.
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\4\ See OCC Rule 1001(a).
\5\ See, e.g., Exchange Act Release No. 89014 (June 4, 2020), 85
FR 35446 (June 10, 2020) (SR-OCC-2020-003) (approving OCC's
Liquidity Risk Management Framework).
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OCC proposes to modify this allocation methodology to align more
closely with the methodology for sizing the Clearing Fund. The new
methodology would primarily be driven by a Clearing Member's
proportionate share of shortfalls (i.e., the estimated stress loss
exposure in excess of margin requirements) and would be more aligned
with the current sizing methodology because the same stressed scenarios
used for sizing would be used to calculate the shortfalls. By aligning
the allocation methodology with the stressed scenarios, the proposed
allocation methodology would charge each Clearing Member more in
proportion to the stress loss risk that its trading activity presents
to OCC. As such, the new methodology would focus more on the risk that
a Clearing Member introduces to OCC through stress scenarios, rather
than the risk that OCC already collateralizes through collection of
margin requirements.
The proposed rule change would also provide for an alternate
allocation method for stressed market conditions in which shortfall may
no longer be a reliable factor in allocating the Clearing Fund. OCC has
observed that shortfalls generally decrease during periods of
heightened volatility when margin coverage increases. In order to avoid
significant changes to the Clearing Fund allocation month-over-month,
the shortfall, total risk, and volume calculations would be performed
using a three-month lookback. However, in the unlikely event that
shortfalls decrease over a longer period of time due to a prolonged
period of heightened volatility, OCC proposes to establish authority to
hold constant the allocation from month-to-month as well as remove the
hold constant provision until heightened market volatility conditions
abate.
The impact to each Clearing Member's allocation under the proposed
methodology would be dependent on the trading activity of that Clearing
Member and based on their end-of-day positions. While the changes would
not affect the overall size of the Clearing Fund, some Clearing Members
would see their allocation increase while others would see their
allocation decrease. The impact to Clearing Member allocations will be
primarily driven by the directionality of their portfolios and the
resulting stress exposures relative to other Clearing Members given the
change is intended to incorporate a component of the allocation based
on their share of such stress exposure. Clearing Members that have
alignment in terms of direction across accounts or exposure to
positions that are more reactive to stress scenarios, or a combination
of both, will likely see increases. However, OCC believes that such
increases or decreases would be commensurate with the stressed risk
presented to OCC by each individual Clearing Member.
1. Purpose
Background
Stressed Losses and the Clearing Fund Sizing Methodology
Under the Policy, OCC determines the size of its Clearing Fund
based on the output of stress tests conducted using a range of
foreseeable scenarios that utilize standard pre-determined parameters
and assumptions. These stress tests are conducted daily and consider a
range of stress scenarios with possible price changes that include: (1)
relevant peak historic price volatilities; (2) shifts in other market
factors including, as appropriate, priced determinants and yield
curves; (3) the default of one or multiple members; (4) forward-looking
stress scenarios.
As described in the Methodology Description, OCC leverages a suite
of sizing stress tests broadly categorized into two types: ``Systemic
Scenarios'' and ``Idiosyncratic Scenarios.'' Systemic Scenarios are
created to capture risk to OCC in an extreme event impacting all
positions mainly driven by risk drivers, while Idiosyncratic Scenarios
are used to assess the impact of extreme moves of specific equities in
a Clearing Member portfolio.
Systemic Scenarios include certain ``Hypothetical Scenarios'' that
represent events in which market conditions change in ways that have
not yet been observed. The Hypothetical Scenarios are derived using
statistical methods (e.g., draws from estimated multivariate
distributions) or created based on expert judgment (e.g., a 15% decline
in market prices and 50% increase in volatility). These scenarios give
OCC the ability to change the distribution and level of stress in ways
necessary to produce an effective forward-looking stress testing
methodology. OCC uses these pre-determined stress scenarios in stress
tests, conducted daily, to determine OCC's risk exposure to each
Clearing Member Group by simulating the profits and losses of the
positions in their respective account portfolios under each such stress
scenario. Idiosyncratic Scenarios are designed to capture the risks of
extreme moves in individual or small subsets of securities. OCC shocks
each single-name equity and evaluates the effects of such shocks on
every Clearing Member Group portfolio, within which OCC identifies the
four single-name equities for which such shocks would result in the
largest losses.
From the combined set of scenarios used in the determination of the
Clearing Fund size (``Sizing Scenarios''), which currently consist of
Systemic and Idiosyncratic Scenarios, OCC selects the largest aggregate
stress test exposures as the primary basis for sizing the Clearing
Fund. Under the Policy and Methodology Description, OCC performs these
stress test scenarios to establish the monthly size of the Clearing
Fund necessary for OCC to maintain sufficient pre-funded financial
resources to cover losses that could arise from the default of the two
Clearing Member Groups that would potentially cause the largest
aggregate credit exposure in extreme but plausible market conditions as
a result of a 1-in-80 year hypothetical market event.
[[Page 47385]]
Clearing Fund Allocation Methodology
Currently, OCC's rules provide that Clearing Members are required
to make Clearing Fund deposits comprised of a fixed amount of $500,000
per Clearing Member and an amount that is a Clearing Member's
proportionate share of the remaining amount necessary to arrive at the
total size of the Clearing Fund (``variable amount'') determined by a
weighted average of the Clearing Member's proportionate share of three
other measures:
(1) total risk: a risk measure aggregated across all accounts of a
Clearing Member over the previous month determined using OCC's margin
methodology and such add-on charges as may be determined pursuant to
OCC's policies and procedures;
(2) open interest: the daily average number of open interest in
cleared contracts and stock loan and borrow positions during the
previous calendar month; and
(3) volume: the daily average number of all cleared contracts and
stock loan and borrow positions cleared by such Clearing Member during
a look-back period determined by OCC from time to time.\6\
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\6\ See OCC Rule 1003(b)(iii).
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Each Clearing Member's proportionate share of the variable amount
is determined using an allocation formula that apportions 70% from
total risk, 15% from volume, and 15% from open interest. Each Clearing
Member's margin requirement is calculated from all accounts held by the
Clearing Member.
Proposed Changes
OCC proposes to enhance its Clearing Fund allocation strategy by:
(1) modifying OCC's allocation weighting formula; (2) providing
authority in the rules for OCC to hold constant month-over-month
allocation weights in light of volatile market conditions; and (3)
other minor clarifying and conforming changes to the Methodology
Description and Policy.
1. Modification of OCC's Allocation Weighting Methodology
OCC proposes to modify its methodology for allocating Clearing Fund
requirements amongst its Clearing Members to focus on the stress loss
in excess of margin (i.e., ``shortfall''). OCC believes it is
appropriate to use the shortfall generated from running stress
scenarios as a basis to calculate the Clearing Fund allocations because
shortfall is a closer proxy to the risk borne by OCC from Clearing
Members assuming a default in stressed market conditions, which are the
conditions that the Clearing Fund is designed to address. Accordingly,
OCC proposes to define ``shortfall'' under Rule 1003(b)(ii) to mean
``an estimated stress loss exposure in excess of margin amounts
aggregated across all accounts of a Clearing Member determined using
the Corporation's margin methodology and such add-on charges as may be
determined pursuant to the Corporation's policies and procedures.'' \7\
The Methodology Description would, in turn, provide that the Clearing
Fund shortfall would be calculated and allocated from Sizing Scenarios
(i.e., the 1-in-80 Rally, 1-in-80 Decline and Idiosyncratic Sizing
scenarios).\8\ OCC believes this approach better aligns the allocation
of the Clearing Fund with the sizing of the Clearing Fund. OCC also
proposes to make conforming changes to its Policy and Methodology
Description to reflect the new definition of ``shortfall.''
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\7\ The shortfall component used in the allocation is based on
the highest shortfall across all Sizing scenarios for that Clearing
Member on a given business date and will be treated as zero in the
even there are no shortfalls.
\8\ In the event the size of the Clearing Fund was a result of
the Sufficiency Buffer, shortfalls from Sufficiency scenarios would
be considered as part of the Sizing Scenarios for the Clearing
Member(s) within the Clearing Member Group(s) that triggered the
sizing condition. The term ``Sufficiency Buffer'' is the condition
that occurs if the results of a daily Sufficiency Stress Test over
the final five business days preceding the monthly Clearing Fund
sizing exceed 90% of the projected Clearing Fund size for the
upcoming month, the Clearing Fund size shall be set such that the
peak Sufficiency Stress Test shortfall is no greater than 90% of the
Clearing Fund size.
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The new shortfall definition in Rule 1003(b)(ii) would replace the
definition of ``open interest,'' which OCC would remove as an input to
the allocation formula. OCC believes that removing the open interest
component is consistent with the aim of making the allocation
methodology more risk based. For the same reason, OCC previously
reduced the weighting given to open interest in the allocation formula
from 100% to 50%,\9\ and then from 50% to 15%.\10\ In each case, OCC
determined that the change was appropriate to align the allocation
methodology with the risks posed to OCC and the Commission found the
proposed changes to be consistent with the Exchange Act.\11\
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\9\ See Exchange Act Release No. 69403 (Apr. 18, 2013), 78 FR
24257 (Apr. 24, 2013) (SR-OCC-2013-02).
\10\ See Exchange Act Release No. 83735 (July 27, 2018), 83 FR
37855, 37859 (Aug. 2, 2018) (SR-OCC-2018-008).
\11\ See id. at 37863 (concluding that the change would ``allow
OCC to better manage its credit exposures to its clearing members by
better aligning each clearing member's contributions to the credit
risk it poses to OCC''); Exchange Act Release No. 69403, 78 FR at
24258 (concluding that the change would ``enhanc[e] the Clearing
Fund allocation methodology by incorporating measures that OCC
believes will apportion contributions based on more sophisticated
measurements of Clearing Members' usage of OCC's facilities and
recognize demands on OCC's services and facilities that are not
captured by the current methodology'').
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Under proposed amendments to Rule 1003(b), the new shortfall factor
would receive a 70% weighting in calculating a Clearing Member's
proportionate share of the variable amount. OCC also proposes to change
the weighting formula to allocate the remaining weight of 30%. Total
risk, which would be re-titled ``margin'' for clarity,\12\ would remain
a factor in the allocation, but would be reduced to 15%. OCC believes
that maintaining the margin component is appropriate as margin
evaluates risk using a different monte carlo based model and therefore
can capture a different risk profile from stress testing. This reflects
a decrease from OCC's current 70% allocation weighting for the margin
component of a Clearing Member's Clearing Fund allocation. OCC believes
that reducing the allocation to this level would be consistent with the
aim of aligning the allocation of the Clearing Fund with the sizing of
the Clearing Fund. OCC also proposes to keep the cleared volume
allocation at the 15% threshold, which is not changed from OCC's
current allocation methodology. OCC believes that maintaining the
volume threshold at the same level would be appropriate to ensure that
Clearing Member participants with intra-day trading activities receive
an allocation of the Clearing Fund even when their holdings overnight
reflect flat positions.\13\ The proposed allocation methodology would
result in a formula that distributes Clearing member contributions
according to the following proportions: 70% shortfall, 15% margin, and
15% cleared volume. OCC believes, based on its analysis of different
allocation weightings,\14\ that this specific allocation scheme
generates a balance between the various risks captured by each
component and would align the Clearing Fund allocation with the
exposure driving the size of the Clearing Fund. The proposed allocation
scheme creates alignment between the process to size the Clearing Fund
and the process to allocate the Clearing Fund, as
[[Page 47386]]
the same set of stress scenarios used to calculate the shortfalls will
be used as input to the allocation scheme. Margin evaluates risk based
on a different model than stress testing and therefore can capture
different risk profiles than shortfall. Volume keeps in place a means
to allocate a portion of the Clearing Fund based on trading activity
that occurs throughout the day, which shortfall and margin do not
currently capture as they utilize data as of EOD.
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\12\ Specifically, using the term ``margin'' rather than ``total
risk'' provides better clarity as to the metric upon which the
factor is based.
\13\ Overnight positions maybe flat for certain Clearing Member
participants because holdings in their portfolio may net to zero
from intra-day trading activities i.e., entering, existing, or
transferring trades during the day.
\14\ OCC has included the results of this analysis in
confidential Exhibit 3 to File No. SR-OCC-2025-018.
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OCC also proposes to adopt a longer lookback period for all three
measures, from a one-month lookback for the current total risk measure
to a three-month lookback for shortfall, margin and cleared volume. A
three-month lookback aligns with the parameters used in the sizing of
the Clearing Fund and mitigates the impact of significant changes in
margin shortfalls driven by periods of elevated margin coverage.
Accordingly, OCC proposes to replace the lookback periods in the
definitions section under Rules 1003(b)(i), (ii) and (iii) to three (3)
calendar months. OCC also proposes to make conforming changes to
reflect this change in its Policy and Methodology Description.
With respect to the impact of the proposal on the Clearing Fund
allocations, OCC has reviewed the potential impact of the proposal on
Clearing Fund allocations, for the period between May 2024 and May 2025
and also for April 2020, a time horizon that reflected a monthly
resizing during a stressed market period.\15\ OCC has observed that
overall, the proposed approach allocates the Clearing Fund in a more
distributed fashion within the top 10 Clearing Members (as measured by
highest Clearing Fund contribution amounts) with some members
experiencing larger changes relative to other Clearing Members, but, as
noted above, the effects of the proposal would be primarily attributed
to the directionality of Clearing Member portfolios and the resulting
stress exposures. As a result, some Clearing Members will see their
Clearing Fund requirement increase, while others will see it decrease
with significant and pronounced variations across members. Generally,
Clearing Members that have aligned directional exposure across accounts
or exposure to positions that are more sensitive to stress events, or a
combination of both, could see an increase from this proposal but it is
portfolio-dependent and also a function of how the Clearing Members
compare to other Clearing Members. The impact of the proposal on OCC's
top 5, top 10, and remaining Clearing Members over the past four
quarters spanning third quarter 2024 through second quarter 2025,\16\
shown as averages, is presented in the tables below:
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\15\ See supra note 14.
\16\ The average Clearing Fund size during this period was
$19.51 billion.
Table 1--Change in Clearing Fund Contribution Percentages for the Top 10 Clearing Member Contributors
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Current
production Proposal (%) Change (%)
(%)
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Q3 2024......................................................... 66.06 66.79 0.73
Q4 2024......................................................... 65.57 66.90 1.33
Q1 2025......................................................... 65.40 66.97 1.58
Q2 2025......................................................... 65.65 67.13 1.48
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Table 2--Change in Clearing Fund Contribution Percentages for the Top 5 Clearing Member Contributors
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Current
production Proposal (%) Change (%)
(%)
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Q3 2024......................................................... 48.07 45.42 -2.65
Q4 2024......................................................... 47.32 44.66 -2.66
Q1 2025......................................................... 47.39 44.77 -2.63
Q2 2025......................................................... 47.05 44.29 -2.76
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Table 3--Change in Clearing Fund Contribution Percentages for Members Excluding the Top 10 Clearing Member
Contributors
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Current
production Proposal (%) Change (%)
(%)
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Q3 2024......................................................... 33.94 33.21 -0.73
Q4 2024......................................................... 34.43 33.10 -1.33
Q1 2025......................................................... 34.60 33.03 -1.58
Q2 2025......................................................... 34.35 32.87 -1.48
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From Tables 1 and 2, above, OCC observed that, on average, the top
10 Clearing Members would have experienced a 1.28% increase in their
Clearing Fund contributions, while the top 5 Clearing Members would
have seen a 2.67% decrease in Clearing Fund contributions over the four
quarters referenced. In contrast, in Table 3, which presents the
effects on the remaining members, excluding the top 10 Clearing Fund
contributors, OCC observed a 1.28% decrease in contributions to the
Clearing Fund, indicating that the proposed rule change would have
allocated a greater portion of the Clearing Fund contribution
requirement toward the larger, top 10
[[Page 47387]]
contributing members. However, OCC has also observed that there were
substantial variations in the range and distribution of relative change
between individual contributions spread across members within each
category.\17\
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\17\ This applies to members within all three categories
presented in Table 1,2, and 3.
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2. Authority to Hold Constant Allocation Weights
OCC proposes to expand its authority under the Rules to hold
constant month-over-month Clearing Member allocations during stressed
market conditions. When markets are highly volatile during periods of
market stress, elevated margin coverage becomes more commonplace and
consequently may reduce or even eliminate Clearing Fund shortfalls
because of elevated margin requirements. Such reductions in shortfalls
could cause the resulting Clearing Fund allocation to change
dramatically month-over month. In the first instance, OCC would address
this risk through the three-month lookback discussed above, which would
help to smooth month-over-month changes.\18\ Based on its analysis of
the potential impact of the current proposal, OCC believes that the
proposed three-month lookback would have been sufficient without
further intervention in recent periods of elevated stress, for example
as observed in March 2020.\19\ However, in the unlikely event that high
volatility and reduced shortfalls persisted, OCC believes it is
possible the extended lookback alone may not be sufficient even though
that has not been observed in the impact data produced. As a result,
the proposed rules include authority for OCC to hold all Clearing
Members' proportionate shares of the variable amount constant month-
over-month.\20\
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\18\ OCC proposes to extend the lookback from one to three
months to smooth out the effects of high volatility during periods
when elevated margin coverage may reduce or even eliminate
shortfalls. Using a one-month lookback during such periods can cause
Clearing Fund allocations to fluctuate dramatically month-over-
month.
\19\ See supra note 14.
\20\ For the avoidance of doubt, the variable amount, which is
dependent on the size of the Clearing Fund, would not be held
constant under this authority. Rather, OCC would hold constant the
proportionate allocation of the variable amount across the
membership.
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Specifically, proposed Rule 1003(c) would provide that OCC, at its
sole discretion, may elect to hold constant month-over-month Clearing
Members' proportionate shares calculated under Rule 1003(b) and the
Corporation's policies and procedures. Rule 1003(c) would further
provide that any such election would (i) be based upon then-existing
facts and circumstances, (ii) be in furtherance of the integrity of OCC
and the stability of the financial system, and (iii) take into
consideration the legitimate interests of Clearing Members and market
participants. OCC believes this authority is consistent with its
existing authority to temporarily increase the Clearing Fund size \21\
and the Clearing Fund Cash Requirement.\22\
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\21\ See OCC Rule 1001(d).
\22\ See OCC Rule 1002(a)(i)(A).
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Proposed amendments to the Policy would provide that OCC would
exercise this authority by conducting daily risk analysis to monitor
the results of the Cover 2 \23\ Sizing Stress Tests and escalate to the
Chair of the Stress Testing Working Group (``STWG''),\24\ or the Chief
Financial Risk Officer, that an STWG meeting be convened to review and
approve or reject a recommendation to hold constant month-over-month
the proportionate share of the variable amount of the Clearing Fund for
all firms. The Policy would be revised to state that any recommendation
to hold allocations constant would be supported by an analysis of the
impact to stress exposures from margin coverages changes and the
resulting Clearing Fund allocation projections.\25\ OCC believes the
STWG is the appropriate OCC internal governing body to approve or
reject such recommendation given the authority the Management Committee
has delegated to it as the subject matter expert on OCC's financial
risk and liquidity risk stress-testing scenarios, models, underlying
parameters and assumptions, and stress test results. In addition, OCC
proposes to append ``Monthly'' to the section heading that deals with
allocations to read as ``Allocation of Monthly Clearing Fund
Contributions'' and reflect within the section the authority to hold
constant month-over-month the allocation proportions or revert to the
proposed allocation calculation formula, by inserting a new paragraph
stating ``[s]ubject to the prior approval of the STWG on recommendation
from STLRM, OCC may hold the proportionate share of the variable amount
constant month-over-month or revert to the proportionate approach,
described in Rule 1003.'' Lastly, within the same section a new
separate paragraph will be inserted that states that ``[t]he Risk
Committee and Clearing Members shall be notified immediately of any
determination to hold constant allocations or the reversion to the
proportionate approach, described in Rule 1003. Such determination and
the reasons thereof shall be promptly reported to the SEC and the
CFTC.''
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\23\ The term ``Cover 2'' refers to sufficient Pre-Funded
Financial Resources, at a minimum, to enable OCC to cover a wide
range of foreseeable stress scenarios that include, but are not
limited to, the default of the two Clearing Member Groups that would
potentially cause the largest aggregate credit exposure in extreme
but plausible market conditions.
\24\ The STWG is a cross-functional group comprised of
representatives from relevant OCC business units, including Stress
Test and Liquidity Risk Management, Credit Risk Management, and
Model Risk Management.
\25\ The analysis may include additional information such as the
percentage of firms generating shortfalls, the size of peak
shortfalls relative to the Clearing Fund size, a comparison of
Clearing Fund allocation projections versus current requirements as
well as a breakdown of the allocation projections by component.
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Other Clarifying and Conforming Changes
Finally, OCC proposes several additional clarifying and conforming
changes to the Rules, Policy, and Methodology Description to align with
the proposed changes to the Clearing Fund methodology. These supporting
changes are described below.
Proposed Changes to the Allocation of Clearing Fund Contributions
Description
OCC proposes a number of changes to its Methodology Description to
reflect the proposed changes and describe the proposed allocation
formula. For example, the Methodology Description would be revised to
reflect the updated Rule 1003 text changes, which includes introduction
of the shortfall, removal of the open interest, the extension of the
lookback period to three months, and incorporation of the new proposed
weightings for the Clearing Fund Allocation formula. In addition, the
proposed changes would add a paragraph reflecting the proposed Rule
1003(c) text. In addition, certain definitions within the Methodology
Description referring to the OCC's current Clearing Fund allocation,
including ``daily averages,'' ``Risk Exposure,'' and ``Open Interest''
will be removed. Additional clarifying text such as ``Cleared'' will
also be appended before ``Volume'' to ensure greater clarity regarding
the definition of ``Cleared Volume.''
Proposed Changes to the Policy
OCC proposes a number of changes to its Policy to reflect the
proposed changes. First, all references to ``Draw'' or ``Draws'' in the
document will be replaced with ``shortfall'' or ``shortfalls,''
respectively. In a similar fashion to the Methodology Description, the
Policy will be revised to reflect the updated Rule 1003 text changes,
that includes introduction of the ``shortfall,'' removal of the ``open
interest,'' update to the lookback period to three months,
[[Page 47388]]
and incorporation of the new proposed weightings for the Clearing Fund
Allocation formula. In addition, the proposed changes would add a
paragraph reflecting the proposed Rule 1003(c) text.
Proposed Changes to the Rules
To enhance clarity and eliminate potential confusion, OCC proposes
to remove all references to an implementation period from Rule 1003.
Specifically, OCC proposes to delete Interpretation and Policy .03 of
Rule 1003 in its entirety from OCC's Rules, as this section contains
the implementation period provisions that are no longer necessary.
Clearing Member Outreach
OCC has provided an overview of the proposed changes to the
Financial Risk Advisory Council (``FRAC''), informing Clearing Members
of the proposed changes. The FRAC is a working group comprised of
exchanges, Clearing Members, and indirect participants of OCC. OCC has
not received any material objections or concerns in response to this
outreach to date.
Implementation Timing
OCC will implement the proposed changes within 180 days after the
date OCC receives all necessary regulatory approvals for the proposed
changes. OCC will announce the implementation date of the proposed
changes by posting an Information Memorandum on its public website at
least two (2) weeks prior to implementation.
2. Statutory Basis
OCC believes the proposed rule change is consistent with the
requirements of Section 17A(b)(3)(F) of the Exchange Act,\26\ and Rule
17ad-22(e)(4) \27\ and Rule 17ad-22(e)(2) \28\ thereunder.
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\26\ 15 U.S.C. 78q-1(b)(3)(F)
\27\ 17 CFR 240.17ad-22(e)(4).
\28\ 17 CFR 240.17ad-22(e)(2).
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Section 17A(b)(3)(F) of the Act \29\ 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, to assure the safeguarding of securities and funds which
are in its custody or control, and in general, to protect investors and
the public interest. Taken together, OCC believes the proposed changes
are designed to enhance OCC's overall framework for managing credit and
liquidity risks and are consistent and in accordance with Section
17A(b)(3)(F) of the Act \30\ for the reasons set forth below.
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ Id.
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OCC's mutualized Clearing Fund is designed, in part, to cover
default losses arising from Clearing Member defaults during stressed
market conditions. As described above, the proposed rule change would
enhance OCC's framework for managing its credit risk by revising the
Clearing Fund allocation scheme to include a shortfall component that
represents the aggregate stress losses in excess of margin. In a
Clearing Member default, a Clearing Member's Clearing Fund contribution
would be the first to be utilized to cover any losses before any other
mutualized resource. The use of shortfall in the allocation scheme
aligns OCC's credit exposure to that Clearing Member by ensuring its
Clearing Fund requirements are commensurate with the risk presented to
OCC, thereby helping to ensure that OCC can continue to effect the
prompt and accurate clearance and settlement of securities and
derivatives transactions. The proposed changes to the component
allocation weights in its Clearing Fund allocation scheme produces
Clearing Member allocations better aligned with the same stress
scenarios used to size the Clearing Fund, which OCC believes is
reasonably designed to enhance OCC's framework for managing credit risk
because it would result in more proportionate and accountable Clearing
Fund allocations and generate contribution requirements that are
commensurate to the risks borne by OCC from its Clearing Members. OCC
believes these changes would help to reduce risky behavior that may
arise through risk mutualization and incentivize participants to better
manage their risk by charging more to Clearing Members who introduce
such stressed risk, thereby supporting the public interest. In
addition, OCC would use the Clearing Fund deposit along with the margin
of a defaulting Clearing Member to manage a default ahead of other
resources under OCC's default waterfall, including the Clearing Fund
deposits of non-defaulting Clearing Members.\31\ By allocating more to
a Clearing Member that is introducing higher stressed risk, more
resources ahead of risk mutualization would be available in the event
of that Clearing Member's default, thereby helping to safeguard the
Clearing Fund deposits of non-defaulting Clearing Members. OCC
therefore believes these changes are designed to promote the prompt and
accurate clearance and settlement of securities and derivatives
transactions, assure the safeguarding of securities and funds which are
in its custody or control and, in general, protect investors and the
public interest consistent with Section 17A(b)(3)(F) of the Act.\32\
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\31\ See OCC Rule 1006(b).
\32\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC also believes the proposed revisions to its Rules, Policy, and
Methodology Description to update the lookback period to three months
for all components of the Clearing Fund allocation scheme and to allow
OCC to hold constant the allocations month-over-month are designed, in
general, to protect investors and the public interest. The proposed
changes are anti-procyclical measures for periods of elevated market
volatility during which Clearing Members may maintain higher margin
levels that may cause shortfalls for the majority of market
participants to fall to zero. The extended lookback and authority under
Rule 1003(c) would help ensure that OCC's Clearing Fund allocations
would be smoother month-over-month ensuring that significant
fluctuations in Clearing Fund allocations are avoided, particularly
during periods of stressed market conditions in which Clearing Members
may maintain elevated margin coverage levels and their ability to meet
additional liquidity demands may be strained. A three-month lookback
would smooth out the impact to Clearing Members of high volatility
periods reducing the dramatic fluctuations experienced from using a
shorter 1-month lookback. As such, OCC believes that these changes
reduce systemic risk, and are thereby designed to help ensure OCC can
continue to provide prompt and accurate clearance and settlement of
securities and derivatives transactions, and in general protect
investors and the public interest consistent with Section 17A(b)(3)(F)
of the Act.\33\
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\33\ Id.
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OCC also believes the proposed changes are consistent with Rules
17ad-22(e)(4),\34\ which requires that a covered clearing agency
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes including
by, in part, maintaining financial resources at the minimum to enable
it to cover a wide range of foreseeable stress scenarios that include,
but are not limited to, the default of the participant family that
would potentially cause the largest aggregate credit exposure for the
covered clearing agency in extreme but
[[Page 47389]]
plausible market conditions,\35\ and do so exclusive of assessments for
additional guaranty fund contributions or other resources that are not
prefunded.\36\ OCC complies with these obligations by maintaining a
prefunded Clearing Fund that is sized to cover potential losses
resulting from the default of its two largest Clearing Member Groups in
stressed market conditions. With respect to the use of Clearing Funds
and adherence to the requirements of Rule 17ad-22(e)(4),\37\ the
Commission has noted that, to the extent that a clearing agency uses
guaranty or clearing fund contributions to mutualize risk across
participants, clearing agencies generally should value margin and
guaranty fund contributions so that the contributions are commensurate
to the risks posed by the participants' activities.\38\ OCC believes
that by utilizing the same stressed scenarios used to size the Clearing
Fund, the proposed allocation methodology would provide for Clearing
Fund contribution requirements commensurate to the risks posed by each
Clearing Member. As a result, OCC believes the proposed changes are
reasonably designed to comply with the requirements of Rule 17ad-
22(e)(4).\39\
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\34\ 17 CFR 240.17ad-22(e)(4).
\35\ 17 CFR 240.17ad-22(e)(4)(iii).
\36\ 17 CFR 240.17ad-22(e)(4)(iv).
\37\ 17 CFR 240.17ad-22(e)(4).
\38\ See Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR
70786, 70813 (Oct. 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies'').
\39\ 17 CFR 240.17ad-22(e)(4).
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Finally, OCC believes the proposed changes are consistent with Rule
17ad-22(e)(2)(i),\40\ which requires that each covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that, in relevant part, are clear and transparent. As discussed above,
OCC believes that by establishing authority to hold allocations
constant month-over-month in extraordinary circumstances in its rules,
and making clarifying, organizational, and streamlining changes
elsewhere in its policies and procedures, it would improve the clarity
of its rules and policies and therefore the proposed changes would be
consistent with Rule 17ad-22(e)(2)(i).\41\
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\40\ 17 CFR 240.17ad-22(e)(2)(i).
\41\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \42\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. While the
proposed rule change may impact Clearing Members to a greater or lesser
degree depending on each Clearing Member's trading activity, OCC does
not believe that the proposed rule change would impose any burden of
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
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\42\ 15 U.S.C. 78q-1(b)(3)(I).
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The proposed changes relate to risk management modifications
designed to shift the allocation from margin to stress shortfall. As
discussed above, the current Clearing Fund distribution scheme utilizes
margin as the main driver to allocate individual Clearing Member
contributions, which may not adequately reflect the risk presented by
individual Clearing Members in a default in stressed market conditions.
In such scenarios, OCC believes that the shortfall is a closer proxy to
the risk borne by OCC to be used as a basis to calculate Clearing Fund
allocations, notwithstanding that margin and volume would remain
factors with smaller weightings. The proposed changes would ensure
contribution requirements would be apportioned to Clearing Members
based on each Clearing Member's share of the overall shortfall relative
to margin. Moreover, the proposed rule change would be applied
uniformly to all Clearing Members, but as noted above, the sizing of
the Clearing Fund would not be affected. In addition, as indicated by
OCC's impact analysis, the proposal's effects vary across all members
under both normal and stressed market conditions. As shown above in
Tables 1, 2, and 3, some Clearing Members would see their Clearing Fund
requirement increase, while others will see it decrease. Individual
impacts would depend on a variety of factors, including but not limited
to, the directionality of exposure across accounts within a Clearing
Member, exposure to positions that are more sensitive to stress
scenarios, and stress exposures relative to other Clearing Members.
OCC believes these changes are necessary and appropriate requiring
those Clearing Members that present elevated levels of stress-based
risk to contribute more to the Clearing Fund and thereby incentivize
those firms to better manage and reduce the risk attributed to their
trading activities. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4e3c3b222b632d2123232b203a3d0e3d2b2d60292138"><span class="__cf_email__" data-cfemail="691b1c050c440a0604040c071d1a291a0c0a470e061f">[email protected]</span></a>. Please include
file number SR-OCC-2025-018 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2025-018. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of such filing 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>.
[[Page 47390]]
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-2025-018 and
should be submitted on or before October 22, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-19104 Filed 9-30-25; 8:45 am]
BILLING CODE 8011-01-P
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