Notice2026-07265
Self-Regulatory Organizations; the Options Clearing Corporation; Notice of Filing of Proposed Rule Change by the Options Clearing Corporation Concerning Amendments to OCC's STANS Methodology Description To Enable OCC To Accept Binary Options for Clearing and Appropriately Manage the Risk Created by Binary Options
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Published
April 15, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 72 (Wednesday, April 15, 2026)</title>
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[Federal Register Volume 91, Number 72 (Wednesday, April 15, 2026)]
[Notices]
[Pages 20192-20195]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-07265]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105208; File No. SR-OCC-2026-003]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by the Options Clearing
Corporation Concerning Amendments to OCC's STANS Methodology
Description To Enable OCC To Accept Binary Options for Clearing and
Appropriately Manage the Risk Created by Binary Options
April 10, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule
[[Page 20193]]
19b-4 thereunder,\2\ notice is hereby given that on April 8, 2026, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``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 amend OCC's System for Theoretical
Analysis and Numerical Simulation (``STANS'') Methodology Description
to enable OCC to accept binary options for clearing and appropriately
manage the risk created by binary options.
OCC filed as Exhibit 5 to File No. SR-OCC-2026-003 the updated
version the STANS Methodology Description. Material proposed to be
added is marked by underlining and material proposed to be deleted is
marked with strikethrough text. All terms with initial capitalization
that are not otherwise defined herein have the same meaning as set
forth in the OCC By-Laws and Rules.\3\
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\3\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
OCC is the sole clearing agency for standardized equity options
listed on national securities exchanges registered with the Commission.
OCC also clears certain stock loan and futures transactions. Recently,
OCC Participant Exchanges have expressed interest in listing binary
options for trading and OCC is proposing to accept binary options for
clearing. A binary call option pays $1 when the underlying asset is at
or above the strike at maturity and expires worthless otherwise.
Likewise, A binary put option pays $1 when the underlying asset is
below the strike at maturity and expires worthless otherwise. As an
initial matter, OCC proposes to clear binary options on equity indexes.
As such, OCC presently intends to clear only binary options that are
within the definition of a ``security'' as determined by the
Commission.\4\ All initially proposed binary options would be European-
style. However, OCC expects additional products to be launched as
exchanges expand their offerings, and additional exchanges begin to
list binary options. Because OCC previously cleared binary options,
OCC's rulebook still includes a chapter covering binary options that
OCC believes is adequate to enable it to clear binary options.\5\
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\4\ See, e.g., 15 U.S.C. 78c(a)(10) (defining ``security'' to
include ``any put, call, straddle, option or privilege on any
security, certificate of deposit, or group or index of securities
(including any interest therein or based on the value thereof)''); 7
U.S.C. 2(a)(1)(C)(i)(I) (providing that the CFTC ``shall have no
jurisdiction to designate a board of trade as a contract market for
any transaction whereby any party to such transaction acquires any
put, call, or other option on one or more securities (as defined [by
15 U.S.C. 78c(a)(10)]), including any group or index of such
securities, or any interest therein or based on the value
thereof'').
\5\ See OCC Rulebook Chapter XV.
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OCC, however, believes that certain changes are necessary to enable
it to clear binary options to reflect changes in OCC's risk management
since the last time that OCC cleared binary options. 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. OCC is therefore exposed to the
credit risk arising from the activity of the Clearing Members. 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.
To calculate margin requirements, OCC uses STANS, its proprietary
risk management system.\6\ The STANS methodology utilizes large-scale
Monte Carlo simulations to forecast price and volatility movements in
determining a Clearing Member's margin requirement.\7\ STANS margin
requirements are calculated at the portfolio level of Clearing Member
accounts with positions in marginable securities and consists of an
estimate of two primary components: a base component and a
concentration/dependence stress test add-on component. The base
component is an estimate of a 99% expected shortfall \8\ over a two-day
time horizon.
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\6\ See Exchange Act Release No. 91079 (Feb. 8, 2021), 86 FR
9410 (Feb. 12, 2021) (File No. SR-OCC-2020-016). OCC makes its STANS
Methodology description available to Clearing Members. An overview
of the STANS methodology is on OCC's public website: <a href="https://www.theocc.com/Risk-Management/Margin-Methodology">https://www.theocc.com/Risk-Management/Margin-Methodology</a>.
\7\ See OCC Rule 601.
\8\ The expected shortfall component is established as the
estimated average of potential losses higher than the 99% value at
risk threshold. The term ``value at risk'' or ``VaR'' refers to a
statistical technique that, generally speaking, is used in risk
management to measure the potential risk of loss for a given set of
assets over a particular time horizon.
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While OCC previously cleared binary options contracts, the STANS
Methodology Description, which OCC filed as a rule in 2020,\9\ does not
currently include a mechanism for calculating margin requirements for
binary options. OCC did not include treatment for binary options
because no Participant Exchanges listed binary products at the time OCC
filed a proposed rule change to establish the STANS Methodology
Description.\10\ Specifically, the STANS Methodology Description does
not include a mechanism to calculate the price of binary options, which
is a necessary pricer for calculating the base margin requirement for
the products. OCC is therefore proposing to update its STANS
Methodology Description to enable it to price and adequately calculate
initial margin requirements for clearing member accounts that hold
binary options positions.
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\9\ See Exchange Act Release No. 91079 (Feb. 8, 2021) 85 FR
85788 (Feb. 12, 2021) (SR-OCC-2020-016).
\10\ Id. at 85799.
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OCC is proposing to price the binary options using the closed-form
pricer under the Black-Scholes framework. Initially, OCC proposes to
use the closed-form pricer with the forward price of the underlying
asset and the implied volatility of the corresponding vanilla option to
price a binary option. OCC will use an adjustment term to ensure that
the resultant price of the binary option aligns with market price. The
adjustment term captures the difference between the market price and
the theoretical price using the implied volatility of the vanilla
option. Furthermore, the adjustment term could be used to account for
market prices for binary options potentially being out of the range of
the closed-form pricer due to illiquidity or market frictions,
particularly during the launch stage. OCC filed as Confidential Exhibit
3A to
[[Page 20194]]
File No. SR-OCC-2026-003 its model whitepaper for the pricing of binary
options.
For margin calculations, the vanilla option implied volatility
scenarios will be used as proxy. As trading volume increases and
liquidity improves after the launch stage, OCC will consider
transitioning to use the closed-form pricer and bid/ask prices to
derive the implied volatility of the binary options. After transition
to the mature stage,\11\ smoothing will be performed to construct the
implied volatility surface, which will be used to generate the
corresponding implied volatility scenarios for the margin calculations.
The adjustment term will be kept for any minor price adjustment to
align with the market, if necessary. Furthermore, such transition from
the launch stage to mature stage would be subject to review and
approval by OCC's Model Risk Work Group (``MRWG'') \12\ following
review of the transition by OCC's Model Risk Management (``MRM'')
business unit.\13\
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\11\ For clarity, the transition from Launch Stage to Mature
Stage will be managed separately for different binary options
products. For a given product, the transition from Launch Stage to
Mature Stage will be determined by the following considerations: (1)
the trading activities of newly launched binary options, such as
volume or number of contracts cleared at OCC; (2) the quality of
market data of newly launched binary options, such as strike and
maturity coverage, the range of bid-ask spreads, and price
difference compared to the corresponding vertical spread formed by
vanilla options; and (3) the outcomes (relative to the actual market
data) from the proposed smoothing and pricing modeling approaches in
the Mature Stage.
\12\ MRWG is a cross-functional group responsible for assisting
OCC's management in overseeing OCC's model-related risk comprised of
representatives from relevant OCC business units.
\13\ MRM is an independent team at OCC that is responsible for
validating OCC's risk models and is not involved in developing or
implementing the models.
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In accordance with OCC's existing Model Risk Management (MRM)
Policy,\14\ OCC's independent MRM team validated the proposed approach
for the launch stage and supported its use for binary options. MRM
concluded that the proposal is consistent with the theories for
replication of European binary options with vanilla options using a
vertical spread. MRM further concluded that the additional adjustment
term accounts for the implied volatility and market pricing
differences, as different market participants may use different
spreads. Because the primary risk factor for binary options is the
underlying price movement, the validation tests performed by MRM show
that the Black-Scholes based pricing model (together with adjustment
term) will be effective at pricing the products, and generating the
theoretical prices needed for margin calculations and stress testing.
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\14\ See Exchange Act Release No. 97484 (May 11, 2023), 88 FR
31549, 31551 n.15 (May 17, 2023) (SR-OCC-2023-004) (pursuant to the
Model Risk Working Group Procedure, the MRWG reviews and, if
appropriate, approves all new Risk Methodologies, changes to Risk
Methodologies, and proposals for decommissioning Risk Methodologies
prior to submitting to the Management Committee for review and
approval.).
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1. Purpose
In order to enable OCC to clear and risk manage binary options, OCC
is proposing a number of changes to the STANS Methodology Description.
OCC is proposing to add binary options to the list of FLEX and Exotic
Options included in section 1.2.3 of the STANS Methodology Description.
Specifically, OCC will state that ``[b]inary options are a European-
style option contract that are paid out if settlement value of the
underlier is equal to or exceeds the exercise price in case of a call
option or is less than the exercise price, in case of a put option. The
underliers of binary options can be indexes, futures, equities, etc.''
Similarly, in section 2.3.1 of the STANS Methodology Description, OCC
proposes to include binary options in the list of products that are
supported by the implied volatility smoothing algorithm.
OCC is also proposing the necessary steps to apply its smoothing
algorithm to binary options in section 2.3.1.3.1.\15\ Specifically, for
smoothing using market quotes, OCC states it will find a set of prices
that are closest to target prices and (1) are within the bid-ask
constraints,\16\ (2) satisfy monotonicity constraints,\17\ and (3)
maintains the put-call parity of binary options.\18\ Further, OCC
treats out-of-the-money (OTM) binary options with strikes in the wings
(far from the current spot price), so that the smoothed prices decay
toward zero, reflecting their low probability of payoff. Similarly, in
section 2.3.1.3.2, OCC proposes that for smoothing using last prices,
OCC will find a set of prices that are closest to exchange prices and
(1) satisfy monotonicity constraints and (2) maintains the put-call
parity of binary options.
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\15\ OCC is also proposing to add the word ``vanilla'' to the
first paragraph of section 2.3.1.3.1 to further clarify which
options are being described in that paragraph.
\16\ Prices within the bid-ask constraints refers to prices that
are within the realistic trading range.
\17\ Monotonicity means that prices move in a logically
consistent direction with the strike price.
\18\ For binary options, put-call parity means that the sum of
the price of a binary call option and the price of a binary put
option with the same expiry and strike is the present value of one
dollar at expiration.
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Finally, OCC is proposing to add section 2.3.5 titled ``Binary
Options.'' The section describes the pricing process for binary
options. Specifically, OCC is proposing to price binary options using a
classic Black-Scholes options pricing framework. OCC is also proposing
to use an adjustment term to account for differences between the market
prices of binary options and the theoretical prices.
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Exchange Act \19\ and Rule 17ad-22(e)(6) \20\ thereunder.
Section 17A(b)(3)(F) of the Act \21\ requires, among other things, that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions and to
protect investors. OCC's STANS model and the proposed changes to the
STANS Methodology Description help ensure that OCC has sufficient
financial resources to conduct prompt settlement of binary options
contracts even in the event of a clearing member default. Similarly,
OCC's changes will help protect investors from the impact of a default
by their binary options counterparty. For these reasons, the proposed
changes to OCC's rules are reasonably designed promote the prompt and
accurate clearance and settlement of securities transactions and to
protect investors. in accordance with Section 17A(b)(3)(F) of the
Act.\22\
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\19\ 15 U.S.C. 78q-1.
\20\ 17 CFR 240.17ad-22(e)(6).
\21\ 15 U.S.C. 78q-1(b)(3)(F).
\22\ Id.
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Rule 17ad-22(e)(6) \23\ requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to cover, if the covered clearing agency provides central
counterparty services, its credit exposures to its participants by
establishing a risk-based margin system that, at a minimum, considers,
and produces margin levels commensurate with, the risks and particular
attributes of each relevant product, portfolio, and market.\24\ OCC is
proposing to price binary options using a closed-form pricer under a
Black-Scholes framework. OCC plans to adjust the theoretical price by
an adjustment term to ensure that the resultant theoretical price of
the binary option aligns with arbitrage-free market price that is
within the range of bid and ask prices. Further, OCC's MRM team
performed a validation of the proposed approach and concluded that the
approach will be effective at pricing the products to mid-market, and
generating the theoretical
[[Page 20195]]
prices needed for margin calculations and stress testing. For those
reasons, OCC believes that the proposal is consistent with Rule 17ad-
22(e)(6).
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\23\ 17 CFR 240.17ad-22(e)(6).
\24\ 17 CFR 240.17ad-22(e)(6).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \25\ 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. OCC does not
believe that the proposed rule changes will impose any burden on
competition. The changes are designed to facilitate the clearing and
trading of binary options and will apply equally to all participants
that trade binary options, not favoring any participant over any other
participant. Further, because the proposed change applies only to
binary options and there is no current open interest in binary options,
there is no burden on competition resulting from changes to the margin
charges for existing portfolios. Finally, OCC does not believe that the
proposed rule change would unfairly inhibit access to OCC's services or
disadvantage any particular participant in relationship to another
participant.
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\25\ 15 U.S.C. 78q-1(b)(3)(I).
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(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 rule 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#3e4c4b525b135d5153535b504a4d7e4d5b5d10595148"><span class="__cf_email__" data-cfemail="3143445d541c525e5c5c545f4542714254521f565e47">[email protected]</span></a>. Please include
file number SR-OCC-2026-003 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-2026-003. 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>. 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-2026-003 and should
be submitted on or before May 6, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-07265 Filed 4-14-26; 8:45 am]
BILLING CODE 8011-01-P
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