Notice2026-10453
Self-Regulatory Organizations; the Options Clearing Corporation; Order Approving 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
May 27, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 101 (Wednesday, May 27, 2026)</title>
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[Federal Register Volume 91, Number 101 (Wednesday, May 27, 2026)]
[Notices]
[Pages 31513-31515]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-10453]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105537; File No. SR-OCC-2026-003]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Approving 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
May 21, 2026.
I. Introduction
On April 8, 2026, the Options Clearing Corporation (``OCC''), filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
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 (hereinafter ``Proposed Rule Change''). The Proposed
Rule Change was published for comment in the Federal Register on April
15, 2026.\3\ For the reasons discussed below, the Commission is
approving the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 105208 (Apr. 10, 2026), 91 FR
20192 (Apr. 15, 2026) (File No. SR-OCC-2026-003) (``Notice''). The
Commission received one comment expressing the general view that
there is no interest in the product, but the comment raises no
concerns or objections with the substance of the proposal. The
comment on the Proposed Rule Change is available at <a href="https://www.sec.gov/rules-regulations/public-comments/sr-occ-2026-003">https://www.sec.gov/rules-regulations/public-comments/sr-occ-2026-003</a>.
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II. Background
OCC is a central counterparty (``CCP''), which means that, as part
of its function as a clearing agency, it interposes itself as the buyer
to every seller and seller to every buyer for certain financial
transactions. As the CCP for the listed options markets in the United
States,\4\ as well as for certain futures and stock loans, OCC is
exposed to various risks arising from providing clearance and
settlement services to its Clearing Members.\5\ Because OCC is
obligated to perform on the contracts it clears, one such risk that OCC
is exposed to is credit risk, including the risk that OCC would not
maintain sufficient financial resources to cover exposures if one of
its Clearing Members defaults. OCC manages such credit risk, in part,
through financial safeguards, including the collection of margin
collateral.
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\4\ OCC describes itself as ``the sole clearing agency for
standardized equity options listed on national securities exchanges
registered with the Commission.'' See Notice, 91 FR at 20193.
\5\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at <a href="https://www.theocc.com/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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OCC previously cleared binary options and maintains rules
addressing such products.\6\ however, OCC's margin methodology does not
currently include a mechanism for calculating margin requirements for
binary options. OCC
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states that its Participant Exchanges have expressed interest in
listing binary options for trading and OCC is proposing to accept
binary options for clearing.\7\ OCC is now proposing changes to its
margin methodology to support the clearing of European-style binary
options.
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\6\ See OCC Rules Chapter XV, available 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>.
\7\ See Notice, 91 FR at 20193. OCC states that it proposes to
clear binary options on equity indexes and, as such, it presently
intends to clear only binary options that are within the definition
of a ``security.'' OCC also states that all initially proposed
binary options would be European-style. However, OCC states that it
expects additional products to be launched as exchanges expand their
offerings, and additional exchanges begin to list binary options.
See id.
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To calculate margin requirements, OCC uses its STANS
methodology.\8\ The STANS Methodology Description does not currently
include a mechanism to price binary options or to generate the inputs
necessary for margin calculations for such products because no
Participant Exchanges listed binary products at the time OCC filed a
proposed rule change to establish the STANS Methodology Description.\9\
As a result, OCC is proposing to update its STANS Methodology
Description to enable the pricing of binary options and the calculation
of corresponding margin requirements. Specifically, OCC is proposing to
price binary options under a Black Scholes framework.\10\ The proposed
approach utilizes the forward price of the underlying asset and the
implied volatility of a corresponding vanilla option. OCC proposes to
apply an adjustment term to align the theoretical price with observed
market prices. The adjustment term could be used to account for price
behavior resulting from illiquidity, such as for a given set of binary
options at launch.
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\8\ The STANS methodology applies to large scale Monte Carlo
simulations to forecast price and volatility movements and to
determine Clearing Member margin requirements at the portfolio
level. Margin requirements consist of an estimate of expected
shortfall over a defined time horizon and include both a base
component and a concentration and dependency stress test component.
\9\ See Notice, 91 FR at 20193 (citing Exchange Act Release No.
91079 (Feb. 8, 2021), 86 FR 9410 (Feb. 12, 2021) (File No. SR-OCC-
2020-016)). The STANS Methodology Description includes the material
aspects of OCC's risk-based margin system, the purpose of which is
to enable an informed reader to understand OCC's modeling choices
and the interconnectedness of STANS model components in producing
OCC margin requirements. See Exchange Act Release No. 91079 (Feb. 8,
2021), 86 FR 9410, 9410-11 (Feb. 12, 2021) (File No. SR-OCC-2020-
016).
\10\ Black-Scholes is a commonly accepted as a reasonable
framework for pricing European options. See Hull John C., Options,
Futures, and Other Derivatives 321 (9th ed., 2015) (stating that the
importance of the model was recognized when Robert Merton and Myron
Scholes were awarded the Nobel prize for economics).
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For margin calculations during the launch stage, implied volatility
scenarios derived from corresponding vanilla options would be used as a
proxy.\11\ As trading volume increases and market data becomes more
available, OCC will consider transitioning to using bid and ask prices
to derive the implied volatility of binary options. OCC would also
apply its smoothing algorithm to construct an implied volatility
surface for use in margin calculations that conforms to constraints
related to bid and ask ranges,\12\ monotonicity,\13\ and put-call
parity.\14\ Additionally, OCC is proposing to treat far out-of-the-
money binary options such that the smoothed prices decay toward zero,
reflecting the low probability of payoff.
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\11\ OCC's Model Risk Management function validated the proposed
approach for the launch stage and supported its use for binary
options. See Notice, 91 FR at 20194.
\12\ Prices within the bid-ask constraints refers to prices that
are within the realistic trading range. See Notice, 91 FR at 20194,
n.16.
\13\ Monotonicity means that prices move in a logically
consistent direction with the strike price. See Notice, 91 FR at
20194, n.17.
\14\ 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. See Notice, 91 FR at 20194, n.18.
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To effectuate the model changes, OCC proposes to amend the STANS
Methodology Description to incorporate binary options and to support
the clearing and risk management of such products. Specifically, OCC is
proposing to include binary options in the list of FLEX and exotic
options set forth in section 1.2.3 of the STANS Methodology
Description. OCC is also proposing to define binary options as
European-style option contracts that pay a fixed amount at expiration
if the settlement value of the underlying is equal to or exceeds the
exercise price in the case of a call option or is less than the
exercise price in the case of a put option. The underliers for binary
options may include indexes, futures, equities, and similar
instruments. Further, OCC proposes to include binary options among the
products supported by its implied volatility smoothing algorithm.
Finally, OCC is proposing to add a new section 2.3.5, titled ``Binary
Options,'' which describes the pricing process for binary options as
described above.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act requires the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that the proposed rule change is consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to the organization.\15\ Under the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the Exchange Act and the rules and regulations issued thereunder . . .
is on the self-regulatory organization [`SRO'] that proposed the rule
change.'' \16\
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\15\ 15 U.S.C. 78s(b)(2)(C).
\16\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to OCC. More specifically, the Commission finds
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F)
of the Exchange Act,\17\ and Rule 17ad-22(e)(6)(i) thereunder, as
described in detail below.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17ad-22(e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act \19\ requires, among other
things, that the rules of a clearing agency be designed to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. Based on
the Commission's review of the record, and for the reasons described
below, the Proposed Rule Change is consistent with assuring the
safeguarding of securities and funds which are in OCC's custody or
control or for which it is responsible.
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, the STANS methodology, as modified by the
proposed changes to the STANS Methodology Description, would provide
for the calculation of margin requirements for binary options
contracts, including in scenarios involving a Clearing Member default.
In particular, the proposed changes would incorporate characteristics
of binary options into the model and produce theoretical values used
for margin calculations. Absent the proposed changes, OCC's margin
methodology may not fully reflect the particular risk characteristics
associated with binary options contracts. As a result, OCC may not
collect sufficient margin collateral to address the risks posed by such
positions in the event of a Clearing Member default.
By incorporating characteristics of binary options into OCC's
margin
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methodology, the proposed changes would support the calculation of
margin requirements that more accurately reflect the risks associated
with binary options products. More accurate margin calculations would
improve OCC's ability to assess and manage its credit exposures
associated with binary options positions, which increases the
likelihood that OCC would collect sufficient margin collateral.
Increasing the likelihood that OCC collects sufficient margin
collateral to address risks associated with binary options positions
would, in turn, help reduce the likelihood that OCC would need to
utilize Clearing Fund contributions of non-defaulting Clearing Members
to cover losses associated with such a default.
Accordingly, the proposed changes would help assure the
safeguarding of securities and funds which are in OCC's custody or
control or for which it is responsible. Therefore, the Commission finds
that the Proposed Rule Change is consistent with the requirements of
Section 17A(b)(3)(F) of the Exchange Act.\20\
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\20\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17ad-22(e)(6)(i) Under the Exchange Act
Rule 17ad-22(e)(6)(i) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to cover, if the
covered clearing agency provides central counterparty services, its
credit exposures to 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.\21\
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\21\ 17 CFR 240.17ad-22(e)(6)(i).
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As described above, OCC proposes to update its STANS Methodology
Description to support the clearing of European-style binary options,
which OCC does not currently address in its margin methodology. OCC's
initial adoption of the STANS Methodology Description was consistent
with Rule 17ad-22(e)(6)(i) under the Exchange Act, in part, because it
covered various components of STANS designed to address the particular
attributes of the products that OCC clears, including European-style
options, and described OCC's process for addressing the entrance of new
products, such as identifying and separately processing risk factors
with incomplete data sets that lack sufficient data.\22\
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\22\ See Exchange Act Release No. 91079 (Feb. 8, 2021), 86 FR
9410, 9413 (Feb. 12, 2021) (File No. SR-OCC-2020-016).
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The additions to the STANS Methodology Description are clearly
designed to consider the risks and attributes of binary options
products as well as the market for such products. With regard to the
product itself, OCC's proposal to operate within a Black-Scholes
options pricing framework initially using the forward price of the
underlying asset and the implied volatility of the corresponding
vanilla option to price a binary option is consistent with the
consideration of the particular attributes of the binary options
products.\23\ With regard to potential market issues such as
illiquidity at the launch of a given binary option, the proposed
methodology includes an adjustment term that is designed to capture
differences between market prices and theoretical prices and ensure
that the price of the binary option aligns with market price. Further,
OCC will apply its smoothing algorithm, using market quotes, to ensure
that prices conform to specific constraints related to bid-ask spreads,
monotonicity, and put-call parity.
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\23\ The price of the underlying security and implied volatility
are notable risk factors utilized in STANS. See Exchange Act Release
No. 95319 (July 19, 2022), 87 FR 44167, 44168 (July 25, 2022) (File
No. SR-OCC-2022-001) (stating that the majority of risk factors
utilized in STANS are the returns on individual equity securities;
however, a number of other risk factors may be considered,
including, among other things, returns on implied volatility).
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Accordingly, the Commission finds that the Proposed Rule Change is
consistent with the requirements of Rule 17ad-22(e)(6)(i).\24\
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\24\ 17 CFR 240.17ad-22(e)(6)(i).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, with the requirements of Section
17A(b)(3)(F) of the Exchange Act,\25\ and Rule 17ad-22(e)(6)(i)
thereunder.\26\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ 17 CFR 240.17ad-22(e)(6)(i).
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It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \27\ that the proposed rule change (SR-OCC-2026-003) be,
and hereby is, approved.\28\
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\27\ 15 U.S.C. 78s(b)(2).
\28\ In approving the Proposed Rule Change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-10453 Filed 5-26-26; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 27, 2026.
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