Notice2026-15928
Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change by The Options Clearing Corporation To Amend Its System for Theoretical Analysis and Numerical Simulation Methodology Description To Incorporate Options Implied Interest Rates as an Additional Source of Interest Rates Inputs for Constructing the Interest Rate Discount Curve Used in Options Pricing
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 6, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 150 (Thursday, August 6, 2026)</title>
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[Federal Register Volume 91, Number 150 (Thursday, August 6, 2026)]
[Notices]
[Pages 50908-50911]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-15928]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106030; File No. SR-OCC-2026-005]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change by The Options Clearing
Corporation To Amend Its System for Theoretical Analysis and Numerical
Simulation Methodology Description To Incorporate Options Implied
Interest Rates as an Additional Source of Interest Rates Inputs for
Constructing the Interest Rate Discount Curve Used in Options Pricing
August 3, 2026.
I. Introduction
On June 5, 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 incorporate options implied
interest rates as an additional source of interest rates inputs for
constructing the interest rate discount curve used in options pricing
(hereinafter ``Proposed Rule Change''). The Proposed Rule Change was
published for comment in the Federal Register on June 23, 2026.\3\ The
Commission did not receive comments regarding the Proposed Rule Change.
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. 105712 (Jun. 17, 2026), 91 FR
37461 (Jun. 23, 2026) (File No. SR-OCC-2026-005) (``Notice'').
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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
[[Page 50909]]
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 designed to cover the market risk associated with a Clearing
Member's positions during the period that OCC would take to liquidate
those positions in the event of a Clearing Member default. OCC employs
its proprietary risk management system, STANS, to calculate each
Clearing Member's margin requirements.\6\
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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 37462.
\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>.
\6\ An overview of the STANS methodology is posted on OCC's
public website, available at <a href="https://www.theocc.com/Risk-Management/Margin-Methodology">https://www.theocc.com/Risk-Management/Margin-Methodology</a>. OCC makes the confidential STANS Methodology
Description available to Clearing Members who execute a non-
disclosure agreement. See also Exchange Act Release No. 91079 (Feb.
8, 2021), 86 FR 9410 (Feb. 12, 2021) (File No. SR-OCC-2020-016).
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In the STANS methodology, the interest rate discount curve
(``discount curve'') is a critical input for OCC's pricing models. OCC
constructs the discount curve using industry standard benchmark rates
and instruments. Currently, OCC states that it uses only the Secured
Overnight Financing Rate (``SOFR'') based discount curve.\7\ However,
OCC has observed that the SOFR-based discount curve may not always
align with the rates implied by the options market, and market
participants likewise have reported similar discrepancies in OCC's in-
the-money options marks for long-dated SPX option expiries,
specifically that the SOFR rates used by OCC are systematically below
the options implied interest rates.\8\
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\7\ See Notice, 91 FR at 37462, n. 6. See also Exchange Act
Release No. 93371 (Oct. 18, 2021), 86 FR 58704, 58705 (Oct. 22,
2021) (SR-OCC-2021-011) (transitioning OCC's discount curve
methodology to SOFR-based rates).
\8\ See Notice, 91 FR at 37462.
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To address this misalignment, OCC proposes to amend its STANS
Methodology Description to incorporate box rates implied by the SPX
options market as an additional input to the discount curve
construction used in options pricing.\9\ As a supplement to the current
methodology, these market-derived box rates would allow OCC to
incorporate box rates into its theoretical mark calculations and, thus,
would increase smoothing output adherence to market quotations.\10\ OCC
states that it expects the proposed change to improve pricing accuracy
for deep-in-the-money options with medium- to long-term expirations,
resulting in more realistic margin requirement calculations that more
precisely reflect the risk of Clearing Member portfolios.\11\
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\9\ Box rates are interest rates derived from box spread trades.
A box spread is a delta-neutral options strategy that involves
simultaneously holding a bull call spread and a bear put spread with
the same strike prices and expiration dates, which essentially
creates a synthetic loan with an implied interest rate. See Notice,
91 FR at 37462-63, notes 15-17.
\10\ See Notice, 91 FR at 37462, note 8. (``Smoothing refers to
OCC's Implied Volatility Smoothing algorithm, which generates
implied volatilities for all listed and FLEX options. The discount
curve serves as an input to this algorithm and is used in computing
forward prices and option valuations throughout the smoothing
process.'')
\11\ See Notice, 91 FR at 37462.
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A. Overview of Discount Curve Inputs
The STANS methodology utilizes large-scale Monte Carlo simulations
to forecast price and volatility movements in determining a Clearing
Member's margin requirement.\12\ OCC's pricing model within its STANS
methodology uses the discount curve, along with dividends and implied
volatility, to specify underlying price dynamics. OCC uses this data,
along with Exchange-listed option price data, to calibrate the implied
borrow cost and implied volatility parameters used in its option
pricing models. In general, the discount curve is used to project
expected future cash flows for option derivatives and to discount them
back to present value.
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\12\ See OCC Rule 601.
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OCC has observed that a SOFR-based discount curve may not always
align with the rates implied by the options market, resulting in
pricing discrepancies, particularly for deep-in-the-money options.\13\
OCC states that, according to its analysis, the SOFR rate it uses
generally is at a discount compared to the rate implied from put-call
parity i.e., box rates, and historical data shows that box rates
generally exceed SOFR-based rates by approximately 20 to 40 basis
points across tenors, with varied spreads observed at shorter
tenors.\14\ OCC also states that market participants have reported
discrepancies between OCC's end-of-day option marks and observed market
prices for deep-in-the-money SPX options with long-dated expiries
across all option types.\15\
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\13\ See Notice, 91 FR at 37462. OCC states that at-the-money
options and out-of-the-money options are relatively less affected
because the calibration of implied borrow costs largely absorbs the
interest rate differences and it dampens the impact on the
calculated implied forwards. Id.
\14\ Id.
\15\ Id.
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B. Proposal To Incorporate Box Rates
To address these pricing discrepancies, OCC proposes to amend the
STANS Methodology Description to incorporate interest rates implied by
the SPX options market as inputs for constructing the discount curve.
The incorporation of box rates would supplement OCC's current
methodology, which uses SOFR rates as the primary input for discount
curve modeling.
First, OCC would estimate such implied interest rates by sourcing
market quotes for SPX European-style options and calculating their mid-
prices from the average of the bid and ask. Then, using these mid-
prices, OCC would apply a proprietary regression technique to derive
box rates.\16\ SPX options typically extend to approximately five years
out; as such, OCC would extend the term structure of the discount curve
by applying a basis adjustment to longer term SOFR swap rates to create
a curve that extends to approximately 50 years.\17\ OCC states that
this approach would capture the market's cost of capital for equity
options, which OCC has observed would typically run 20 to 40 basis
points higher than SOFR-based rates.\18\
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\16\ OCC states that using mid-prices is consistent with common
market practice and produces more stable and reliable results than
working directly with bid and ask spreads because midpoint prices
provide a neutral estimate of prevailing market value by mitigating
the effect of bid-ask spread variability. See Notice, 91 FR at
37463.
\17\ See Notice, 91 FR at 37463, note 19. (``The basis
adjustment would be calculated as the observed spread between box
rates and SOFR rates at the longest available box rate expiry,
applied as a constant adjustment to SOFR rates beyond that point.'')
\18\ See Notice, 91 FR at 37463. As part of SR-OCC-2026-005, OCC
filed confidential Exhibit 3C containing data underlying its impact
analysis. OCC states that the proposal would result in a modest
reduction in the aggregate margin collected, but that individual
portfolios may experience varying effects depending on their
composition. See Notice, 91 FR at 37463. For example, ``a single-day
impact assessment for a typical business date in November 2025
indicates a modest total margin reduction of approximately $141
million, or approximately 0.27% in relative terms.'' Id. OCC states
that portfolios with a greater concentration of deep-in-the-money
options are likely to see a more pronounced margin impact since the
impact of discount rates is higher in such options. Id. OCC also
states that ``[i]n all cases, these adjustments are a consequence of
correcting existing mispricing in option prices thereby aligning
margin requirements more closely with actual risk.'' Id.
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The proposal would revise Section 3.2 in the STANS Methodology
Description, which currently provides for three legacy groups of input
data available for constructing the U.S. dollar discount curve: (1)
cash rates, such as SOFR, (2) contiguous interest rate futures, and (3)
[[Page 50910]]
interest rate swaps.\19\ The proposal would expand the input data
sources by adding a fourth input source to the list, namely, interest
rates over the short and medium term implied by market quotes for
options and other derivatives. Under the proposal, OCC would be able to
use box rates derived from market quotes of standard SPX options, where
available. As amended, Section 3.2 also would describe the process of
extending the curve beyond available box rates to maintain continuity
across the entire term structure, thus allowing OCC to extrapolate
beyond the longest available expiration of standard SPX options using
adjusted SOFR swap rates.
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\19\ Not all of these sources are used under the current
approach nor would be used under the proposal. See Notice, 91 FR at
37463.
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Further proposed changes to Section 3.2 of the STANS Methodology
Description include replacement of specific maturity details with
generalized timeframes so that, for example, cash rates would span from
``overnight (i.e., one day) to a few months'' rather than listing
specific tenors. Likewise, under the proposal, the term ``contiguous''
would be removed from the interest rate futures discussion, as would
the last sentence on seamless selection changes. Other changes in
Section 3.2 would revise terminology from ``yield curve'' to ``discount
curve'', as well as provide additional clarifying context and remove
certain references to algorithmic notations. The proposal would
eliminate entirely from Section 3.2 the cash instruments subsection,
which references legacy instrument-specific details related to the
construction of the interest rate curve before OCC transitioned away
from LIBOR to SOFR transition.\20\
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\20\ The proposal would make non-substantive formatting,
grammatical, and other minor updates throughout the methodology
document, such as renumbering certain numerical computations to
accurately reflect proposed deletions. See Notice, 91 FR at 37463.
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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.\21\ 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.'' \22\
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\21\ 15 U.S.C. 78s(b)(2)(C).
\22\ 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,\23\ and Rule 17ad-22(e)(6)(i) thereunder, as
described in detail below.\24\
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ 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 Act \25\ requires, in part, 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.
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC uses its proprietary risk management system, STANS, to set
risk-based margin requirements for its Clearing Members to address the
credit risk it faces as a central counterparty in the event of a
Clearing Member default. Pricing models outlined in OCC's STANS
Methodology Description help inform the calculation of such margin
requirements. The interest rate discount curve is a crucial component
of these pricing models and is solely based on the secured overnight
financing rate, but OCC and certain Clearing Members have stated the
discount curve calculation is misaligned with current markets. They
noted that the SOFR rates used by OCC to construct its discount curve
are systematically below the options implied interest rates, especially
for deep in-the-money SPX options for long-dated expiries across all
option types. To address this mispricing and obtain a more accurate
modeling of margin requirements, the proposal would incorporate box
rates as a supplemental input in the discount curve construction.
Addressing the pricing discrepancies described above would provide
a more accurate means of constructing the discount curve as an input to
pricing options. More accurate pricing would, in turn, improve OCC's
ability to assess its credit exposures and collect an appropriate
amount of margin collateral to address such exposures. Collecting an
appropriate amount of margin collateral would increase the likelihood
that OCC is able to risk manage the default of a Clearing Member
without recourse to loss mutualization through the use of Clearing Fund
assets of non-defaulting Clearing Members, which supports the
safeguarding of securities and funds of such non-defaulting members in
OCC's custody or control or for which it is responsible.
Accordingly, the Proposed Rule Change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\26\
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\26\ Id.
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B. Consistency With Rule 17ad-22(e)(6) Under the Exchange Act
Exchange Act Rule 17Ad-22(e)(6) requires that a covered clearing
agency establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, among
other things, considers, and produces margin levels commensurate with,
the risks and particular attributes of each relevant product,
portfolio, and market.\27\
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\27\ 17 CFR 240.17Ad-22(e)(6)(i).
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As stated above, the proposal seeks to address the discrepancy
noted by OCC and certain Clearing Members regarding one of the inputs
underlying pricing models used to set margin requirements. OCC and its
Clearing Members have observed that the SOFR-based discount curve used
in margin-setting pricing models may not always align with the rates
implied by the options market and that SOFR rates used by OCC are
systematically below the options implied rates, particularly impacting
deep in-the-money options marks for long-dated SPX option expiries
across all option types. To address this misalignment, OCC proposes to
supplement the SOFR-based input with box interest rates implied by the
SPX options market. Additionally, OCC proposes to establish a process
of extending the curve beyond available box rates, which typically
extend to approximately five years out, to maintain continuity across
the entire term structure, and allow for extrapolation beyond the
longest available expirations of standard SPX options using adjusted
SOFR swap rates.
The Proposed Rule Change would help improve pricing accuracy,
especially for deep-in-the-money options with medium- to long-term
expirations by aligning margin requirements and OCC's credit risk
management more closely with the
[[Page 50911]]
current market. The proposal would, therefore, result in more accurate
calculations for margin requirements commensurate with risks and
particular attributes of the products it clears.
Accordingly, the Proposed Rule Change is consistent with the
requirements of Rule 17ad-22(e)(6) under the Act.\28\
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\28\ 17 CFR 240.17ad-22(e)(6).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, with the requirements of Section
17A(b)(3)(F) of the Exchange Act,\29\ and Rule 17ad-22(e)(6)(i)
thereunder.\30\ It is therefore ordered pursuant to Section 19(b)(2) of
the Exchange Act \31\ that the proposed rule change (SR-OCC-2026-005)
be, and hereby is, approved.\32\
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 17 CFR 240.17ad-22(e)(6)(i).
\31\ 15 U.S.C. 78s(b)(2).
\32\ 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.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-15928 Filed 8-5-26; 8:45 am]
BILLING CODE 8011-01-P
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