67392 Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices 

13 15 U.S.C. 78s(b)(2)(B). 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Notice of Filing infra note 5, at 83 FR 55918. 

4 In Partial Amendment No. 1, OCC corrected an 

error in Exhibit 5 without changing the substance 

of the Proposed Rule Change. References to the 

Proposed Rule Change from this point forward refer 

to the Proposed Rule Change, as amended by Partial 

Amendment No. 1. 

5Securities Exchange Act Release No. 84524 

(Nov. 2, 2018), 83 FR 55918 (Nov. 8, 2018) (SR– 

OCC–2018–014) (‘‘Notice of Filing’’). OCC also filed 

a related advance notice (SR–OCC–2018–804) 

(‘‘Advance Notice’’) with the Commission pursuant 

to Section 806(e)(1) of Title VIII of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, 

entitled the Payment, Clearing, and Settlement 

Supervision Act of 2010 and Rule 19b–4(n)(1)(i) 

under the Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 

78s(b)(1) and 17 CFR 240.19b–4, respectively. The 

Advance Notice was published in the Federal 

Register on November 26, 2018. Securities 

Exchange Act Release No. 84626 (Nov. 19, 2018), 

83 FR 60541 (Nov. 26, 2018) (SR–OCC–2018–804). 

6 In December 2015, the Commission approved a 

proposed rule change and issued a Notice of No 

Objection to an advance notice filing by OCC to its 

modify margin methodology by more broadly 

incorporating variations in implied volatility within 

STANS. See Securities Exchange Act Release No. 

76781 (Dec. 28, 2015), 81 FR 135 (Jan. 4, 2016) (SR– 

OCC–2015–016) and Securities Exchange Act 

Release No. 76548 (Dec. 3, 2015), 80 FR 76602 (Dec. 

9, 2015) (SR–OCC–2015–804). 

7Using the Black-Scholes options pricing model, 

the implied volatility is the standard deviation of 

the underlying asset price necessary to arrive at the 

market price of an option of a given strike, time to 

maturity, underlying asset price and the current 

risk-free rate. 

8OCC’s Implied Volatility Model excludes: (i) 

Binary options, (ii) options on commodity futures, 

(iii) options on U.S. Treasury securities, and (iv) 

Asians and Cliquets. These products were relatively 

new products at the time that OCC completed its 

last implied volatility margin methodology changes, 

and OCC had de minimus open interest in those 

options. OCC uses its Implied Volatility Model 

specifically for options that have a residual tenor 

of less than three years (‘‘Shorter Tenor Options’’). 

or otherwise in furtherance of the 

purposes of the Act. If the Commission 

takes such action, the Commission shall 

institute proceedings under Section 

19(b)(2)(B) 13 of the Act to determine 

whether the proposed rule change 

should be approved or disapproved. 

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 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NYSENAT–2018–27 on the subject line. 

Paper Comments 

• 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–NYSENAT–2018–27. 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 (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make available publicly. All 

submissions should refer to File 

Number SR–NYSENAT–2018–27, and 

should be submitted on or before 

January 18, 2019. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–28183 Filed 12–27–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–84879; File No. SR–OCC– 

2018–014] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Approving Proposed Rule Change, as 

Modified by Partial Amendment No. 1, 

Related to The Options Clearing 

Corporation’s Margin Methodology for 

Incorporating Variations in Implied 

Volatility 

December 20, 2018. 

I. Introduction 

On October 22, 2018, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change SR–OCC–2018– 

014 (‘‘Proposed Rule Change’’) pursuant 

to Section 19(b) of the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’) 1 and Rule 19b–4 2 thereunder to 

propose changes to OCC’s model for 

incorporating variations in implied 

volatility within OCC’s margin 

methodology, the System for Theoretical 

Analysis and Numerical Simulations.3

On October 30, 2018, OCC filed a 

partial amendment (‘‘Partial 

Amendment No. 1’’) to the Proposed 

Rule Change.4 The Proposed Rule 

Change, as modified by Partial 

Amendment No. 1, was published for 

public comment in the Federal Register 

on November 8, 2018,5 and the 

Commission received no comments 

regarding the Proposed Rule Change. 

This order approves the Proposed Rule 

Change. 

II. Background 

The System for Theoretical Analysis 

and Numerical Simulations (‘‘STANS’’) 

is OCC’s methodology for calculating 

margin. STANS includes econometric 

models that incorporate a number of 

risk factors. OCC defines a risk factor in 

STANS as a product or attribute whose 

historical data is used to estimate and 

simulate the risk for an associated 

product. 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 risk 

factors.6

As a general matter, the implied 

volatility of an option is a measure of 

the expected future volatility of the 

option’s underlying security at 

expiration, which is reflected in the 

price of the option.7 Changes in implied 

volatility, therefore, result in changes to 

an option’s value. In effect, the implied 

volatility is responsible for that portion 

of the premium that cannot be attributed 

to the then-current intrinsic value of the 

option (i.e., the difference between the 

price of the underlying and the exercise 

price of the option), discounted to 

reflect its time value. 

STANS includes a model that 

simulates variations in implied 

volatility for most of the option 

contracts that OCC clears (‘‘Implied 

Volatility Model’’).8 The purpose of 


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9See Notice of Filing, 83 FR at 55919. 

10The VIX is a measure of the implied volatility 

of the of Standard & Poor’s 500 index (‘‘SPX’’). 

11See Notice of Filing, 83 FR at 55919. 

12See id. 

13See id. For example, the total margin 

requirements for one Clearing Member would have 

increased from $120 million on February 2, 2018 to 

$1.78 billion on February 5, 2018. See Notice of 

Filing, 83 FR at 55919, n. 22. 

14An exponentially weighted moving average is 

a statistical method that averages data in a way that 

gives more weight to the most recent observations. 

15OCC’s backtesting, which the Commission has 

reviewed and analyzed, demonstrated that coverage 

levels using the proposed model were substantially 

similar to the results obtained from the current 

model. See Notice, 83 FR at 55920. 

16 15 U.S.C. 78s(b)(2)(C). 

17 15 U.S.C. 78q–1(b)(3)(F). 

18 17 CFR 240.17Ad–22(e)(6)(i). 

19 15 U.S.C. 78q–1(b)(3)(F). 

20See supra note 15. 

OCC’s Implied Volatility Model is to 

ensure that the anticipated cost of 

liquidating options positions in an 

account recognizes the possibility that 

implied volatility could change during 

the two-business day liquidation time 

horizon and lead to corresponding 

changes in the market prices of the 

options. OCC, in turn, uses such 

anticipated costs to determine and 

collect the amount of margin necessary 

to collateralize the exposure that OCC 

could face in the event of a Clearing 

Member default. 

One component of the Implied 

Volatility Model is a forecast of the 

volatility of implied volatility. In the 

process of performing backtesting and 

impact analyses as well as comparing 

the Implied Volatility Model to industry 

benchmarks, OCC determined that its 

process for forecasting the volatility of 

implied volatility is extremely sensitive 

to sudden spikes in volatility, which 

can at times result in over-reactive 

margin requirements that OCC believes 

are unreasonable and procyclical.9 For 

example, on February 5, 2018, the Cboe 

Volatility Index (‘‘VIX’’) experienced a 

large amount of volatility.10 Based on its 

review and understanding of OCC’s 

analysis, the Commission understands 

that OCC’s Implied Volatility Model 

forecasted an extreme increase in the 

volatility of implied volatility in 

response to the increase in the VIX on 

February 5, 2018.11 Specifically, the 

Implied Volatility Model forecasted a 

volatility of implied volatility for an atthe-money, one-month tenor SPX 

position that was approximately 4 times 

larger than the comparable market 

index.12 This forecast caused aggregate 

margin requirements at OCC to jump 

more than 80 percent overnight due to 

the Implied Volatility Model, and 

margin requirements for certain 

individual Clearing Members increased 

by a factor of 10.13 Due in large part to 

the over-reaction of the Implied 

Volatility Model’s to the rise in the VIX, 

a future shock to the VIX during a time 

of market stress could result in an 

increase in margin requirements that 

likely would impose additional stresses 

on Clearing Members. 

The Proposed Rule Change would 

modify OCC’s Implied Volatility Model 

by introducing an exponentially 

weighted moving average 14 for the daily 

forecasted volatility of implied volatility 

risk factors. Specifically, when 

forecasting the volatility for each 

implied volatility risk factor, OCC 

would use an exponentially weighted 

moving average of forecasted volatilities 

over a specified look-back period rather 

than using unweighted daily forecasted 

volatilities. The Proposed Rule Change 

would change the Implied Volatility 

Model’s sensitivity to large, sudden 

shocks in market volatility when 

forecasting the volatility of implied 

volatility. Specifically, the Proposed 

Rule Change would result in a more 

measured initial response to such 

shocks while producing margin 

requirements that may remain elevated 

for a longer period of time following a 

market shock. Based on its analysis of 

data provided by OCC, the Commission 

understands that the margin 

requirements calculated with the 

current and proposed models would be 

very similar during less volatile periods, 

and that the likelihood that OCC would 

have sufficient margin to cover its 

exposures under normal market 

conditions would not decrease under 

the proposed model.15 However, the 

proposed model would present a more 

commensurate response to the extreme 

volatility increases in the market. 

III. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Exchange 

Act directs the Commission to approve 

a proposed rule change of a selfregulatory organization if it finds that 

such proposed rule change is consistent 

with the requirements of the Exchange 

Act and the rules and regulations 

thereunder applicable to such 

organization.16 After carefully 

considering the Proposed Rule Change, 

the Commission finds the proposal 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 proposal is consistent 

with Section 17A(b)(3)(F) of the 

Exchange Act 17 and Rule 17Ad– 

22(e)(6)(i) thereunder.18

A. Consistency With Section 

17A(b)(3)(F) of the Exchange Act 

Section 17A(b)(3)(F) of the Exchange 

Act requires that the rules of a clearing 

agency be designed to, among other 

things, assure the safeguarding of 

securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible, and, in 

general, to protect investors and the 

public interest.19 Based on its review of 

the record, the Commission believes 

that the proposed changes are designed 

to assure the safeguarding of securities 

and funds which are in OCC’s custody 

or control, and, in general, protect 

investors and the public interest for the 

reasons set forth below. 

First, margin deposits at OCC provide 

collateral to mitigate the potential 

default of a Clearing Member. As noted 

above, OCC uses STANS, including the 

Implied Volatility Model, to determine 

and collect the amount of margin 

necessary to collateralize the exposure 

that OCC could face in the event of a 

Clearing Member default. The Proposed 

Rule Change would change the Implied 

Volatility Model’s response to sudden, 

large changes in market volatility. As 

noted above, the margin requirements 

produced by the current model appear 

to be overly responsive to sudden, large 

shocks. Following implementation of 

the Proposed Rule Change, OCC’s 

margin methodology would produce a 

more measured initial response to a 

sudden, large change in market 

volatility while maintaining elevated 

margin requirements following such a 

shock. As described above, however, the 

coverage provided by OCC’s margin 

methodology following implementation 

of the Proposed Rule Change would 

likely be comparable to the coverage 

provided currently.20 Further, the 

proposal would result in margin 

requirements that remain elevated for a 

longer period of time following a market 

shock, which could provide further 

support for OCC’s ability to cover its 

potential future exposure to risk. 

For these reasons, the Commission 

believes that the Proposed Rule Change 

would enhance the Implied Volatility 

Model by enabling OCC to determine its 

margin requirements more precisely and 

to better reflect the risks and particular 

attributes of the products cleared by 

OCC, thereby allowing OCC to more 

effectively cover its credit exposure to 

its Clearing Members. By more precisely 

determining OCC’s credit exposure to its 

Clearing Members, the Proposed Rule 

Change is designed to help ensure that, 


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67394 Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices 

21 15 U.S.C. 78q–1(b)(3)(F). 

22 17 CFR 240.17Ad–22(e)(6)(i). 

23See supra note 15. 

24 17 CFR 240.17Ad–22(e)(6). 

25 In approving this Proposed Rule Change, the 

Commission has considered the proposed rules’ 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

26 15 U.S.C. 78s(b)(2). 

27 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 84589 

(Nov. 14, 2018), 83 FR 58633. 

4 15 U.S.C. 78s(b)(2). 

in the event of a Clearing Member 

default, OCC’s operations would not be 

disrupted and non-defaulting Clearing 

Members would not be exposed to 

losses that they cannot anticipate or 

control. In this way, the Proposed Rule 

Change is designed to help assure the 

safeguarding of securities and funds 

which are in the custody or control of 

OCC, or for which it is responsible, 

consistent with Section 17A(b)(3)(F) of 

the Exchange Act. 

Second, the Proposed Rule Change 

could reduce the likelihood that OCC’s 

margin requirements impose sudden 

and excessive stress on Clearing 

Members during times of broader 

market stress. As described above, the 

current Implied Volatility Model could 

result in dramatic increases in Clearing 

Member margin requirements in 

response to a sudden, large shock in 

market volatility. Based on its review of 

OCC’s data comparing margin 

requirements to market data on 

February 5, 2018, the Commission 

understands that the size of such an 

increase would not necessarily be 

commensurate with the risk of the 

Clearing Member’s portfolio because, as 

described above, the volatility of 

implied volatility forecasted by the 

current model on that day was 4 times 

the size of a comparable market index, 

resulting in margin requirements for 

some Clearing Members that rose by a 

factor of 10. Imposing a large, 

unexpected increase in margin 

requirements could impose a large, 

unexpected stress on a Clearing Member 

during a period of high volatility. The 

Commission believes that reducing the 

likelihood of unnecessarily large and 

unexpected stresses on Clearing 

Members could help to lessen the risk 

of Clearing Member defaults. Reducing 

the risk of Clearing Member defaults 

could also reduce the likelihood of 

contagion during times of market stress 

because Clearing Members, particularly 

large Clearing Members, tend to be 

active participants in multiple asset 

markets. Therefore, the Commission 

believes that the Proposed Rule Change 

provides for rules designed, in general, 

to protect investors and the public 

interest. 

Accordingly, and for the reasons 

stated above, the Commission believes 

that the Proposed Rule Change is 

consistent with Section 17A(b)(3)(F) of 

the Exchange Act.21

B. Consistency With Rule 17Ad–22(e)(6) 

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 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.22

The Proposed Rule Change is 

designed to better align the margin 

requirements produced by OCC’s 

margin methodology with the level of 

risk posed by changes in market 

volatility. The component of the current 

Implied Volatility Model that forecasts 

the volatility of implied volatility is 

very sensitive to sudden, large changes 

in market volatility, as evidenced by the 

model’s reaction to the large, sudden 

spike in market volatility observed on 

February 5, 2018 discussed above, 

which produced dramatic increases in 

Clearing Member margin requirements. 

The Proposed Rule Change to the 

Implied Volatility Model would reduce 

the sensitivity of the model to sudden, 

large changes in market volatility, and, 

as demonstrated by OCC’s backtesting, 

would be unlikely to reduce the level of 

coverage.23

The Commission believes that 

revising the Implied Volatility Model 

could produce margin requirements that 

are more precise and better reflect the 

risks and particular attributes of the 

products cleared by OCC. The 

Commission further believes that such 

changes could produce margin levels 

that are commensurate with the risks of 

the products being cleared. Accordingly, 

based on the foregoing, the Commission 

believes that the Proposed Rule Change 

is consistent with Exchange Act Rule 

17Ad–22(e)(6)(i).24

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, the requirements of 

Section 17A of the Exchange Act 25 and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,26

that the Proposed Rule Change (SR– 

OCC–2018–014) be, and hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.27

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–28180 Filed 12–27–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–84900; File No. SR–MIAX– 

2018–35] 

Self-Regulatory Organizations; Miami 

International Securities Exchange LLC; 

Notice of Designation of Longer Period 

for Commission Action on Proposed 

Rule Change To Amend Exchange 

Rule 100, Definitions; Rule 515, 

Execution of Orders and Quotes; and 

Rule 503, Openings on the Exchange 

December 20, 2018. 

On November 9, 2018, Miami 

International Securities Exchange, LLC 

(‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend Exchange Rules 100 

(Definitions), 515 (Execution of Orders 

and Quotes), and 503 (Openings on the 

Exchange). The proposed rule change 

was published for comment in the 

Federal Register on November 20, 

2018.3 The Commission has received no 

comments on the proposal. 

Section 19(b)(2) of the Act 4 provides 

that within 45 days of the publication of 

notice of the filing of a proposed rule 

change, or within such longer period up 

to 90 days as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or as to which the 

self-regulatory organization consents, 

the Commission shall either approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether the 

proposed rule change should be 

disapproved. The 45th day for this filing 

is January 4, 2019. 

The Commission is extending the 45- 

day time period for Commission action 

on the proposed rule change. The 

Commission finds that it is appropriate 


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