85788 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

2To facilitate arbitrage, among other things, each 

day a Fund would publish a basket of securities and 

cash that, while different from the Fund’s portfolio, 

is designed to closely track its daily performance. 

3All entities that currently intend to rely on the 

Order are named as applicants. Any other entity 

that relies on the Order in the future will comply 

with the terms and conditions of the Order and the 

terms and conditions of the Reference Order that 

are incorporated by reference into the Order. 

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

2 17 CFR 240.19b–4. 

Branch Chief, at (202) 551–6825 

(Division of Investment Management, 

Chief Counsel’s Office). 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained via the Commission’s 

website by searching for the file 

number, or for an applicant using the 

Company name box, at http://

www.sec.gov/search/search.htm or by 

calling (202) 551–8090. 

Applicants 

1. The Trust is a statutory trust 

organized under the laws of Delaware 

and will consist of one or more series 

operating as a Shielded Alpha ETFs. 

The Trust is registered as an open-end 

management investment company 

under the Act. Applicants seek relief 

with respect to Funds (as defined 

below), including an initial Fund (the 

‘‘Initial Fund’’). The Funds will operate 

as Shielded Alpha ETFs as described in 

the Reference Order.2

2. The Initial Adviser is a corporation 

organized under the laws of Colorado 

and will be the investment adviser to 

the Initial Fund. Subject to approval by 

the Trust’s board of trustees, an Adviser 

(as defined below) will serve as 

investment adviser to each Fund. The 

Initial Adviser is, and any other Adviser 

will be, registered as an investment 

adviser under the Investment Advisers 

Act of 1940 (‘‘Advisers Act’’). The 

Adviser may enter into sub-advisory 

agreements with other investment 

advisers to act as sub-advisers with 

respect to the Funds (each a ‘‘SubAdviser’’). Any Sub-Adviser to a Fund 

will be registered under the Advisers 

Act. 

3. The Distributor is a corporation 

organized under the laws of Colorado 

and a broker-dealer registered under the 

Securities Exchange Act of 1934, as 

amended, and will act as the principal 

underwriter of Shares of the Funds. 

Applicants request that the requested 

relief apply to any distributor of Shares, 

whether affiliated or unaffiliated with 

the Adviser and/or Sub-Adviser 

(included in the term ‘‘Distributor’’). 

Any Distributor will comply with the 

terms and conditions of the Order. 

Applicants’ Requested Exemptive Relief 

4. Applicants seek the requested 

Order under section 6(c) of the Act for 

an exemption from sections 2(a)(32), 

5(a)(1), 22(d) and 22(e) of the Act and 

rule 22c–1 under the Act, and under 

sections 6(c) and 17(b) of the Act for an 

exemption from sections 17(a)(1) and 

17(a)(2) of the Act. The requested Order 

would permit applicants to offer Funds 

that operate as Shielded Alpha ETFs. 

Because the relief requested is the same 

as certain of the relief granted by the 

Commission under the Reference Order 

and because the Initial Adviser has 

entered into a licensing agreement with 

Blue Tractor Group LLC, or an affiliate 

thereof, in order to offer Funds that 

operate as Shielded Alpha ETFs, the 

Order would incorporate by reference 

the terms and conditions of the same 

relief of the Reference Order. 

5. Applicants request that the Order 

apply to the Initial Fund and to any 

other existing or future registered openend management investment company 

or series thereof that: (a) Is advised by 

the Initial Adviser or any entity 

controlling, controlled by, or under 

common control with the Initial Adviser 

(any such entity, along with the Initial 

Adviser, included in the term 

‘‘Adviser’’); (b) operates as a Shielded 

Alpha ETF as described by the 

Reference Order; and (c) complies with 

the terms and conditions of the Order 

and the terms and conditions of the 

Reference Order that are incorporated 

by reference into the Order (each such 

company or series and the Initial Fund, 

a ‘‘Fund’’).3

6. Section 6(c) of the Act provides that 

the Commission may exempt any 

person, security or transaction, or any 

class of persons, securities or 

transactions, from any provisions of the 

Act, if and to the extent that such 

exemption is necessary or appropriate 

in the public interest and consistent 

with the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the Act. Section 17(b) 

of the Act authorizes the Commission to 

exempt a proposed transaction from 

section 17(a) of the Act if evidence 

establishes that the terms of the 

transaction, including the consideration 

to be paid or received, are reasonable 

and fair and do not involve 

overreaching on the part of any person 

concerned, and the transaction is 

consistent with the policies of the 

registered investment company and the 

general purposes of the Act. Applicants 

submit that for the reasons stated in the 

Reference Order the requested relief 

meets the exemptive standards under 

sections 6(c) and 17(b) of the Act. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Eduardo A. Aleman, 

Deputy Secretary. 

[FR Doc. 2020–28763 Filed 12–28–20; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–90763; File No. SR–OCC– 

2020–016] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Proposed Rule Change 

Concerning The Options Clearing 

Corporation’s System for Theoretical 

Analysis and Numerical Simulation 

(‘‘STANS’’) Methodology 

Documentation 

December 21, 2020. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’ 

or ‘‘Exchange Act’’),1 and Rule 19b-4 

thereunder,2 notice is hereby given that 

on December 9, 2020, 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 by OCC. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

This proposed rule change by OCC 

would adopt a new document 

describing OCC’s System for Theoretical 

Analysis and Numerical Simulation 

(‘‘STANS’’), which OCC uses to 

calculate daily and intra-day margin 

requirements for its Clearing Members 

(such document being the ‘‘STANS 

Methodology Description’’). OCC also 

proposes to make conforming and other 

non-substantive changes to its Margin 

Policy. 

The proposed STANS Methodology 

Description is submitted without 

marking in confidential Exhibit 5A to 

SR–OCC–2020–016 because this 

document is being submitted in its 

entirety as new rule text. The proposed 

changes to OCC’s current rule text 

related to the STANS methodology, 

known as the Margins Methodology, are 

contained in confidential Exhibit 5B to 

SR–OCC–2020–016. Material proposed 

to be added to the current rule text is 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85789 

3OCC has filed a proposed rule change with the 

Commission to adopt a new Third-Party Risk 

Management Framework (‘‘TPRMF’’), which would 

replace the Counterparty Credit Risk Management 

Policy and provide an overview of OCC’s approach 

to third-party risk management. That proposed rule 

change also includes conforming changes to OCC’s 

Margin Policy. See Securities Exchange Act Release 

No. 90406 (November 12, 2020), 85 FR 73582 

(November 18, 2020) (SR–OCC–2020–014). The 

proposed changes to the Margin Policy currently 

pending Commission review in SR–OCC–2020–014 

are marked in double underlining and double 

strikethrough text. 

4OCC’s By-Laws and Rules can be found on 

OCC’s public website: https://www.theocc.com/ 

Company-Information/Documents-and-Archives/ 

By-Laws-and-Rules. 

5See Securities Exchange Act Release No. 53322 

(February 15, 2006), 71 FR 9403 (February 23, 2006) 

(SR–OCC–2004–20). 

6See OCC Rule 601. 

7The ES component is established as the 

estimated average of potential losses higher than the 

value-at-risk (‘‘VaR’’) threshold. VaR refers to a 

statistical technique that is used in risk 

management to measure the potential risk of loss for 

a given set of assets over a particular time horizon. 

8Pursuant to OCC Rule 601(e)(1), OCC also 

calculates initial margin requirements for 

segregated futures accounts on a gross basis using 

the Standard Portfolio Analysis of Risk Margin 

Calculation System (‘‘SPAN’’). SPAN is separate 

from STANS and is therefore not described in the 

STANS Methodology Description. 

9See Securities Exchange Act Release No. 82473 

(January 9, 2018), 83 FR 2271 (January 16, 2018) 

(SR–OCC–2017–011), which describes how OCC 

periodically reviews the parameters and 

assumptions used by STANS pursuant to its Model 

Risk Management Policy and in accordance with 17 

CFR 240.17Ad–22(e)(6). 

10 17 CFR 240.17Ad–22(e)(6). 

11See Securities Exchange Act Release No. 74966 

(May 14, 2015), 80 FR 29784 (May 22, 2015) (SR– 

OCC–2015–010); Securities Exchange Act Release 

No. 76128 (December 28, 2015), 81 FR 135 (January 

4, 2016) (SR–OCC–2015–016); Securities Exchange 

Act Release No. 79818 (January 18, 2017), 82 FR 

8455 (January 25, 2017) (SR–OCC–2017–001); 

Securities Exchange Act Release No. 82161 

(November 28, 2017), 82 FR 57306 (December 4, 

2017) (SR–OCC–2017–022); Securities Exchange 

Act Release No. 84524 (November 2, 2018), 83 FR 

55918 (November 8, 2018) (SR–OCC–2018–014); 

Securities Exchange Act Release No. 85440 (March 

28, 2019), 84 FR 13082 (April 3, 2019) (SR–OCC– 

2019–002); Securities Exchange Act Release No. 

85755 (April 30, 2019), 87 FR 19815 (May 6, 2019) 

(SR–OCC–2019–004); Securities Exchange Act 

Release No. 86296 (July 3, 2019), 84 FR 32816 (July 

9, 2019) (SR–OCC–2019–005); Securities Exchange 

Act Release No. 87387 (October 23, 2019), 84 FR 

57890 (October 29, 2019) (SR–OCC–2019–010); 

Securities Exchange Act Release No. 89392 (July 24, 

2020), 85 FR 45938 (July 30,2020) (SR–OCC–2020– 

007); Securities Exchange Act Release No. 90139 

(October 8, 2020), 85 FR 65886 (October 16, 2020) 

(SR–OCC–2020–012). 

12 Id. 

marked by underlining and material 

proposed to be deleted is marked by 

strikethrough text. The proposed 

changes to the Margin Policy are 

contained in confidential Exhibit 5C to 

SR–OCC–2020–016.3 Material proposed 

to be added to the Margin Policy is 

marked by underlining and material 

proposed to be deleted is marked by 

strikethrough text. The proposed rule 

change does not require any changes to 

the text of OCC’s By-Laws or Rules. All 

terms with initial capitalization that are 

not otherwise defined herein have the 

same meaning as set forth in OCC’s ByLaws and Rules.4

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 

(1) Purpose 

Background 

The STANS methodology is OCC’s 

proprietary risk management system for 

calculating Clearing Member margin 

requirements.5 In general, STANS 

utilizes large-scale Monte Carlo 

simulations to forecast price and 

volatility movements in determining a 

Clearing Member’s margin 

requirement.6 The STANS margin 

requirement is calculated at the 

portfolio level of Clearing Member 

accounts with positions in marginable 

securities. The STANS margin 

requirement consists of an estimate of a 

99% expected shortfall (‘‘ES’’) 7 over a 

two-day time horizon with additional 

charges for model risk, stress tests, 

liquidation costs, and various add-ons. 

The STANS methodology is used to 

measure the exposure of portfolios of 

options, futures, and cash instruments 

cleared by OCC.8

OCC maintains technical 

documentation that describes in detail 

how the various quantitative 

components of STANS were developed 

and operate, including the various 

parameters and assumptions contained 

within those components 9 and the 

mathematical theories underlying the 

selection of those quantitative methods 

(‘‘Model Whitepapers’’). The Model 

Whitepapers are currently synthesized 

in a single document, the Margins 

Methodology, describing how STANS 

operates from end to end. The Margins 

Methodology includes material aspects 

of OCC’s risk-based margin system, 

which OCC must establish as a covered 

clearing agency under the Exchange Act 

and the rules promulgated thereunder, 

and which must be reasonably designed 

to, in part ‘‘(i) [produce] margin levels 

commensurate with [the] risks and 

particular attributes of each relevant 

product, portfolio, and market; (ii) 

[mark] participant positions to market 

and [collect] margin, including variation 

margin or equivalent charges if relevant, 

at least daily . . . ; (iii) [calculate] 

margin sufficient to cover its potential 

future exposure to participants in the 

interval between the last margin 

collection and the close out of positions 

following a participant default; (iv) [use] 

reliable sources of timely price data and 

[use] procedures and sound valuation 

models for addressing circumstances in 

which pricing data are not readily 

available or reliable; [and] (v) [use] an 

appropriate method for measuring credit 

exposure that accounts for relevant 

product risk factors and portfolio effects 

across products . . .’’ 10 The Margins 

Methodology also includes information 

that would not be considered material 

aspects of OCC’s methodology, such as 

internal procedural and administrative 

details, or details that could be 

reasonably and fairly implied by OCC’s 

existing rules or other information 

contained in the document. 

Over time, OCC has filed sections of 

the Margins Methodology with the 

Commission as proposed rule changes 

under Section 19(b)(1) of the Exchange 

Act and Rule 19b–4 thereunder to effect 

changes to individual components of 

STANS.11 Thus, those chapters of the 

Margins Methodology have become 

codified as OCC rule text under Section 

19(b)(1) of the Exchange Act and Rule 

19b–4. However, OCC now proposes to 

adopt a new STANS Methodology 

Description, which would replace the 

Margins Methodology document and 

codify the STANS methodology in its 

entirety under Section 19(b)(1) of the 

Exchange Act and Rule 19b–4. After 

adoption of the STANS Methodology 

Description, OCC would no longer 

maintain the Margins Methodology, 

neither as an OCC rule nor as an 

internal document. 

In connection with this proposed rule 

change, OCC would also retire as rule 

text any chapters of the Margins 

Methodology previously filed with the 

Commission, as the proposed STANS 

Methodology Description is intended to 

cover the material aspects of the STANS 

methodology. Those chapters of the 

Margins Methodology that OCC has 

previously filed under Section 19(b)(1) 

of the Exchange Act and Rule 19b–4 12

would be superseded in their entireties 

by new corresponding sections in the 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85790 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

13Section 19(b)(1) of the Exchange Act requires 

a self-regulatory organization (‘‘SRO’’) such as OCC 

to file with the Commission any proposed rule or 

any proposed change in, addition to, or deletion 

from the rules of such SRO. See 15 U.S.C. 78s(b)(1). 

Section 3(a)(27) of the Exchange Act defines ‘‘rules 

of a clearing agency’’ to mean its (1) constitution, 

(2) articles of incorporation, (3) bylaws, (4) rules, (5) 

instruments corresponding to the foregoing and (6) 

such ‘‘stated policies, practices and interpretations’’ 

(‘‘SPPI’’) as the Commission may determine by rule. 

See 15 U.S.C. 78c(a)(27). Exchange Act Rule 19b– 

4(a)(6) defines the term ‘‘SPPI’’ to include (i) any 

material aspect of the operation of the facilities of 

an SRO and (ii) statements made generally available 

to membership of, to all participants in, or to 

persons having or seeking access to facilities of an 

SRO that establishes or changes certain standards, 

limits, or guidelines. See 17 CFR 240.19b–4(a)(6). 

Rule 19b–4(c) provides, however, that an SPPI may 

not be deemed to be a proposed rule change if it 

is: (i) Reasonably and fairly implied by an existing 

rule of the SRO or (ii) concerned solely with the 

administration of the SRO and is not an SPPI with 

respect to the meaning, administration, or 

enforcement of an existing rule the SRO. See 17 

CFR 240.19b–4(c). 

14See Securities Exchange Act Release No. 82355 

(December 19, 2017), 82 FR 61058 (December 26, 

2017) (SR–OCC–2017–007). 

15See Securities Exchange Act Release No. 82473 

(January 9, 2018), 83 FR 2271 (January 16, 2018) 

(SR–OCC–2017–011). 

16OCC’s Model Risk Management Policy 

establishes detailed standards for Model 

Whitepapers and governance to adopt or make 

changes to a Model Whitepaper. See id. 

17The proposed STANS Methodology 

Description would also include the following nonsubstantive sections: (i) A table of contents; (ii) a 

list of references to academic and technical 

documents, both public and internal to OCC; and 

(iii) a table of defined terms used in the STANS 

Methodology Description. 

18OCC’s Margin Policy and Model Risk 

Management Policy provide more detail on OCC’s 

model monitoring activities. See supra notes 14 and 

15. 

19OCC’s Collateral Risk Management Policy and 

Margin Policy provide more detail on the function 

of OCC’s Pricing & Margins department. See 

Securities Exchange Act Release No. 82009 

(November 3, 2017), 82 FR 52079 (November 9, 

2017) (SR–OCC–2017–008) and supra note 14. 

STANS Methodology Description, as 

described in further detail herein. 

The current text of the Margins 

Methodology includes various details 

that would no longer be OCC rule text 

following the adoption of the proposed 

STANS Methodology Description. 

While the details that OCC proposes to 

remove are described in further detail 

herein, thematically, they consist of the 

following: 

• Details on OCC’s historical 

modeling practices and potential future 

enhancements, which do not describe 

how a model currently functions; 

• Details on the exact set of current 

products applied to each STANS 

component, which will change from 

time to time as OCC-cleared products 

are listed and delisted; 

• Various configuration choices made 

by OCC, such as data sources, model 

parameters, and model performance 

monitoring, that are not inherent to 

model selection or design and that do 

not materially impact a model’s results, 

which OCC may from time to time 

determine it should modify based on 

current market conditions and business 

practices; 

• Extensive, detailed testing results 

and explanatory rationale supporting a 

model; 

• Recitations of standard 

mathematical and economic theories/ 

techniques that are well-known in 

quantitative finance, readily found in 

public sources, and do not include OCCspecific modifications or applications; 

• Redundant descriptions of a model 

component appearing in multiple 

chapters; 

• Details on OCC’s implementation of 

a model in its internal technology 

systems and application of model 

results in operational procedures that 

are not inherent to a model and that 

OCC could change from time to time 

without affecting a model’s results; and 

• Manual margin adjustments and 

add-ons OCC employs pursuant to OCC 

rules, policies, and/or procedures 

outside the STANS methodology. 

The proposed STANS Methodology 

Description is intended to be a 

comprehensive description of STANS 

that is made available to Clearing 

Members and enable an informed reader 

to understand OCC’s modeling choices 

and the interconnectedness of STANS 

model components in producing OCC 

margin requirements. Therefore, OCC 

believes the details summarized above 

and described herein are extraneous to 

this purpose. Rather, OCC believes these 

types of details are more appropriately 

covered—to the extent these details are 

specific to an OCC model—in other OCC 

rules and policies, Model Whitepapers, 

or other internal OCC documentation. 

OCC also believes, as described in 

Item II.A.2 below, these details do not 

need to maintained as OCC ‘‘rules’’ as 

defined by Section 19(b)(1) of the 

Exchange Act and Rule 19b–4.13 These 

internal procedural and administrative 

details used by OCC’s model developers 

and model validators would: (1) Be 

reasonably and fairly implied by the 

proposed STANS Methodology 

Description, OCC’s Margin Policy,14

OCC’s Model Risk Management 

Policy,15 and other OCC rules; and/or 

(2) otherwise not be deemed to be 

material aspects of OCC’s margin 

setting-related operations. While OCC 

would not maintain these details in the 

STANS Methodology Description, OCC 

would continue to maintain and update 

these details when necessary in the 

Model Whitepapers and other internal 

OCC documentation, where these 

details are also currently found.16

STANS Methodology Description 

The proposed STANS Methodology 

Description would describe the material 

aspects of OCC’s margin methodology. 

Specifically, the STANS Methodology 

Description would include (i) an 

executive summary; (ii) descriptions of 

the quantitative model components of 

STANS; and (iii) ‘‘model utilities’’ 

intended to enhance the quality of 

model results. Each of these sections is 

described in further detail below.17

Executive Summary 

The STANS Methodology Description 

would provide an executive summary of 

STANS. This executive summary would 

describe how the purpose of STANS is 

to determine margin requirements for 

OCC’s Clearing Members (as described 

below), and in doing so meet various 

risk management goals and regulatory 

requirements for OCC. The executive 

summary would then describe the types 

of positions and collateral modeled 

through STANS, which include (i) 

valued securities and stock loans; (ii) 

equity, index, and futures options; (iii) 

Flexible Exchange (‘‘FLEX’’) options; 

(iv) equity and index futures; (v) 

volatility futures; and (vi) commodity 

futures. The executive summary would 

then provide an overview of the STANS 

methodology, which includes (i) 

econometric calibration; (ii) copula 

estimation and Monte Carlo simulation; 

(iii) volatility forecasting; (iv) theoretical 

underlying price generation; (v) 

theoretical derivatives price generation; 

and (vi) aggregation and margin 

calculation. These components are 

described in further detail below. The 

executive summary would then describe 

OCC’s model monitoring activities, 

which include (i) daily backtesting and 

(ii) ongoing parameter monitoring 

pursuant to monitoring plans 

established by OCC’s Model Risk 

Working Group (‘‘MRWG’’).18 The 

executive summary would then describe 

that STANS relies on price feeds of realtime market data to generate theoretical 

values in calculating margin 

requirements, and how OCC staff may 

use price editing techniques to improve 

the quality of pricing data for input into 

STANS.19 Lastly, the executive 

summary would briefly outline the 

organization of the sections of the 

STANS Methodology Description that 

substantively describe the core 

components of the STANS methodology 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85791 

20See supra note 14. 

21 ‘‘Kernel smoothing’’ is a statistical process by 

which data points are better fitted to an expected 

function using weighted averages and a ‘‘smoothing 

parameter.’’ 

22See Securities Exchange Act Release No. 76128 

and Securities Exchange Act Release No. 84524 for 

more information on the function and application 

of the implied volatility model. 

and the related data processing utilities 

used by STANS. 

The proposed text of this executive 

summary would replace current OCC 

rule text from the Margins 

Methodology’s introductory section. 

The current text, in addition to 

summarizing the STANS methodology 

as would the proposed text described 

above, includes descriptions of the 

following: 

• OCC’s historical modeling 

practices: OCC does not believe this 

historical information is needed to 

understand how the model functions. 

• Redundant details of the STANS 

methodology also found in the main 

body of both the Margins Methodology 

and the proposed STANS Methodology 

Description: This information, would 

already be detailed in the main body of 

the STANS Methodology Description, 

and OCC does not believe repeating it 

here is needed to understand how 

STANS functions. 

• A ‘‘documentation guide’’ 

describing what information can be 

found within various sections of the 

Margins Methodology: OCC does not 

believe this documentation guide is 

needed to understand how STANS 

functions, or to understand the 

organization of the proposed STANS 

Methodology Description. 

For the reasons stated above, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

STANS Methodology Components 

The STANS Methodology Description 

would next describe the components of 

OCC’s risk-based margin methodology, 

which OCC uses to cover the credit 

exposures presented by Clearing 

Members in accordance with Rule 

17Ad–22(e)(6). In particular, the STANS 

Methodology Description would 

describe the (i) calibration of various 

parameters and price data inputs used 

by OCC’s econometric and pricing 

models to create risk factors; (ii) 

construction of a copula from the risk 

factors that identifies correlations 

among simulated changes in the various 

risk factors; (iii) application of the 

simulated risk factor changes and 

correlations to actual data through 

Monte Carlo simulations that estimate 

10,000 possible scenarios for each risk 

factor, then estimation of theoretical 

prices for securities, derivatives, and 

futures using these theoretical scenarios; 

and (iv) application of the theoretical 

prices to actual Clearing Member 

positions to calculate margin 

requirements. 

i. Model and Econometric Calibration 

The STANS Methodology Description 

would describe how the quantitative 

models used by STANS incorporate 

various historical price data and 

econometric parameter inputs, which 

are used to estimate and simulate the 

risk for an associated product. These 

inputs consist of (i) returns on equity 

securities; (ii) implied volatilities; (iii) 

energy and commodity futures; (iv) 

treasury securities; (v) variance futures; 

and (vi) volatility futures. In total, there 

are currently approximately 40,000 of 

these inputs. The exact number of 

inputs is subject to change based on the 

types of products that OCC clears and 

OCC’s research on what risk factors 

correlate with prices changes in these 

products. Historical price data comes 

from OCC’s Pricing & Margins 

department, which obtains the data 

from external vendors and then 

validates it for use within STANS.20

STANS uses several models, described 

below, to calibrate this historical data 

and then transform the historical data 

into theoretical values that, along with 

specialized volatility forecast and 

marginal distribution parameters 

constructed by other OCC models 

described below, are used to construct 

a copula, described in the next step. 

Equity Returns 

STANS uses returns on equity 

securities that are based on current 

market prices. STANS first calibrates 

this data by simply creating a time 

series of logarithmic returns based on 

the closing, and in some cases opening, 

prices. This transformation does not 

require a separate model. The data is 

used to create econometric parameters 

and for pricing as described further 

below. 

Implied Volatility 

STANS uses implied volatility risk 

factors to measure the expected future 

volatility of an option’s underlying 

security at expiration, which is reflected 

in the current option premium in the 

market. To address variations in implied 

volatility, OCC models a volatility 

surface for options by incorporating into 

the econometric models underlying 

STANS certain risk factors called ‘‘pivot 

points.’’ These pivot points are chosen 

such that their combination allows 

STANS to identify changes in the level, 

skew, convexity, and term structure of 

the implied volatility surface. STANS 

generates a value for each of the nine 

pivot points for each eligible underlying 

asset and for each business day in the 

historical data period. To calibrate this 

data, for each of the nine pivot points 

STANS performs a kernel smoothing 

technique 21 on the historical data. 

Application of these pivot points 

enables STANS to simulate implied 

volatility scenarios, which are then used 

to create the specialized volatility 

forecast and marginal distribution 

parameters described below, and in the 

pricing of options through OCC’s option 

pricing models described further 

below.22

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on implied 

volatility. The current rule text also 

includes other information related to the 

implied volatility model. Specifically, 

the current rule text includes 

descriptions of the following: 

• Products eligible for implied 

volatility scenarios modeling in STANS: 

OCC does not believe the exact list of 

products to which this model is applied 

is needed to understand how the model 

functions, and this list may change from 

time to time as OCC-cleared products 

are listed and delisted. 

• Data sources used by STANS to 

perform the kernel smoothing 

technique: These data sources are 

configuration choices made by OCC that 

are not inherent to the model’s selection 

or design and that OCC could change 

from time to time without affecting the 

model’s results. 

• Rationale for the assumptions 

underlying implied volatility modeling 

of longer-tenor options: OCC does not 

believe that the justification for these 

model assumptions is needed to 

understand how the model currently 

functions. 

• Historical background on OCC’s 

decision to incorporate implied 

volatility modeling into STANS: OCC 

does not believe that this historical 

information is needed to understand 

how the model currently functions. 

• Model testing and validation results 

for the implied volatility model: OCC 

does not believe that the internal testing 

and validation performed to verify the 

model is fit for use is needed to 

understand how the model currently 

functions. 

OCC believes that this information is 

more appropriately covered in the 

Implied Volatility Scenarios Model 

Whitepaper and other internal OCC 

documentation rather than in OCC’s 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85792 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

23While OCC does not clear treasury securities or 

derivatives on such products, OCC permits Clearing 

Members to deposit treasury securities as margin 

collateral. 

24See Nelson, C.R. and Siegel, A.F., 

‘‘Parsimonious Modeling of Yield Curves,’’ 60 The 

J. of Bus. 4, 473–489 (1987) (describing the NelsonSiegel model). 

25 In addition to pricing treasury securities, 

STANS uses a Nelson-Siegel framework to simulate 

potential changes in interest rates. Refer to the 

below description of the interest rate curve model 

utility. 

26STANS also introduces extra ‘‘noise’’ into the 

bond prices to account for the bonds’ idiosyncratic 

behaviors and prevent the resulting treasury 

securities price movements from being perfectly 

correlated. 

27As described previously, pursuant to OCC’s 

Model Risk Management Policy OCC periodically 

reviews all parameters and assumptions used in 

STANS and they are subject to change. 

28See Securities Exchange Act Release No. 85440 

for further information on OCC’s synthetic futures 

model as applied to volatility index-based products. 

OCC notes that the synthetic futures model can also 

be used for other futures products, such as interest 

rate futures. See e.g., Securities Exchange Act 

Release No. 89392 and Securities Exchange Act 

Release No. 90139. 

rules for the reasons listed above. 

Therefore, OCC proposes to delete this 

rule text in its entirety without adding 

new, corresponding rule text in the 

STANS Methodology Description. 

Treasury Securities 

STANS prices treasury securities 23

using a Nelson-Siegel framework,24 a 

commonly used polynomial model for 

constructing the term structure of an 

interest rate and modeling changes in a 

yield curve.25 STANS constructs a 

theoretical yield curve using current 

and historical settlement prices for 

treasury securities. 

STANS calibrates this data by 

transforming the market prices into a 

time series of unobservable factors that 

represents the yield curve. STANS fits 

these Nelson-Siegel parameters using 

observed bond prices. In simulation, 

STANS creates ‘‘shocks’’ on theoretical 

Nelson-Siegel parameters 26 to create 

theoretical interest rate curves, which 

are in turn used to price treasury 

securities. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on U.S. Treasury 

bills and fixed rate notes, bonds, and 

strips. The current rule text also 

includes other information related to the 

treasury securities and interest rate 

model. Specifically, the current rule text 

includes the following: 

• Summary and introduction sections 

that describe OCC’s need to model 

treasury securities and interest rates and 

provide an overview of the U.S. 

Treasury securities market: OCC does 

not believe these background 

descriptions of the macroeconomic 

environment, found in public sources, 

are needed to understand how the 

model currently functions. 

• Restatements of mathematical 

definitions and equations describing the 

relationship between the forward and 

yield curves, and the payoff function for 

bonds used to describe all interest rate 

curves: This information, while relevant 

to understanding how the model 

functions, is foundational information 

commonly understood in quantitative 

finance and readily found in public 

academic sources. To the extent the text 

does not describe OCC’s application of 

these theories, OCC does not believe 

this information needs to be maintained 

in OCC’s rules. 

• Details on how OCC implemented 

the model in its technology systems: 

These implementation details relate to 

OCC’s internal administration of its 

technology systems and are not needed 

to understand how the model currently 

functions. Because these details are not 

inherent to the model’s selection or 

design, OCC could also change them 

from time to time without affecting the 

model’s results. 

• Redundant description of the 

copula constructed by STANS: This 

information, described further below, 

would already be detailed in the STANS 

Methodology Description section related 

to the construction of a copula, and OCC 

does not believe repeating it here is 

needed to understand how the model 

currently functions. 

OCC believes that this information is 

more appropriately covered in the 

Nominal Treasury Securities Model 

Whitepaper and other internal OCC 

documentation rather than in OCC’s 

rules for the reasons listed above. 

Therefore, OCC proposes to delete this 

rule text in its entirety without adding 

new, corresponding rule text in the 

STANS Methodology Description. 

Generic Futures 

Relying on current futures prices and 

time series of spot prices as inputs, 

STANS uses a generic futures model to 

price linear derivatives with limited 

term structures. Using basic economic 

assumptions that the relationship of 

spot prices to forward prices does not 

allow for arbitrage and that futures 

prices equal forward prices, or that any 

deviations from this are adequately 

addressed through costs implicit in 

carrying such positions,27 the model 

estimates and applies theoretical 

discount factors to the futures prices. 

These discount factors are based on a 

ratio of estimated spot prices on the 

underlying securities to the futures 

prices. 

Variance Futures 

STANS uses a specialized factor 

model to price variance futures, which 

uses historical data for both variance 

futures products and the Standard and 

Poor’s 500 Index (‘‘SPX’’). This model 

relies on basic assumptions that the 

short-term volatility of variance futures 

prices tends to revert towards a mean 

(i.e., volatility remains relatively close 

to an average value), but the long-term 

volatility is itself stochastic. Using these 

assumptions, STANS fits current values 

of the volatility and volatility mean 

reversion level, in addition to 

parameters describing the dynamics, to 

the current term structure of variance 

futures prices. Modeling variance 

futures prices based on these 

assumptions allows the theoretical 

prices to move in a realistic fashion. 

The model is first calibrated with 

historical data on variance futures 

prices and their recent dynamics. It then 

simulates prices for variance futures 

using two sets of random variables: (i) 

SPX returns; and (ii) changes in the 

long-term volatility level, represented 

by normal random numbers that STANS 

generates daily for use only with 

variance futures and that have no 

correlation with other theoretical 

numbers generated by STANS. Both 

random variables are used to simulate 

scenarios for prices of the variance 

futures tenors. 

Synthetic Futures 

Using logarithmic daily returns of 

active futures and various other 

securities, STANS uses a ‘‘synthetic 

futures’’ model to estimate prices of 

certain products such as volatility 

index-based futures (e.g., VIX futures). 

In general, the synthetic futures model 

creates an artificial (or ‘‘synthetic’’) time 

series of price innovations for actual 

futures contracts with approximately 

the same tenor as the actively-traded 

futures.28 This synthetic time series 

then serves as a uniform substitute for 

a time series of daily settlement prices 

for the actual futures contracts, which 

persists over many expiration cycles 

and thus can be used as a basis for 

econometric analysis. STANS performs 

this analysis by fitting the synthetic 

time series with associated volatility 

forecast and marginal distribution 

parameters, which are described below. 

The traded futures contracts are then 

mapped to the simulated return 

scenarios of the corresponding synthetic 

contracts to produce theoretical prices. 

The first synthetic contract in the series 

contains returns of the front contract on 

any given day. STANS switches the 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85793 

29See id. 

30See infra note 36. 

31The generalized hyperbolic distribution is a 

special type of continuous probability distribution. 

See Barndorff-Nielsen, O., ‘‘Exponentially 

decreasing distributions for the logarithm of particle 

size,’’ 353 Proc. of the Royal Soc’y of London. Series 

A, Mathematical and Physical Sci. 1674, 401–419 

(1977) (explaining the generalized hyperbolic 

distribution). 

32 ‘‘Return’’ refers generally to changes in a risk 

factor’s value over a time interval. Returns could 

take the form of simple differences, log returns, or 

other forms. 

33Except for (i) Chicago Volatility Index (‘‘VIX’’) 

futures, which are assumed to follow an asymmetric 

NRIG distribution, and (ii) implied volatility, which 

is assumed to follow a Student’s t-distribution. 

front contract of the series to the next 

one out on the day following the 

expiration date of the front contract. 

While the synthetic time series contain 

returns from different contracts, a return 

on any given date is constructed from 

prices of the same contract. Using a 

synthetic time series allows STANS to 

better approximate correlations between 

futures contracts of different tenors by 

creating more price data points and 

their margin offsets. These synthetic 

time series are mapped to the 

underlying futures product they are 

intended to represent. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on synthetic 

futures. The current rule text also 

includes other information related to the 

synthetic futures model. Specifically, 

the current rule text includes 

descriptions of the following: 

• Rationale for making changes to the 

model in 2019 29 and other historical 

information: OCC does not believe that 

this rationale and historical information 

is needed to understand how the model 

currently functions. 

• Equations for standard GARCH 

provided for introductory purposes: A 

description of OCC’s GARCH model, 

described further below, would already 

be detailed in the STANS Methodology 

Description section related to GARCH 

parameters, and OCC does not believe 

repeating it here is needed to 

understand how the model functions. 

Furthermore, the GARCH equations as 

implemented in STANS are modified 

from the standard GARCH equations 

provided here, and OCC believes this 

text could create confusion around the 

exact GARCH equations used in 

STANS.30

OCC believes that this information is 

more appropriately covered in the 

Synthetic Futures Model Whitepaper 

and other internal OCC documentation 

rather than in OCC’s rules for the 

reasons listed above. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

GARCH and NRIG Parameters 

STANS utilizes econometric 

parameters related to volatility forecasts 

and marginal distributions, and 

calibrates these parameters using tenyear histories of the data inputs 

described above. For both volatility 

forecasts and marginal distributions, 

STANS utilizes a generalized 

autoregressive conditional 

heteroskedasticity (‘‘GARCH’’) model. 

GARCH is a common statistical model 

for, in a time series of data, comparing 

the variance of one point in the time 

series to the previous point in the series 

rather than an arithmetic average of all 

the points in the series. This is 

particularly useful when the value of 

volatility at one point in a time series is 

known to be correlated with the 

volatility at previous points in the 

series. STANS estimates these GARCH 

parameters through a maximum 

likelihood estimation method. By fitting 

these GARCH parameters to a time 

series of risk factor innovations, STANS 

is able to remove the effects of volatility 

from—or ‘‘devolatilize’’—the risk factor 

time series so that the copula described 

below can estimate the correlations 

among the risk factors irrespective of 

their individual volatilities. 

To model volatility forecast 

parameters, STANS fits the time series 

of implied volatility pivot points 

(described above) into a Student’s tdistribution, a continuous probability 

distribution that is commonly used to 

estimate the mean of a population with 

a relatively small sample size and 

unknown standard deviation. To 

determine the appropriate degrees of 

freedom for a particular distribution, 

STANS applies an Anderson-Darling 

test. 

To model marginal distribution 

parameters, STANS utilizes a normal 

reciprocal inverse Gaussian (‘‘NRIG’’) 

distribution, a special case of the 

generalized hyperbolic distribution.31

The returns 32 of each risk factor used in 

STANS are assumed to exhibit returns 

in the shape of a symmetric NRIG 

distribution.33 Consequently, STANS 

calibrates NRIG parameters that are 

designed to describe the shape of every 

risk factor individually. 

As described previously, STANS 

constructs these GARCH and NRIG 

parameters from the historical price data 

and econometric parameter inputs that 

are first calibrated by the models 

described above. These historical price 

data and econometric parameters, and 

the resulting GARCH and NRIG 

parameters, are the foundational data 

elements used by the copula and pricing 

models described in the proceeding 

steps. 

The STANS Methodology Description 

would also describe the controls that 

may be placed on the GJR–GARCH 

parameters after their initial calibration. 

GARCH volatility forecasting models 

can be very reactive in certain market 

environments. As a result, OCC may 

implement parameter controls for risk 

factors and classes of risk factors, which 

are subject to periodic review and 

approval by the MRWG. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on GARCH 

forecasts. OCC notes that the current 

rule text describes the standard NRIG 

cumulative distribution function that is 

widely available in public academic 

texts. The proposed rule text would 

describe the same function in a reparameterized form that is proprietary 

to OCC. While the two forms are 

mathematically equivalent, the reparameterized form is used in the 

Econometric Model for Risk Factors in 

STANS Model Whitepaper and the 

proposed text would therefore be made 

consistent with the Model Whitepaper. 

The proposed rule text would also 

include a citation to an academic paper 

describing the rationale for the reparameterization. 

The current rule text also includes 

other information related to OCC’s 

GARCH model. Specifically, the current 

rule text includes descriptions of the 

following: 

• Introductory language describing 

the standard Glosten-JagannathanRunkle GARCH model and the use of a 

Student’s t-distribution: This 

information, while relevant to 

understanding how the model 

functions, is foundational information 

commonly understood in quantitative 

finance and readily found in public 

academic sources. To the extent this text 

does not describe OCC’s application of 

GARCH and the Student’s t-distribution, 

OCC does not believe this information 

needs to be maintained in OCC’s rules. 

• Details on variance forecasting (i.e., 

considering how securities volatility 

tends to clusters during certain periods) 

as rationale for model selection: OCC 

believes this information is extraneous 

to understanding how the GARCH 

model currently functions in STANS. 

• Variance forecasting as applied to 

the One-Day and Two-Day Scenarios 

model utility: This information, 

described further below, would already 

be detailed in the STANS Methodology 

Description section related to the OneDay and Two-Day Scenarios model 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85794 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

34 In probability theory, the cumulative 

distribution function of a random variable is the 

probability that the variable will be less than or 

equal to a set value. 

35A likelihood function is a tool used to measure 

the goodness of fit of a statistical model to sample 

data. 

36The Anderson-Darling test is a statistical test of 

whether a given sample of data is drawn from a 

population of data with a specific probability 

distribution. 

37 Gamma and Beta functions, respectively, are 

related one and two-variable functions that serve as 

foundations for various mathematical applications. 

38Based on OCC’s research, four degrees of 

freedom is in the conservative end of a range of 

degrees of freedom that are generally suitable fits 

for univariate distributions and is therefore 

appropriate for use in constructing the copula. 

39 In the context of linear transformations, an 

Eigenvector is a value that does not change 

direction when the transformation is applied to it, 

but rather changes in scale based on the application 

of a scalar factor, called an Eigenvalue. Eigenvectors 

and Eigenvalues are used to analyze the 

characteristics of linear transformations, including 

correlation/covariance matrices, and generate 

random variables with the equivalent correlation. 

utility, and OCC does not believe 

repeating it here is needed to 

understand how the model utility 

currently functions. 

• Mathematical rationale for the 

cumulative distribution function,34

inverse cumulative distribution 

function, and degrees of freedom for the 

Student’s t-distribution used by the 

GARCH model for implied volatility risk 

factors: OCC believes this information is 

extraneous to understanding how the 

GARCH model currently functions in 

STANS. This information is also 

foundational information commonly 

understood in quantitative finance and 

readily found in public academic 

literature. To the extent this text does 

not describe OCC’s application of these 

functions and the Student’s 

t-distribution, OCC does not believe this 

information needs to be maintained in 

OCC’s rules. 

• Explanatory mathematical formulas 

for variance forecasting of implied 

volatility risk factors and a likelihood 

function 35 and equations related to the 

Anderson-Darling test,36 including the 

Student’s t cumulative distribution 

function for integer values of ν: These 

details relate to implementation of the 

GARCH model in OCC’s internal 

technology systems, are not inherent to 

the model’s selection or design, and are 

not needed to understand how the 

model currently functions. 

• Expressions for the Gamma and 

Beta functions: 37 This information, 

while relevant to understanding how 

the model functions, is foundational 

information commonly understood in 

quantitative finance and readily found 

in public academic literature. To the 

extent the text does not describe OCC’s 

application of Gamma and Beta 

functions in the model, OCC does not 

believe this information needs to be 

maintained in OCC’s rules. 

OCC believes that this information is 

more appropriately covered in the 

underlying GARCH Model Whitepaper 

and other internal OCC documentation 

rather than in OCC’s rules for the 

reasons listed above. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

ii. Copula Construction 

The STANS Methodology Description 

would describe how a copula is used to 

quantify the joint behavior and 

dependence structure of the risk factors 

used by STANS. A copula is a 

mathematical construct used in 

probability theory to calculate the 

cumulative distribution of a set of 

random variables. The fitted copula can 

then be used by STANS to perform 

Monte Carlo simulations of theoretical 

prices for underlying securities and 

associated derivatives, which will be 

used in the aggregation step during 

which margin requirements are 

calculated. 

To estimate the copula, STANS first 

transforms two years of historical data 

for the risk factors produced by the 

models described above into a data set 

described by the Student’s t-distribution 

with four degrees for freedom.38 STANS 

then performs a singular value 

decomposition of this data set to obtain 

the eigenvector decomposition 39 of the 

correlation matrix. This means the 

resulting fitted copula is a Student’s t 

copula with four degrees of freedom. 

Before the copula is estimated, 

STANS performs an ‘‘alignment’’ step 

on the time series to identify and 

separately process risk factors with 

incomplete data sets that lack sufficient 

data to estimate the copula. Specifically, 

for pricing data/models for underlyings 

OCC extracts data on the previous two 

years (i.e., 500 business days) and 

ensures (i) the data has no more than 

100 missing returns as compared to 

baseline dates and (ii) the five latest 

returns are not missing as compared to 

baseline dates. If a risk factor’s data set 

does not meet each of these three 

criteria, it is subject to a conditional or 

default simulation, described below. 

To simulate price movements, STANS 

draws random samples from the 

multivariate Student’s t-distribution 

described by the copula. These random 

draws are abstract values that 

correspond to correlated, uniform, 

normalized shocks in the risk factors. 

STANS then reincorporates the 

individual volatility and marginal 

distribution of the risk factors to create 

appropriate return scenarios. STANS 

next applies these theoretical returns to 

current market prices to generate 

potential price scenarios for underlying 

securities. STANS essentially performs 

the reverse of the function that was 

performed to fit the econometrics of the 

risk factors. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on the Student-t 

Copula model. The current rule text also 

includes other information related to the 

construction and simulation of a copula 

in STANS. Specifically, the current rule 

text includes a mathematical 

justification for using a copula 

generally, and introductory text 

describing the general properties of a 

Student’s t copula. OCC believes this 

information is extraneous to 

understanding how the Student-t 

Copula model currently functions in 

STANS. This information is also 

foundational information commonly 

understood in quantitative finance and 

readily found in public academic 

literature. To the extent this text does 

not describe OCC’s application of a 

mathematical copula, OCC does not 

believe this information needs to be 

maintained in OCC’s rules. Instead, OCC 

believes that this information is more 

appropriately covered in the underlying 

Student-t Copula Model Whitepaper 

and other internal OCC documentation 

rather than in OCC’s rules for the 

reasons listed above. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

Conditional and Default Simulations 

For risk factors with data sets that 

have only recently become available, or 

that have experienced drastic changes in 

their return characteristics, and do not 

meet one or more of the criteria in the 

alignment step, there may be too small 

of a sample size to reliably estimate 

correlations among the data. In such 

cases, these risk factors are excluded 

from the copula simulation in STANS 

and OCC applies conditional or default 

simulation. 

OCC applies a conditional simulation 

when it believes that a risk factor that 

has been identified during the 

alignment step does not meet the data 

quality criteria but has an appreciable 

correlation with another risk factor that 

has a more robust dataset. OCC uses that 

more robust risk factor’s data as a proxy 

for the identified risk factor. The 

identified risk factor is assumed to 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85795 

40 VIX options are treated as options on VIX 

futures and thus represent a type of option on 

futures that is also supported by the implied 

volatility smoothing. 

41See Securities Exchange Act Release No. 86296 

for further information on the smoothing algorithm 

used in STANS. 

exhibit simulated results that follow an 

NRIG distribution of specified mean, 

variance, and shape parameters, and any 

variation from the proxy data is 

assumed to be purely idiosyncratic. 

Pursuant to OCC’s Margin Policy, OCC 

periodically reviews whether applying a 

conditional simulation to a particular 

risk factor continues to be appropriate. 

OCC applies a default simulation 

when it does not believe an identified 

risk factor has any obvious proxy and 

has no view on its prospective volatility, 

or when a risk factor is identified by 

STANS during nightly margin 

processing and OCC has not already 

selected it to undergo a conditional 

simulation. In a default simulation, 

movements in the risk factor are 

assumed to be entirely idiosyncratic and 

have a volatility that is typical of highly 

volatile stocks. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on default, 

derived, and conditional factors. The 

current rule text also includes other 

information related to conditional and 

default simulations. Specifically, the 

current rule text includes the following: 

• Introductory text restating the use 

of time series in STANS: This 

information would already be described 

elsewhere in the STANS Methodology 

Description where applicable, and OCC 

does not believe repeating it here is 

needed to understand how the model 

functions. 

• A description of ‘‘derived 

scenarios,’’ a special case of conditional 

simulations related to exchange rate risk 

factors: This special case is applied 

pursuant to internal OCC procedures, 

and occurs outside of the STANS 

methodology. Therefore, OCC does not 

believe this information is needed to 

understand how the model currently 

functions. 

• A description of the how OCC 

operationally applies conditional 

simulations: These operational details 

relate to OCC’s application of the 

model’s results in operational 

procedures and are not inherent to the 

model’s selection or design, and that 

OCC could change from time to time 

without affecting the model’s results. 

• Details on how OCC implemented 

default scenarios in its internal 

technology systems: These 

implementation details relate to OCC’s 

internal administration of its technology 

systems and are not inherent to the 

model’s selection or design, and that 

OCC could change from time-to-time 

without affecting the model’s results. 

OCC believes that this information is 

more appropriately covered in the 

Student-t Copula Model Whitepaper or 

other internal OCC documentation 

rather than in OCC’s rules for the 

reasons listed above. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

iii. Implied Volatility Smoothing and 

Options Pricing 

The STANS Methodology Description 

would next describe how STANS 

utilizes the inputs and outputs 

described above to (i) perform implied 

volatility smoothing, (ii) price European 

and American options, (iii) price Asian 

FLEX options, and (iv) price Cliquet 

options. 

Implied Volatility Smoothing 

STANS employs an Implied Volatility 

Smoothing model to estimate fair prices 

of listed option contracts based on their 

bid and ask price quotes. This model 

supports pricing of the following types 

of options: (i) European and American 

options on equity products with a 

dividend yield or with discrete cash 

dividends; (ii) European and American 

options on futures on equity indices, 

currencies, and commodities; (iii) 

options on volatility indices for which 

volatility futures trade (e.g., VIX 

options 40); (iv) forward start options; 

and (v) Asian FLEX options. 

The model is essentially an advanced 

data filtering and pre-processing 

technique to improve data quality to 

support option pricing during the 

calibration and simulation phases of the 

STANS methodology. It makes use of 

the same theory that underpins OCC’s 

Vanilla Options model, described 

below. The most important stages of the 

Implied Volatility Smoothing model are: 

(i) A preprocessing procedure, to filter 

out ‘‘bad’’ price quotes; (ii) an implied 

forward price calculation using prices 

from near-the-money options on the 

same securities at all tenors or 

expiration dates; (iii) the smoothing, in 

which prices are generated for all plain 

vanilla listed options at all strikes by 

using corresponding bid and ask price 

quotes and forward prices (from step 

two); and (iv) construction of a volatility 

surface based on linear interpolation of 

total variance among the smoothed 

prices and performing any necessary 

post-processing. When applied to prices 

estimated by the option pricing models 

described below, the model functions to 

(i) makes data points comprising the 

volatility surface more consistent with 

the actual bid-ask spreads found in 

current market prices and (ii) correct 

data that would create arbitrage 

opportunities by not having 

monotonicity and convexity with 

respect to the strike and/or not 

satisfying put-call parity.41

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on the Implied 

Volatility Smoothing model. The 

current rule text also includes other 

information related to the model. 

Specifically, the current rule text 

includes the following: 

• A description of the use of target 

prices based on model parameters: This 

represents configuration choices made 

by OCC that are not inherent to the 

model’s selection or design and that do 

not materially impact the model’s 

results, which OCC may from time to 

time determine it should modify based 

on current market conditions and 

business practices. 

• Economic rationale for various 

features of the model: OCC does not 

believe that this economic rationale is 

needed to understand how the model 

currently functions. 

• A discussion of the model’s 

performance in deriving theoretical spot 

prices from underlying futures and 

indices, and specific ‘‘if/then’’ 

conditions the model applies to bid and 

ask prices to filter out poor quality data 

based on certain control parameters: 

These data filtering parameters are 

configuration choices made by OCC that 

are not inherent to the model’s selection 

or design and that do not materially 

impact the model’s results, which OCC 

may from time to time determine it 

should modify based on current market 

conditions and business practices. 

• Mathematical rationale for the 

method by which the smoothing 

algorithm calculates implied forward 

prices: OCC does not believe that the 

rationale for the model’s configuration 

is needed to understand how the model 

currently functions. 

• A detailed description of the Vegaweighted least squares calculation 

performed during the first round of 

optimization to produce arbitrage-free 

options prices for European options: 

This information, while relevant to 

understanding how the model 

functions, is foundational information 

commonly understood in quantitative 

finance and readily found in public 

academic sources. To the extent the text 

does not describe OCC’s application of 

a Vega-weighted least squares 

calculation, OCC does not believe this 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85796 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

42 In the context of volatility smoothing, ‘‘longdated’’ refers to expirations beyond the listed 

expiration date of standard exchange-traded 

options. 

43See Securities Exchange Act Release No. 86296 

for further information on OCC’s Vanilla Options 

model, which prices American and European 

options and generic futures. 

44See Securities Exchange Act Release No. 74966 

for further information on how STANS models 

Asian-style options. 

45 Instead, forward start options trade with strikes 

defined as a fraction a, known prior to expiration, 

of the underlying closing price on the 

determination date. 

46The netting/offsetting of a Clearing Member’s 

positions within an account pursuant to OCC’s 

rules occurs outside STANS before the position 

data is brought into STANS for this step. 

information needs to be maintained in 

OCC’s rules. 

• Operational details on (1) how the 

model’s results are applied to other 

models for pricing European and 

American options, options on futures, 

and long-dated 42 volatilities; (2) price 

smoothing for contracts that are 

otherwise missing smoothed prices for 

various reasons, FLEX options, and 

over-the-counter options; and (3) 

detailed steps for a linear interpolation/ 

extrapolation used to construct a 

volatility surface from smoothed 

volatilities: These details relate to 

configuration choices made by OCC to 

applying a model overlay in certain 

cases where there is insufficient data, 

that are not inherent to the model’s 

selection or design, and that do not 

materially impact the model’s results, 

which OCC may from time to time 

determine it should modify based on 

current market conditions and business 

practices. 

OCC believes that this information is 

more appropriately covered in the 

Implied Volatility Smoothing Model 

Whitepaper and other internal OCC 

documentation rather than in OCC’s 

rules for the reasons listed above. 

Therefore, OCC proposes to delete this 

rule text in its entirety without adding 

new, corresponding rule text in the 

STANS Methodology Description. 

European and American Options 

The Vanilla Options model is used by 

STANS to price European and American 

options. This model is comprised of 

several modules that (i) calculate 

theoretical option prices, (ii) calculate 

risk sensitivities of the option prices 

with respect to the market variables (the 

‘‘Greeks’’), and (iii) calculate implied 

volatilities from option prices. The 

model prices European options using a 

modified Black-Scholes formula and 

American options using a Leisen-Reimer 

binomial tree.43

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on the Vanilla 

Options model. The current rule text 

includes other information related to the 

model. Specifically, the current rule text 

includes the following: 

• Rationale and testing to support the 

number of steps used in the LeisenReimer binomial tree: OCC does not 

believe the rationale to support this 

model choice is needed to understand 

how the model currently functions. 

• Equations describing the 

calculation of various ‘‘Greeks’’ (i.e., 

Gamma, Vega, Theta, and Rho), 

restatements of standard Black’s 

formulas, and a restatement of the 

standard Leisen-Reimer binomial tree: 

This information, while relevant to 

understanding how the model 

functions, is foundational information 

commonly understood in quantitative 

finance and readily found in public 

academic literature. To the extent the 

text does not describe OCC’s application 

of the ‘‘Greeks,’’ Black’s formulas, and 

the Leisen-Reimer binomial tree, OCC 

does not believe this information needs 

to be maintained in OCC’s rules. 

• A list of control parameters of the 

Newton-Raphson method used to 

calculate implied volatilities for vanilla 

options: These control parameters are 

configuration choices made by OCC that 

are not inherent to the model’s selection 

or design and that do not materially 

impact the model’s results, which OCC 

may from time to time determine it 

should modify based on current market 

conditions and business practices. 

OCC believes that this information is 

more appropriately covered in the 

Vanilla Options Model Whitepaper and 

other internal OCC documentation 

rather than in OCC’s rules for the 

reasons listed above. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

Asian FLEX Options 

Like European options, Asian FLEX 

options are priced based on a BlackScholes formula.44 Asian FLEX options 

are modeled with assumptions that 

volatility, interest rates and cost of carry 

remain constant across an option’s 

tenor. Furthermore, implied volatility is 

determined from ‘‘terminal’’ option (i.e., 

the last option in a series) volatilities, 

which are obtained from prices of 

available regular options expiring at the 

same tenor or, in their absence, by 

interpolating terminal volatilities of 

existing tenor regular options using an 

internal calculator developed by OCC. 

Cliquet Options 

STANS also prices Cliquet options 

using a Black-Scholes model. Like Asian 

FLEX options, Cliquet options are 

modeled with assumptions that 

volatility, interest rates, and cost of 

carry remain constant across an option’s 

tenor. STANS calculates options 

premiums based on the premiums of the 

individual forward starting options that 

comprise the Cliquet option. This 

valuation is then repeated for each 

‘‘reset period’’ of the Cliquet option. 

Forward Start Options 

STANS can also be used to price 

forward start options. Forward start 

options are options for which the strike 

price in dollars is unknown prior to the 

determination date of the strike shortly 

before expiration.45 Forward start 

option values depend on the same input 

model parameters as vanilla options and 

on the determination date of the strike. 

Using the Black-Scholes framework, the 

pricing problem of a forward-start 

option prior to strike determination can 

be transformed into the valuation of a 

plain vanilla option at determination 

time, after which the option can be 

priced using a standard application of 

Black’s formula. 

iv. Aggregation 

The STANS Methodology Description 

would next describe how STANS 

applies the theoretical derivatives prices 

to actual positions in Clearing Members’ 

accounts to calculate margin 

requirements. This is accomplished by 

aggregating (i) a base margin charge, 

which consists of an ES calculation with 

the addition of Extreme Value Theory 

(‘‘EVT’’) loss modeling and a stress test 

component; (ii) an error compensation 

charge; (iii) a liquidation cost charge; 

(iv) a positive risk reversal charge; and 

(v) various add-on charges that are 

applied based on accounting principles. 

Base Margin Charge 

STANS first calculates the base 

margin charge. This is accomplished by 

identifying the positions present in a 

Clearing Member’s account,46

multiplying the values of those 

positions to each of the 10,000 

theoretical values calculated in the 

above step, then adding the products’ 

values together to obtain possible 10,000 

net asset values (‘‘NAVs’’) for the 

account. The account’s actual NAV is 

then subtracted from each of these 

10,000 possible NAVs to obtain 10,000 

possible Profit and Loss (‘‘P&L’’) 

statements. STANS then constructs a 

VaR line separating the 100 most 

extreme negative projected P&L 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85797 

47A Generalized Pareto distribution is a type of 

continuous probability distribution that can be used 

to model the distribution of the tail of another 

underlying distribution. 

48The Delta and Vega of an option represent the 

sensitivity of the option price with respect to the 

price and volatility of the underlying security, 

respectively. 

49See Securities Exchange Act Release No. 85755 

for more detail on the liquidation cost model used 

by STANS. 

50 ‘‘Delta one products’’ refer to products for 

which a change in the value of the underlying asset 

results in a change of the same, or nearly the same, 

proportion in the value of the product. 

statements over a two-day horizon from 

the remaining 9,900 simulated 

outcomes, representing the worst 1% of 

the projected scenarios, and calculates 

the average of these 100 values to obtain 

a single ES value for the account. This 

is called the empirical ES because 

STANS uses actual historical prices in 

calibrating the simulation, which 

represents the historical dependence 

among the various risk factors. 

In addition to calculating the 

empirical ES, STANS applies EVT to 

parametrically fit the largest losses and 

parametrically calculate ES. EVT is 

based on a tenet of probability theory 

that the distribution of extremes of a 

univariate random variable converge to 

a Generalized Pareto distribution.47 The 

parametric EVT estimator can use a 

larger tail sample than the empirical 

estimator, which, for ES at the 99th 

percentile, is limited to 100 (i.e., 1% of 

10,000) points. Empirical ES is used 

when there is indication that the tail is 

not well fit by EVT. 

STANS next applies a stress test 

component to its base charge. This 

component includes additional 

calculations related to (i) concentration, 

which is intended to consider extreme 

idiosyncratic moves in concentrated 

positions and to counteract ‘‘survivor 

bias’’ in historical equity returns data 

(i.e., that historical data typically does 

not incorporate certain extreme 

movements in a firm’s stock prices, such 

as when a firm declares bankruptcy or 

is subject to a rich takeover); and (ii) 

dependence, in which the ES 

calculations described above are 

performed twice again, once assuming 

perfect correlation among the various 

risk factors and once assuming no 

correlation among the various risk 

factors. After performing these 

concentration and dependence 

calculations, STANS takes the higher of 

the two factors and combines it with the 

empirical ES to create a more 

conservative margin requirement for the 

account. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s chapter on the base 

charge, stress-test add-on charge, and 

total margin charge. The current rule 

text also includes a summary section 

summarizing historical changes OCC 

has made to the manner in which 

STANS calculates a total margin charge. 

OCC does not believe this information is 

needed to understand how STANS 

currently functions. OCC further 

believes that this information is more 

appropriately covered in the Portfolio 

Risk Measures Model Whitepaper or 

other internal OCC documentation 

rather than in OCC’s rules for this 

reason. Therefore, OCC proposes to 

delete this rule text in its entirety 

without adding new, corresponding rule 

text in the STANS Methodology 

Description. 

Error Compensation 

An inherent property of ES 

calculations is the existence of 

estimation error. To compensate for the 

potential risk that a STANS ES 

calculation includes such an error on 

the positive (lower loss) side, the ES 

value based on the simulated results is 

shifted through a compensation term to 

a more conservative level. 

Mathematically, the error compensator 

shifts ES to the left by 1.2 standard 

deviations of the loss tail, covering the 

70% quantile of estimation error. The 

extent to which this alters the calculated 

ES in absolute varies based on the 

distribution’s kurtosis (i.e., the shift is 

more significant for distributions with 

fatter tails). 

Liquidation Cost Charge 

The default of a Clearing Member 

requires OCC to close-out that Clearing 

Member’s positions, which results in 

OCC incurring costs. Closing out 

positions in a defaulted portfolio may 

also entail selling long positions at the 

current bid price and covering short 

positions at the current ask price, which 

could create additional costs based on 

the bid-ask spread. To account for these 

costs, STANS calculates a daily 

liquidation cost charge based on a 

liquidation cost grid, calibrated with 

data from historical stressed periods, 

and applies this calculated cost as an 

add-on charge. In general, the 

Liquidation Charge model calculates 

two risk-based liquidation costs for a 

portfolio, Vega 48 liquidation cost 

(‘‘Vega LC’’) and Delta liquidation cost 

(‘‘Delta LC’’), using ‘‘Liquidation Grids.’’ 

More specifically, the model consists of: 

(1) The decomposition of the defaulter’s 

portfolio into sub-portfolios by 

underlying security; (2) the creation and 

calibration of Liquidation Grids used to 

determine liquidation costs; (3) the 

calculation of the Vega LC (including a 

minimum Vega LC charge) for options 

products; (4) the calculation of Delta 

LCs for both options and Delta-one 

products; (5) the calculation of Vega and 

Delta concentration factors; and (6) the 

calculation of volatility correlations for 

Vega LCs.49 STANS applies both Vega 

and Delta LCs to options products, but 

only applies a Delta charge to Deltaone 50 products such as futures 

contracts, Treasury securities, and 

equity securities. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on the 

Liquidation Charge model. The current 

rule text also includes other information 

related to the model. Specifically, the 

current rule text includes the following: 

• Background historical information 

on adoption of the model: OCC does not 

believe this historical information is 

needed to understand how the model 

currently functions. 

• Classifications OCC applies to an 

underlying equity security based on the 

security’s liquidity level to determine 

which liquidation grid is most 

appropriate: These details represent 

configuration choices made by OCC that 

are not inherent to the model’s selection 

or design and that do not materially 

impact the model’s results, which OCC 

may from time to time determine it 

should modify based on current market 

conditions and business practices. 

• Intermediate equations used to 

define variables for calculating Vega LC: 

OCC does not believe these 

intermediate, explanatory equations are 

needed to understand how the model 

currently functions. 

• Descriptions of the parameters used 

to calibrate liquidation grids: These 

calibration parameters represent 

configuration choices made by OCC that 

are not inherent to the model’s selection 

or design and that do not materially 

impact the model’s results, which OCC 

may from time to time determine it 

should modify based on current market 

conditions and business practices. 

OCC believes that this information is 

more appropriately covered in the 

underlying Liquidation Charge Model 

Whitepaper and other internal OCC 

documentation rather than in OCC’s 

rules for the reasons listed above. 

Therefore, OCC proposes to delete this 

rule text in its entirety without adding 

new, corresponding rule text in the 

STANS Methodology Description. 

Positive Risk Reversal 

As an additional conservative 

measure, STANS applies a ‘‘positive 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85798 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

51See Securities Exchange Act Release No. 82355, 

which states that OCC’s Margin Policy establishes 

the application of add-on charges. 

52See Securities Exchange Act Release No. 81949 

(October 26, 2017), 82 FR 50719 (November 1, 2017) 

(SR–OCC–2017–009) for more information on 

OCC’s Watch Level framework. OCC has filed a 

proposed rule change with the Commission to 

adopt a new TPRMF, which would replace the 

Counterparty Credit Risk Management Policy and 

provide an overview of OCC’s overall approach to 

third-party risk management. See supra note 3. 

53See Securities Exchange Act Release No. 82009, 

which describes OCC’s Collateral Risk Management 

Policy. 

54The specific margin add-on charges OCC may 

apply are subject to change in accordance with 

internal governance established by OCC’s Margin 

Policy and supporting procedures. 

55OCC considers the potential effects of stock 

dividends outside of STANS. 

risk reversal’’ charge to ensure that the 

total calculated margin requirement is at 

least equal to the estimated liquidation 

cost, even in the event a position is 

liquidated at the current market price 

(or a more favorable price). STANS 

incorporates the positive risk reversal 

charge by simply applying a minimum 

margin requirement to a position that is 

equal to the estimated liquidation cost 

charge. 

Various Add-On Charges 

In addition to the charges described 

above, OCC may, pursuant to its rules, 

elect to apply additional charges to a 

Clearing Member’s margin requirements 

for various reasons; e.g., based on the 

Clearing Member’s Watch Level status 

or to account for rebates, adjustments 

and add-ons related to stock loan 

positions.51 These additional charges 

occur outside of STANS and are outside 

the scope of the STANS Methodology 

Description. 

The proposed text would replace 

current OCC rule text from a section in 

the Margins Methodology’s base charge, 

stress-test add-on charge, and total 

margin charge chapter covering add-on 

charges. The current rule text notes that 

OCC may apply various add-on charges 

to its margin requirements outside the 

STANS methodology, which could 

include additional margin charges 

related to (i) cross-margin accounts, 

established by OCC Rule 704; (ii) 

placement on a heightened Watch Level 

based on OCC’s credit risk surveillance, 

established by OCC’s Counterparty 

Credit Risk Management Policy; 52 (iii) 

interest payments and adjustments to 

stock loan positions, established by OCC 

Rule 601, Interpretation & Policy .05; 

(iv) customer positions subject to certain 

margin requirements promulgated by 

the U.S. Commodity Futures Trading 

Commission, established by OCC Rule 

601, Interpretation & Policy .07; (v) 

concentration risk for equity securities 

exceeding an average daily trading 

volume threshold, established by OCC’s 

Collateral Risk Management Policy; 53

and (vi) OCC’s extended trading hours 

program, established generally by OCC’s 

Margin Policy and specified in OCC’s 

Extended Trading Hours Set-Up and 

Monitoring Procedure.54

As outlined above, these add-on 

charges are applied pursuant to other 

OCC rules, policies, and/or procedures, 

and are established outside of the 

STANS methodology. Therefore, OCC 

believes that they are more 

appropriately covered in the underlying 

OCC rules, policies, and procedures that 

establish them, and, accordingly, 

proposes to delete this text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

Model Utilities 

The STANS Methodology Description 

would next describe several ‘‘model 

utilities’’ that are applied at various 

points in the STANS methodology, to 

incorporate various market and 

operational factors that affect options 

pricing and thereby produce model 

results which more accurately reflect 

current and potential market conditions. 

i. Dividends 

The STANS Methodology Description 

would describe how STANS 

incorporates expected cash dividends 

on a stock into options pricing.55

STANS obtains daily information on 

general dividend yields and discrete 

dividends from pricing vendors, then 

applies a dividend growth rate to this 

information to forecast dividends 

(typically) 16 quarters into the future. 

STANS accounts for the possibility 

that cash dividends may be paid on 

stocks, which would affect their pricing, 

through a dividend utility that interacts 

with the pricing models in STANS. 

Daily, STANS retrieves from an external 

vendor data on forecasted cash 

dividends and yield curves associated 

with the issuance of those dividends. 

STANS uses this data to forecast when 

a security may go ex-dividend, and 

accordingly incorporates this into 

pricing the associated equity security. 

STANS also accounts for the possibility 

that an option may be exercised early to 

obtain a cash dividend on the 

underlying security. Using the same 

external dividend data, STANS 

calculates when an option would likely 

be exercised early to receive the 

dividend and prices it accordingly. 

ii. Interest Rate Curve 

This model utility calculates the yield 

curve using (i) overnight, one-week, 

one-month, two-month, and threemonth cash deposit interest rates; (ii) 

Eurodollar interest rate futures with 

three-month to two-year tenors; and (iii) 

interest rate swaps with three-year to 

30-year tenors. The model utility 

calculates a discount factor from a given 

date to any future date along the curve. 

This discount factor is used as an input 

to pricing models to generate theoretical 

prices for instruments based on these 

rates. 

iii. Overnight and Daily Returns 

STANS calculates margin 

requirements on a daily basis, using 

prices from that day’s market close. 

However, some positions may expire or 

be exercised during a business day and 

before the following day’s margin 

settlement. Since OCC clears derivatives 

that are settled on both opening and 

closing prices, both types of events 

affect derivatives prices and their 

corresponding margin requirements. 

Therefore, the STANS Methodology 

Description would describe how STANS 

obtains relevant risk factors for both the 

most recent opening price and the most 

recent closing price. STANS includes 

within the copula it constructs, 

described previously, a joint 

distribution of both overnight and daily 

returns on relevant risk factors. 

The proposed text would replace 

current OCC rule text from the Margins 

Methodology’s section on overnight and 

daily innovations. The current rule text 

also includes other information on the 

overnight and daily returns model 

utility. Specifically, the current rule text 

includes the following: 

• Details on how OCC implemented 

the model utility in its technology 

systems: These implementation details 

relate to OCC’s internal administration 

of its technology systems and are not 

needed to understand how the model 

currently functions. Because these 

details are not inherent to the model’s 

selection or design, OCC could also 

change them from time to time without 

affecting the model’s results. 

• Redundant detail related to the 

copula constructed by STANS: These 

details, described above, would be 

described in the STANS Methodology 

Description’s section on the Student-t 

Copula model, and OCC does not 

believe repeating it here is needed to 

understand how the model utility 

currently functions. 

OCC believes that this information is 

more appropriately covered in the Daily 

and Overnight Theoretical Price 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85799 

56The Schwartz and Smith’s model is a twofactor model of commodity prices that allows for 

mean reversion in short-term prices and uncertainty 

in the long-term equilibrium level to which prices 

revert. See Schwartz, E. and Smith, E., ‘‘Short-Term 

Variations and Long-Term Dynamics in Commodity 

Prices,’’ 46 Mgmt. Sci. 7, 893–911 (2000) 

(describing the Schwartz and Smith’s model). 

57Seasonality is a characteristic of futures 

products that exhibit regular and predictable price 

changes that recur every calendar year. 

Scenario Simulation Model Whitepaper 

or other internal OCC documentation 

rather than in OCC’s rules for the 

reasons listed above. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

iv. One-Day and Two-Day Scenarios 

As noted previously, OCC has 

established margin levels to cover the 

costs of liquidating positions over a twoday margin period of risk. Furthermore, 

and as described above, during this 

interval expiring OCC-cleared or crossmargined positions may experience 

final settlement based on either the 

opening or closing price of the 

underlying security. Therefore, the 

STANS Methodology Description would 

describe how STANS calculates for each 

underlying price scenario simulated 

prices at four different points in time: (i) 

Opening price on day one; (ii) closing 

price on day one; (iii) opening price on 

day two; and (iv) closing price on day 

two. STANS must account for these 

additional prices to avoid undermargining portfolios with both expiring 

and non-expiring positions in a risk 

group, and to reflect the prices of 

underlying securities and associated 

derivatives that are forecasted to go exdividend or ex-coupon on T+1 or T+2 

(where T represents the activity date). 

To calculate the two additional prices 

that may be observed over the two-day 

margin period of risk, STANS applies a 

randomly generated permutation to the 

return scenarios. The second-day return 

scenarios and securities that go exdividend on T+2 are then applied 

scenario-by-scenario to the first-day 

results in the same fashion. 

v. Portfolio Specific Haircuts 

Some Clearing Members have 

deposited securities as margin collateral 

that are also used in STANS as risk 

factors, and therefore potential price 

movements in these securities are 

factored into margin requirement 

calculations. However, a Clearing 

Member may want—or be required—to 

withdraw or deposit such margin 

collateral intraday. This would change 

the concentration of the Clearing 

Member’s collateral types and would 

also change the sensitivity of how the 

Clearing Member’s portfolio responds to 

such changes. To account for these 

changes in concentration and 

sensitivity, the STANS Methodology 

description would describe how STANS 

utilizes a Portfolio Specific Haircuts 

model. This model provides haircut 

values for withdrawals or deposits of 

collateral, which are then applied to the 

previous day’s collateral values to arrive 

at the impact of the collateral 

movements on the margin requirement. 

These haircuts represent the sensitivity 

of that Clearing Member account’s risk 

profile to its position in the collateral 

security being withdrawn or deposited. 

These haircuts are designed to provide 

an estimate of the resulting change in 

margin requirements if the entire margin 

calculation were re-run following the 

withdrawal or deposit. A different 

haircut is associated with each 

combination of Clearing Member 

account and security posted as margin 

collateral. 

Margins Methodology Chapters Not 

Found in STANS Methodology 

Description 

The current rule text from the Margins 

Methodology describes that STANS uses 

historical and current prices for listed 

tenors of energy and other commodity 

futures to simulate prices of energy and 

other commodity futures using two 

variants of a two-factor Schwartz and 

Smith’s model: 56 One variant to 

incorporate the effects of seasonality 57

for pricing futures related to 

nonseasonal commodities such as crude 

oil and the other variant to incorporate 

the effects of seasonality and is used to 

price futures related to seasonal 

commodities such as natural gas, 

heating oil, gasoline, electricity, and 

petrochemicals. The products for which 

OCC previously used this model to 

calculate margin requirements are no 

longer listed, and therefore OCC has 

decommissioned this associated pricing 

model. Therefore, OCC proposes to 

delete this rule text in its entirety 

without adding new, corresponding rule 

text in the STANS Methodology 

Description. 

The current text from the Margins 

Methodology also includes information 

on a model used to price European-style 

binary options. The products for which 

OCC used this model to calculate 

margin requirements are no longer 

listed, and OCC decommissioned the 

model. The current text also includes 

information on OCC’s use of the Vanilla 

Options model to calculate margin 

requirements for Currency Options and 

Foreign Index Futures, both of which 

are products OCC no longer clears. 

Therefore, OCC proposes to delete this 

rule text in its entirety without adding 

new, corresponding rule text in the 

STANS Methodology Description. 

The current rule text from the Margins 

Methodology also includes information 

on certain processes OCC uses to 

operationalize the STANS methodology 

in its systems. Specifically, these 

processes are (i) daily calibration and 

transfer, which describes 

implementation of the processes to daily 

obtain pricing data and calibrate pricing 

models; (ii) Monte Carlo marginals, 

which describes implementation of the 

processes that create price scenarios for 

underlying risk factors from either 

copula draws or (in the absence of a 

copula) conditional or default 

simulations; (iii) Monte Carlo 

theoreticals, which describes 

implementation of the processes that 

calculate theoretical values for futures 

and options; and (iv) monthly copula 

estimation and simulation, which 

describes implementation of the 

processes that generate copula scenarios 

for underlying risk factors based on 

calibrated parameters. 

These chapters describe 

implementation details related to OCC’s 

internal administration of its technology 

systems and are not needed to 

understand how the STANS models 

currently function. Because these details 

are not inherent to model selection or 

design, OCC could also change them 

from time to time without affecting 

model results. OCC believes that this 

information is more appropriately 

covered in the underlying Model 

Whitepapers and other internal OCC 

documentation rather than in OCC’s 

rules for this reason. Therefore, OCC 

proposes to delete this rule text in its 

entirety without adding new, 

corresponding rule text in the STANS 

Methodology Description. 

Margin Policy 

Lastly, OCC would make conforming 

changes to its Margin Policy to reflect 

the adoption of the STANS 

Methodology Description and the 

retirement of the Margins Methodology. 

OCC would also make other nonsubstantive changes to the Margin 

Policy to correct typographical errors, 

update references to other related 

internal OCC policies and procedures, 

and conform the policy to OCC’s current 

internal policy template. The proposed 

changes are intended to promote the 

accuracy and clarity of OCC’s Margin 

Policy and would not impact OCC’s 

margin setting practices or processes. 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85800 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

58 15 U.S.C. 78q–1. 59 15 U.S.C. 78q–1(b)(3)(F). 60 Id. 61 17 CFR 240.17Ad–22(b)(1). 

62 Id. 

63 17 CFR 240.17Ad–22(b)(2). 

64 Id. 

65 17 CFR 240.17Ad–22(e)(6)(i), (iii), and (v). 

66 Id. 

67 17 CFR 240.17Ad–22(e)(23). 

(2) Statutory Basis 

OCC believes that the proposed rule 

change is consistent with Section 17A of 

the Act 58 and the rules thereunder 

applicable to OCC. Section 17A(b)(3)(F) 

of Act 59 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 derivative 

agreements, contracts, and transactions. 

The purpose of the proposed rule 

change is to adopt a STANS 

Methodology Description document to 

clearly and concisely describe the 

material aspects of OCC’s quantitative 

methodology for calculating Clearing 

Member margin requirements. OCC uses 

the margin it collects to limit its credit 

exposures to participants and to protect 

other Clearing Members from losses that 

may arise as a result of a default and 

ensure that OCC is able to continue the 

prompt and accurate clearance and 

settlement of its cleared products. As a 

result, OCC believes the proposed 

STANS Methodology Description is 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions and derivative 

agreements, contracts, and transactions 

in accordance with Section 17A(b)(3)(F) 

of the Act.60

Rule 17Ad–22(b)(1) 61 requires that a 

registered clearing agency that performs 

central counterparty services establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to measure its 

credit exposures to its participants at 

least once a day and limit its exposures 

to potential losses from defaults by its 

participants under normal market 

conditions so that the operations of the 

clearing agency would not be disrupted 

and non-defaulting participants would 

not be exposed to losses that they 

cannot anticipate or control. As 

described above, the proposed STANS 

Methodology Description described 

herein details the risk-based margin 

methodology by which OCC measures 

its credit exposures to its participants 

on a daily basis and determines margin 

requirements based on such 

calculations. OCC believes that the 

proposed STANS Methodology 

Description would result in a more 

transparent and clearly understandable 

description of the methodology used to 

measure and mitigate credit exposures 

to OCC’s Clearing Members, and that the 

proposed rule change is therefore 

designed to ensure that OCC sets margin 

requirements that would serve to limit 

OCC’s exposures to potential losses 

from defaults by its participants under 

normal market conditions so that the 

operations of OCC would not be 

disrupted, and non-defaulting 

participants would not be exposed to 

losses that they cannot anticipate or 

control. Accordingly, OCC believes the 

proposed rule change is consistent with 

Rule 17Ad–22(b)(1).62

Rule 17Ad–22(b)(2) 63 further 

requires, in part, that a registered 

clearing agency that performs central 

counterparty services establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to use margin 

requirements to limit its credit 

exposures to participants under normal 

market conditions and use risk-based 

models and parameters to set margin 

requirements. The STANS Methodology 

Description is intended to better 

describe how the STANS methodology 

is designed to limit OCC’s credit 

exposures to participants under normal 

market conditions in a manner 

consistent with Rule 17Ad–22(b)(2).64

Rules 17Ad–22(e)(6)(i), (iii), and (v) 65

further require 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: (1) Considers, 

and produces margin levels 

commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market; (2) 

calculates margin sufficient to cover its 

potential future exposure to participants 

in the interval between the last margin 

collection and the close out of positions 

following a participant default; and (3) 

uses an appropriate method for 

measuring credit exposure that accounts 

for relevant product risk factors and 

portfolio effects across products. As 

described in detail above, OCC believes 

that the proposed STANS Methodology 

Description would result in a clearer, 

more transparent document describing 

OCC’s risk-based margin system that, 

among other things: (1) Considers, and 

produces margin levels commensurate 

with, the risks and particular attributes 

of each relevant product, portfolio, and 

market; (2) calculates margin sufficient 

to cover its potential future exposure to 

participants in the interval between the 

last margin collection and the close out 

of positions following a participant 

default; and (3) uses an appropriate 

method for measuring credit exposure 

that accounts for relevant product risk 

factors and portfolio effects across 

products. OCC therefore believes the 

proposed STANS Methodology 

Description is reasonably designed to 

consider and produce margin levels 

commensurate with the risks and 

particular attributes of products cleared 

by OCC, calculate margin sufficient to 

cover its potential future exposure to 

participants in the interval between the 

last margin collection and the close out 

of positions following a participant 

default, and apply an appropriate 

method for measuring credit exposure 

that accounts for risk factors and 

portfolio effects of products cleared by 

OCC in a manner consistent with Rules 

17Ad–22(e)(6)(i), (iii), and (v).66

Rule 17Ad–22(e)(23) 67 further 

requires, in part, that a covered clearing 

agency establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

provide sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in the covered 

clearing agency. The STANS 

Methodology Description is designed to 

provide Clearing Members with greater 

transparency into the STANS 

Methodology than the current rule text 

of the Margins Methodology, which 

OCC does not make generally available 

to participants and includes various 

details that, as described herein, OCC 

does not believe constitute material 

aspects of the STANS methodology. In 

addition, OCC has organized and 

written the STANS Methodology 

Description in a way that would more 

clearly identify for Clearing Members 

the material aspects of the STANS 

methodology. Specifically, OCC has 

organized the STANS Methodology 

Description in a way that enables a 

reader to better understand how the 

various quantitative model components 

of STANS function in concert to 

produce OCC margin requirements, 

rather than organizing the document in 

a way that would serve OCC’s internal 

purposes but not facilitate 

comprehension of the STANS 

methodology by a third party. 

Furthermore, by including in the 

STANS Methodology Description only 

the OCC rule text covering the material, 

quantitative aspects of the STANS 

methodology, and either not describing 

extraneous or immaterial aspects of the 

STANS methodology in the STANS 

Methodology Description or referring 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 85801 

68For example, the STANS Methodology 

Description would refer to other OCC rules to 

establish manual, non-modeled margin components 

or adjustments made by OCC, and would refer to 

public academic sources for descriptions of 

common mathematical theories and methods that 

do not represent OCC-specific applications or 

modifications of those theories and methods. 

69See supra note 13. 

70See Securities Exchange Act Release No. 82355 

(December 19, 2017), 82 FR 61058 (December 26, 

2017) (SR–OCC–2017–007). 

71See Securities Exchange Act Release No. 82473 

(January 9, 2018), 83 FR 2271 (January 16, 2018) 

(SR–OCC–2017–011). 

72See 15 U.S.C. 78s(b)(1) and 17 

CFR 240.19b–4. 

73 15 U.S.C. 78q–1(b)(3)(I). 

the reader to other OCC or external 

sources where appropriate,68 the 

proposed STANS Methodology 

Description would more clearly identify 

for an informed reader how the STANS 

methodology’s quantitative model 

components form OCC’s basis for 

calculating margin requirements, and 

what aspects of the STANS 

methodology OCC may adjust in the 

course of its business pursuant to its 

other rules and internal policies and 

procedures. OCC believes that this 

additional clarity, transparency, and 

enhanced readability regarding the 

material quantitative model components 

of the STANS methodology promote the 

requirements of Rule 17Ad–22(e)(23). 

Finally, Section 19(b)(1) of the Act 

and Rule 19b–4 thereunder set forth the 

requirements for SRO proposed rule 

changes, including the regulatory filing 

requirements for ‘‘stated policies, 

practices and interpretations.’’ 69 OCC 

proposes to retire its existing Margins 

Methodology, which was, in part, 

previously filed as an OCC ‘‘rule’’ with 

the Commission, as the STANS 

Methodology Description would 

supersede the Margins Methodology in 

its entirety. Under the proposal, the 

material aspects of the STANS 

methodology would be contained in the 

proposed STANS Methodology 

Description described herein. 

As described in detail herein, various 

details in the current Margins 

Methodology would no longer be OCC 

rule text following adoption of the 

STANS Methodology Description. These 

internal procedural and administrative 

details used by OCC’s model developers 

and model validators would: (1) Be 

reasonably and fairly implied by the 

proposed STANS Methodology 

Description, OCC’s Margin Policy,70

OCC’s Model Risk Management 

Policy,71 and other OCC rules; and/or 

(2) otherwise not be deemed to be 

material aspects of OCC’s risk-based 

margin system. Specifically, OCC 

believes the details it proposes to 

remove from OCC’s rule text are 

consistent with Section 19(b)(1) of the 

Act and Rule 19b–4 thereunder for the 

following reasons: 

• To the extent the current rule text 

includes details on OCC’s historical 

modeling practices and potential future 

enhancements, OCC does not believe 

such text constitutes an SPPI of OCC 

because it does not describe OCC’s 

current practices; 

• To the extent the current rule text 

includes details on the exact set of 

current products applied to each 

STANS component, which will change 

from time to time as OCC-cleared 

products are listed and delisted, OCC 

believes such text is reasonably and 

fairly implied by the proposed rule text 

establishing the scope of instruments for 

which the STANS methodology 

calculates margin requirements; 

• To the extent the current rule text 

includes details on various 

configuration choices made by OCC, 

such as data sources, model parameters, 

and model performance monitoring, that 

are not inherent to model selection or 

design and that do not materially impact 

a model’s results, which OCC may from 

time to time determine it should modify 

based on current market conditions and 

business practices, OCC does not 

believe such text constitutes an SPPI 

because it does not describe a material 

aspect of the operation of the facilities 

of OCC; 

• To the extent the current rule text 

includes details on testing results and 

explanatory rationale supporting a 

model, OCC does not believe such text 

constitutes an SPPI because it does not 

describe an OCC policy, practice, or 

interpretation; 

• To the extent the current rule text 

includes recitations of standard 

mathematical and economic theories/ 

techniques that are well-known in 

quantitative finance, readily found in 

public sources, and do not include OCCspecific modifications or applications, 

OCC believes such text is reasonably 

and fairly implied by the rule text 

establishing the theories/techniques 

selected by OCC if OCC has not applied 

such theories/techniques in a modified 

or idiosyncratic manner; 

• To the extent the current rule text 

includes redundant descriptions of a 

model component appearing in multiple 

chapters, the rule text has been 

consolidated to describe the model 

component in the single location; 

• To the extent the current rule text 

includes details on OCC’s 

implementation of a model in its 

internal technology systems and 

application of model results in 

operational procedures that are not 

inherent to a model and that OCC could 

change them from time to time without 

affecting a model’s results, OCC does 

not believe such text constitutes an SPPI 

because (1) it does not describe a 

material aspect of the operation of the 

facilities of OCC and (2) it is reasonably 

and fairly implied that the calculations 

described in the STANS Methodology 

Description must be implemented in 

some manner through internal OCC’s 

systems and processes. For example, 

current chapters of the Margins 

Methodology describe the processes run 

by internal OCC systems to execute the 

calculations described in the proposed 

STANS Methodology Description. These 

chapters do not describe material 

aspects of OCC’s models or 

methodology. Rather, these chapters 

describe, for example, the timing and 

sequencing of various processes and the 

code libraries maintained by OCC to 

support the STANS methodology. 

Changes in such processes would not be 

considered changes to OCC’s models/ 

methodology and would not materially 

impact OCC’s margin requirements. 

Moreover, Clearing Members and 

market participants can reasonably and 

fairly infer that OCC maintains such 

systems and processes to effectuate the 

daily calculation of margin 

requirements using the models and 

methodology described herein; and 

• To the extent the current rule text 

includes manual margin adjustments 

and add-ons OCC employs pursuant to 

OCC rules, policies, and/or procedures 

outside the STANS methodology, OCC 

does not believe such text constitutes an 

SPPI because it is reasonably and fairly 

implied by other existing rules of OCC. 

Accordingly, OCC believes the 

proposed changes would be consistent 

with the requirements of Section 

19(b)(1) of the Act and Rule 19b–4 

thereunder.72

(B) Clearing Agency’s Statement on 

Burden on Competition 

Section 17A(b)(3)(I) of the Act 

requires that the rules of a clearing 

agency do not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of Act.73 OCC does not believe 

that the proposed rule change would 

impact or impose any burden on 

competition. The proposed STANS 

Methodology Description describes 

OCC’s STANS margin setting 

methodology that currently applies to 

all Clearing Members. Therefore, the 

proposal has no impact on Clearing 

Members, and OCC does not believe that 

the proposed rule change would 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES
85802 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Notices 

74 17 CFR 200.30–3(a)(12). 

unfairly inhibit access to OCC’s services 

or disadvantage or favor any particular 

user in relationship to another user. In 

addition, the proposal currently applies 

uniformly to all Clearing Members in 

establishing their margin requirements. 

For the foregoing reasons, OCC 

believes that the proposed rule change 

is in the public interest, would be 

consistent with the requirements of the 

Act applicable to clearing agencies, and 

would not impact or impose a burden 

on competition. 

(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 

the proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be 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 Exchange 

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– 

OCC–2020–016 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–OCC–2020–016. 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 such 

filing also will be available for 

inspection and copying at the principal 

office of OCC and on OCC’s website at 

https://www.theocc.com/CompanyInformation/Documents-and-Archives/ 

By-Laws-and-Rules#rule-filings. 

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–OCC–2020–016 and should 

be submitted on or before January 19, 

2021. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.74

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2020–28662 Filed 12–28–20; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Investment Company Act Release No. 

34150; 812–15158] 

J.P. Morgan Investment Management 

Inc., et al.; Notice of Application 

December 22, 2020. 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Notice. 

SUMMARY: J.P. Morgan Investment 

Management Inc., et al. have applied for 

exemption from rules within the 

Investment Company Act of 1940 to use 

an Amended Liquidity Program for the 

Covered Funds. 

DATES: The application was filed on 

September 14, 2020, and amended on 

November 20, 2020. 

ADDRESSES: The Commission: 

Secretarys-Office@sec.gov. Applicants: 

Margery K. Neale and Anne Choe, 

Willkie Farr & Gallagher LLP, at 

MNeale@willkie.com or AChoe@

willkie.com, respectively. 

FOR FURTHER INFORMATION CONTACT: 

Jessica Shin, Attorney-Adviser, at (202) 

551–3685, or Daniele Marchesani, 

Assistant Chief Counsel, at (202) 551– 

6821 (Division of Investment 

Management, Chief Counsel’s Office), or 

Thoreau Bartmann, Senior Special 

Counsel, at (202) 551–6745. 

SUPPLEMENTARY INFORMATION: Notice of 

an application by J.P. Morgan 

Investment Management Inc., et al. 

under section 6(c) of the Investment 

Company Act of 1940 (‘‘Act’’) for an 

exemption from rules 22e–4(a)(6), 22e– 

4(a)(8), 22e–4(a)(10), 22e–4(a)(12), 22e– 

4(b)(1)(ii), 22e–4(b)(1)(iii), and 22e– 

4(b)(1)(iv) under the Act, and for an 

exemption from Items B.7, B.8 and C.7 

of Form N–PORT and from Parts B 

through D of Form N–LIQUID, to the 

extent necessary to use an Amended 

Liquidity Program for the Covered 

Funds. 

Applicants: 

Each registered open-end 

management investment company listed 

in Exhibit A of the Application (the 

‘‘Companies’’), on its own behalf and on 

behalf of its respective underlying series 

listed in Exhibit A of the Application 

(each such series, a ‘‘JPM Fund’’), and 

J.P. Morgan Investment Management 

Inc. (‘‘JPMIM’’ and collectively with the 

Companies, the ‘‘Applicants’’). 

Summary of Application: 

The requested exemptions would 

permit Applicants to use the Amended 

Liquidity Program for the Covered 

Funds. The Amended Liquidity Program 

would replace rule 22e–4’s liquidity 

classification system with core elements 

of an alternative liquidity classification 

methodology generated under a 

Liquidity Risk Framework (as defined 

below) established by JPMIM and its 

affiliates (collectively, ‘‘JPM’’). The 

Applicants would also modify related 

reporting requirements on Form N– 

PORT and Form N–LIQUID solely to the 

extent necessary to implement the 

Amended Liquidity Program. 

Hearing or Notification of Hearing: 

An order granting the application will 

be issued unless the Commission orders 

a hearing. Interested persons may 

request a hearing by emailing the 

Commission’s Secretary at SecretarysOffice@sec.gov and serving Applicants 

with a copy of the request by email. 


KHAMMOND on DSKJM1Z7X2PROD with NOTICES