28018 Federal Register / Vol. 83, No. 116 / Friday, June 15, 2018 / Notices 

2The requested relief would apply to direct sales 

of shares in Creation Units by a Fund to a Fund of 

Funds and redemptions of those shares. Applicants, 

moreover, are not seeking relief from section 17(a) 

for, and the requested relief will not apply to, 

transactions where a Fund could be deemed an 

Affiliated Person, or a Second-Tier Affiliate, of a 

Fund of Funds because an Adviser or an entity 

controlling, controlled by or under common control 

with an Adviser provides investment advisory 

services to that Fund of Funds. 

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

2 17 CFR 240.19b–4. 

3 In Amendment No. 1, OCC corrected formatting 

errors in Exhibits 5A and 5B without changing the 

substance of the proposed rule change. 

in sections 12(d)(1)(A) and (B) of the 

Act. 

8. Applicants request an exemption 

from sections 17(a)(1) and 17(a)(2) of the 

Act to permit persons that are affiliated 

persons, or second-tier affiliates, of the 

Funds, solely by virtue of certain 

ownership interests, to effectuate 

purchases and redemptions in-kind. The 

deposit procedures for in-kind 

purchases of Creation Units and the 

redemption procedures for in-kind 

redemptions of Creation Units will be 

the same for all purchases and 

redemptions and Deposit Instruments 

and Redemption Instruments will be 

valued in the same manner as those 

Portfolio Instruments currently held by 

the Funds. Applicants also seek relief 

from the prohibitions on affiliated 

transactions in section 17(a) to permit a 

Fund to sell its shares to and redeem its 

shares from a Fund of Funds, and to 

engage in the accompanying in-kind 

transactions with the Fund of Funds.2

The purchase of Creation Units by a 

Fund of Funds directly from a Fund will 

be accomplished in accordance with the 

policies of the Fund of Funds and will 

be based on the NAVs of the Funds. 

9. Applicants also request relief to 

permit a Feeder Fund to acquire shares 

of another registered investment 

company managed by the Adviser 

having substantially the same 

investment objectives as the Feeder 

Fund (‘‘Master Fund’’) beyond the 

limitations in section 12(d)(1)(A) and 

permit the Master Fund, and any 

principal underwriter for the Master 

Fund, to sell shares of the Master Fund 

to the Feeder Fund beyond the 

limitations in section 12(d)(1)(B). 

10. Section 6(c) of the Act permits the 

Commission to exempt any persons or 

transactions from any provision of the 

Act if 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 12(d)(1)(J) of the Act 

provides that the Commission may 

exempt any person, security, or 

transaction, or any class or classes of 

persons, securities, or transactions, from 

any provision of section 12(d)(1) if the 

exemption is consistent with the public 

interest and the protection of investors. 

Section 17(b) of the Act authorizes the 

Commission to grant an order 

permitting a transaction otherwise 

prohibited by section 17(a) if it finds 

that (a) the terms of the proposed 

transaction are fair and reasonable and 

do not involve overreaching on the part 

of any person concerned; (b) the 

proposed transaction is consistent with 

the policies of each registered 

investment company involved; and (c) 

the proposed transaction is consistent 

with the general purposes of the Act. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–12902 Filed 6–14–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83406; File No. SR–OCC– 

2018–008] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Proposed Rule Change, as 

Modified by Amendment No. 1, Related 

to The Options Clearing Corporation’s 

Stress Testing and Clearing Fund 

Methodology 

June 11, 2018. 

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

Securities Exchange Act of 1934 

(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule 

19b–4 thereunder,2 notice is hereby 

given that on May 30, 2018, 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. On June 7, 

2018, OCC filed Amendment No. 1 to 

the proposed rule change.3 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 

The proposed rule change by OCC 

concerns proposed changes to OCC’s 

By-Laws and Rules, the formalization of 

a substantially new Clearing Fund 

Methodology Policy (‘‘Policy’’), and the 

adoption of a document describing 

OCC’s new Clearing Fund and stress 

testing methodology (‘‘Methodology 

Description’’). The proposed changes 

are primarily designed to enhance 

OCC’s overall resiliency, particularly 

with respect to the level of OCC’s prefunded financial resources. Specifically, 

the proposed changes would: 

(1) Reorganize, restate, and 

consolidate the provisions of OCC’s ByLaws and Rules relating to the Clearing 

Fund into a newly revised Chapter X of 

OCC’s Rules; 

(2) modify the coverage level of OCC’s 

Clearing Fund sizing requirement to 

protect OCC against losses stemming 

from the default of the two Clearing 

Member Groups that would potentially 

cause the largest aggregate credit 

exposure for OCC in extreme but 

plausible market conditions (i.e., adopt 

a ‘‘Cover 2 Standard’’ for sizing the 

Clearing Fund); 

(3) adopt a new risk tolerance for OCC 

to cover a 1-in-50 year hypothetical 

market event at a 99.5% confidence 

level over a two-year look-back period; 

(4) adopt a new Clearing Fund and 

stress testing methodology, which 

would be underpinned by a new 

scenario-based one-factor risk model 

stress testing approach, as detailed in 

the newly proposed Policy and 

Methodology Description; 

(5) document governance, monitoring, 

and review processes related to Clearing 

Fund and stress testing; 

(6) provide for certain anti-procyclical 

limitations on the reduction in Clearing 

Fund size from month to month; 

(7) increase the minimum Clearing 

Fund contribution requirement for 

Clearing Members to $500,000; 

(8) modify OCC’s allocation weighting 

methodology for Clearing Fund 

contributions; 

(9) reduce from five to two business 

days the timeframe within which 

Clearing Members are required to fund 

Clearing Fund deficits due to monthly 

or intra-month resizing or due to Rule 

amendments; 

(10) provide additional clarity in 

OCC’s Rules regarding certain antiprocyclicality measures in OCC’s 

margin model; and 

(11) make a number of other nonsubstantive clarifying, conforming, and 

organizational changes to OCC’s ByLaws, Rules, Collateral Risk 

Management Policy, Default 

Management Policy, and filed 

procedures, including retiring OCC’s 

existing Clearing Fund Intra-Month Resizing Procedure, Financial Resources 

Monitoring and Call Procedure (‘‘FRMC 

Procedure’’), and Monthly Clearing 

Fund Sizing Procedure, as these 

procedures would no longer be relevant 

to OCC’s proposed Clearing Fund and 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 116 / Friday, June 15, 2018 / Notices 28019 

4OCC recently proposed changes to Article VIII 

of its By-Laws in connection with advance notice 

and proposed rule change filings related to 

enhanced and new tools for recovery scenarios. See 

Securities Exchange Act Release No. 82351 

(December 19, 2017), 82 FR 61107 (December 26, 

2017) (SR–OCC–2017–020) and Securities Exchange 

Act Release No. 82513 (January 17, 2018). 83 FR 

3244 (January 23, 2018) (SR–OCC–2017–809). The 

proposed changes currently pending Commission 

review in SR–OCC–2017–020 and SR–OCC–2017– 

809 are indicated in Exhibit 5B with double 

underlined and double strikethrough text. 

5 Id. Proposed changes currently pending 

Commission review in SR–OCC–2017–020 and SR– 

OCC–2017–809 are indicated in Exhibit 5C with 

double underlined and double strikethrough text. 

6OCC’s By-Laws and Rules can be found on 

OCC’s public website: http://optionsclearing.com/ 

about/publications/bylaws.jsp. 

7See Rule 1001(a). 8The term ‘‘Clearing Fund Draw’’ refers to an 

estimated stress loss exposure in excess of margin 

requirements. 

9See Rule 1001(b). 

10See Rule 1003. 

11See Securities Exchange Act Release No. 74980 

(May 15, 2015), 80 FR 29364 (May 21, 2015) (SR– 

OCC–2015–009). See also Securities Exchange Act 

Release No. 74981 (May 15, 2015), 80 FR 29367 

(May 21, 2015) (SR–OCC–2014–811). 

12 In the case where an estimated draw is 

associated with multiple Clearing Members within 

a single Clearing Member Group, the margin call is 

allocated among the individual Clearing Members 

in the Clearing Member Group based on each 

Clearing Member’s proportionate share of the ‘‘total 

risk’’ for such Clearing Member Group, as that term 

is defined in current Rule 1001(b). See Rule 

1001(b). Accordingly, the term ‘‘total risk’’ in this 

context means the margin requirement with respect 

to all accounts of the Clearing Member Group 

exclusive of the net asset value of the positions in 

such accounts aggregated across all such accounts. 

13See supra note 10. 

stress testing methodology and would 

be replaced by the proposed Rules, 

Policy, and Methodology Description 

described herein. 

The proposed amendments to OCC’s 

By-Laws and Rules can be found in 

Exhibits 5A and 5B, respectively. 

Material proposed to be added to OCC’s 

By-Laws and Rules as currently in effect 

is marked by underlining, and material 

proposed to be deleted is marked in 

strikethrough text.4 As proposed, 

existing Chapter X would be deleted 

and replaced with new Chapter X in its 

entirety, as set forth in Exhibit 5B. 

The proposed Policy and 

Methodology Description have been 

submitted in Exhibits 5C and 5D, 

respectively, and have been submitted 

without marking to facilitate review and 

readability of the documents as they are 

being submitted in their entirety as new 

rule text.5

The Clearing Fund Intra-Month Resizing Procedure, FRMC Procedure, and 

Monthly Clearing Fund Sizing 

Procedure can be found in Exhibits 5E, 

5F and 5G, respectively, with the 

deletion (or retirement) of these 

procedures indicated by strikethrough 

text. 

The proposed changes to OCC’s 

Collateral Risk Management Policy and 

Default Management Policy can be 

found in Exhibits 5H and 5I, 

respectively. Material proposed to be 

added to the policies as currently in 

effect is marked by underlining, and 

material proposed to be deleted is 

marked in strikethrough text. 

All terms with initial capitalization 

not defined herein have the same 

meaning as set forth in OCC’s By-Laws 

and Rules.6

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 

Overview of OCC’s Existing Clearing 

Fund Methodology 

OCC currently sizes its Clearing Fund 

at an amount sufficient to protect OCC 

against losses under simulated default 

scenarios that include (1) an 

idiosyncratic default scenario that 

includes the default of the single 

Clearing Member Group whose default 

would be likely to result in the largest 

draw against the Clearing Fund at a 99% 

confidence level and (2) a minor 

systemic event default scenario 

involving the near-simultaneous default 

of two randomly-selected Clearing 

Member Groups calculated at a 99.9% 

confidence level (‘‘Cover 1 Standard’’).7

OCC then uses the daily peak of such 

draw estimates to determine the 

monthly size of the Clearing Fund, 

which is established at the greater of (i) 

a ‘‘base amount’’ equal to the peak fiveday rolling average of the Clearing Fund 

Draws 8 observed over the preceding 

three calendar months, plus a 

prudential margin of safety equal to $1.8 

billion, or (ii) 110% of OCC’s committed 

credit facilities. Upon each monthly 

determination of the Clearing Fund’s 

size, each Clearing Member is required 

to contribute an amount equal to the 

sum of: (i) The $150,000 minimum 

membership requirement, and (ii) an 

amount equal to the weighted average of 

the Clearing Member’s proportionate 

share of open interest, volume, and total 

risk charges.9 Any deficits resulting 

from a difference between a Clearing 

Member’s required Clearing Fund 

contribution and the amount that such 

member currently has on deposit are 

due within five business days of the 

resizing.10

Supplemental to the monthly Clearing 

Fund sizing process, OCC’s Financial 

Risk Management department (‘‘FRM’’) 

assesses on a daily basis the sufficiency 

of the Clearing Fund by monitoring 

Clearing Fund Draw estimates in order 

to identify exposures that may require 

collection of additional margin from a 

Clearing Member Group or an intramonth resizing of the Clearing Fund in 

accordance with OCC’s FRMC 

Procedure.11 In instances where an 

estimate of a particular Clearing 

Member Group’s Clearing Fund Draw 

(referred to herein as an ‘‘idiosyncratic’’ 

estimate) exceeds 75% of the amount 

currently in the Clearing Fund (i.e., the 

current Clearing Fund requirement less 

any deficits), OCC issues a margin call 

against the Clearing Member Group(s) 

generating such draw(s) for an amount 

equal to the difference between such 

estimated draw amount and the base 

amount of the Clearing Fund.12 The 

margin call per-Clearing Member may 

be limited to an amount equal to the 

lesser of $500 million or 100% of such 

Clearing Member’s net capital, subject to 

OCC management discretion. All margin 

calls issued must be satisfied by each 

applicable Clearing Member within one 

hour of having been notified and remain 

in place until deficits associated with 

the next monthly Clearing Fund sizing 

are collected.13

In more extreme circumstances, 

where OCC observes an idiosyncratic 

Clearing Fund Draw estimate (after 

factoring in margin calls issued) 

exceeding 90% of the Clearing Fund, 

OCC increases the size of the Clearing 

Fund by a minimum amount equal to 

the greater of (i) $1 billion, or (ii) 125% 

of the difference between the projected 

draw (reduced by margin calls issued) 

and the Clearing Fund in effect. Each 

Clearing Member not subject to OCC’s 

minimum $150,000 Clearing Fund 

requirement (e.g., a Futures-Only 

Affiliated Clearing Member) receives a 

proportionate share of the Clearing 

Fund increase equal to its proportionate 

share of the variable portion of the 

Clearing Fund for the current month 

(i.e., the Clearing Member’s 

proportionate share of the Clearing 

Fund amount as determined pursuant to 

current Rule 1001(b)(y)). Any deficits 


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28020 Federal Register / Vol. 83, No. 116 / Friday, June 15, 2018 / Notices 

14The proposed Policy would define OCC’s ‘‘PreFunded Financial Resources’’ to mean margin of the 

defaulted Clearing Member and the required 

Clearing Fund less any deficits, exclusive of OCC’s 

assessment powers. 

15OCC has separately submitted to the 

Commission its Comprehensive Stress Testing and 

Clearing Fund Methodology document and 

Dynamic VIX Calibration Process paper, which are 

included in this filing as Exhibits 3A and 3B, and 

for which OCC has requested confidential 

treatment. These Exhibits are being provided as 

supplemental information to the filing and would 

not constitute part of OCC’s rules, which have been 

provided in Exhibit 5. 

16A quality that is positively correlated with the 

overall state of the market is deemed to be 

‘‘procyclical.’’ For example, procyclicality may be 

evidenced by increasing margin or Clearing Fund 

requirements in times of stressed market conditions 

and low margin or Clearing Fund requirements 

when markets are calm. Hence, anti-procyclical 

features in a model are measures intended to 

prevent risk-base models from fluctuating too 

drastically in response to changing market 

conditions. 

17While Article VIII of the By-Laws would 

effectively be reserved for future use, a statement 

would be added to indicate that OCC maintains the 

Clearing Fund as provided in and subject to the 

Rules provided in Chapter X. 

associated with the increase to the 

Clearing Fund must be satisfied within 

five business days of the resizing. 

OCC has identified a number of 

limitations to its current methodology, 

which is unable to incorporate historical 

stress test scenarios and which can 

result in disproportionate changes to the 

Clearing Fund size in response to even 

transitory changes in volatility. As a 

result, OCC is proposing to replace its 

current Clearing Fund sizing 

methodology with a new methodology 

that would allow OCC to size and assess 

the sufficiency of its Clearing Fund with 

a wider range of historical and 

hypothetical scenarios. 

Proposed Changes to OCC’s Clearing 

Fund and Stress Testing Rules and 

Methodology 

OCC is proposing a number of 

enhancements intended to strengthen its 

overall resiliency, particularly with 

respect to OCC’s Pre-Funded Financial 

Resources,14 including, but not limited 

to, the following: 

(1) Reorganize, restate, and 

consolidate the provisions of OCC’s ByLaws and Rules relating to the Clearing 

Fund into a newly revised Chapter X of 

OCC’s Rules; 

(2) modify the coverage level of OCC’s 

Clearing Fund sizing requirement to 

ensure that the size of the Clearing Fund 

is sufficient to protect OCC against 

losses stemming from the default of the 

two Clearing Member Groups that 

would potentially cause the largest 

aggregate credit exposure for OCC in 

extreme but plausible market conditions 

(i.e., adopt a ‘‘Cover 2 Standard’’ for 

sizing the Clearing Fund); 

(3) adopt a new risk tolerance for OCC 

to cover a 1-in-50 year hypothetical 

market event at a 99.5% confidence 

level over a two-year look-back period; 

(4) adopt a new Clearing Fund and 

stress testing methodology, which 

would be underpinned by a new 

scenario-based one-factor risk model 

stress testing approach, as detailed in 

the newly proposed Policy and 

Methodology Description; 15

(5) document governance, monitoring, 

and review processes related to Clearing 

Fund and stress testing; 

(6) provide for certain antiprocyclical 16 limitations on the 

reduction in Clearing Fund size from 

month to month; 

(7) increase the minimum Clearing 

Fund contribution requirement for 

Clearing Members to $500,000; 

(8) modify OCC’s allocation weighting 

methodology for Clearing Fund 

contributions; 

(9) reduce from five to two business 

days the timeframe within which 

Clearing Members are required to fund 

Clearing Fund deficits due to monthly 

or intra-month resizing or due to Rule 

amendments; 

(10) provide additional clarity in 

OCC’s Rules regarding certain antiprocyclicality measures in OCC’s 

margin model; and 

(11) make a number of other nonsubstantive clarifying, conforming, and 

organizational changes to OCC’s ByLaws, Rules, and filed procedures. 

1. Reorganization and Consolidation of 

Clearing Fund By-Laws and Rules 

The primary provisions that address 

OCC’s Clearing Fund are currently 

located in Article VIII of the By-Laws 

and Chapter X of the Rules. Because the 

proposed changes to the Clearing Fund 

would substantially amend the relevant 

By-Law and Rule provisions, OCC 

believes that this is an appropriate 

opportunity to consolidate the primary 

provisions that address the Clearing 

Fund into Chapter X of the Rules. As a 

result, the content of Article VIII of the 

By-Laws would be consolidated into 

Chapter X of the Rules, subject to the 

proposed amendments described 

herein.17 In place of this, Article VIII of 

the By-Laws would contain a general 

statement that OCC shall maintain a 

Clearing Fund, as provided in and 

subject to the terms of Chapter X of the 

Rules, and the size of the Clearing Fund 

shall at all times be subject to minimum 

sizing requirements and generally be 

calculated on a monthly basis by OCC; 

however, the size of the Clearing Fund 

may be adjusted more frequently than 

monthly under certain conditions 

specified in proposed Rule 1001. OCC 

believes that consolidating all of the 

Clearing Fund-related provisions of its 

By-Laws and Rules into one place 

would provide more clarity around, and 

enhance the readability of, OCC’s 

Clearing Fund requirements. 

OCC notes that, while the content of 

Article VIII is being moved out of the 

By-Laws and into the Rules, subject to 

the proposed changes described herein, 

OCC is not proposing to change the 

existing governance requirements with 

respect to amending the provisions 

currently contained in Article VIII. 

Article XI, Section 2 of the By-Laws 

provides that the Board of Directors may 

amend the Rules by a majority vote, 

while Article XI, Section 1 of the ByLaws provides that amendments to the 

By-Laws require an affirmative vote of 

two-thirds of the directors then in office, 

but not less than a majority of the 

number of directors fixed by the ByLaws. To ensure that the latter, 

heightened governance standard 

continues to apply to the Clearing Fund 

provisions that will be moved from 

Article VIII of the By-Laws to Chapter X 

of the Rules, OCC is proposing to amend 

Article XI, Section 2 of the By-Laws to 

apply the heightened approval 

requirements to the provisions of 

Chapter X of the Rules that would be 

carried over from the By-Laws. 

Specifically, OCC would amend Article 

XI of the By-Laws to stipulate that while 

the Rules may be amended at any time 

by the Board of Directors, any 

amendment of the introduction to newly 

proposed Chapter X of the Rules, Rule 

1002, Rule 1006, Rule 1009 and Rule 

1010 (the substance of which is 

primarily derived from Article VIII of 

the By-Laws) shall require the 

affirmative vote of two-thirds of the 

directors then in office (but not less than 

a majority of the number of directors 

fixed by the By-Laws). Moreover, Article 

XI of the By-Laws would be amended to 

provide that the first sentence of 

proposed Rule 1006(e) may not be 

amended by action of the Board of 

Directors without the approval of the 

holders of all of the outstanding 

Common Stock of the OCC entitled to 

vote thereon. Proposed Rule 1006(e) is 

derived from existing Article VIII, 

Section 5(d) of the By-Laws, which is 

currently subject to this stockholder 

consent requirement under Article XI, 

Section 1 of the By-Laws. A detailed 

discussion of other organizational 

changes can be found in Section 10 

below. 

As noted above, and further described 

below, OCC also proposes to adopt a 


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Federal Register / Vol. 83, No. 116 / Friday, June 15, 2018 / Notices 28021 

18See 17 CFR 240.17Ad–22(b)(3) and (e)(4)(iii). 

19The calculated size of the Clearing Fund may 

also be determined more frequently than monthly 

under certain conditions, as specified within 

proposed Rule 1001(c). 

20 15 U.S.C. 78a et seq. See supra note 17. 

21See Committee on Payment and Settlement 

Systems and Technical Committee of the 

International Organization of Securities 

Commissions, Principles for financial market 

infrastructures (Apr. 16, 2012), available at http:// 

www.bis.org/publ/cpss101a.pdf. 

22Under the proposed Clearing Fund 

methodology, OCC would no longer maintain the 

prudential margin of safety, as currently provided 

for in existing Rule 1001(a). As described further 

herein, OCC’s proposed risk tolerance would be set 

at a 1-in-50 year market event; however, OCC would 

size its Clearing Fund to cover a more conservative 

1-in-80 year event, creating a buffer beyond its risk 

tolerance. As a result, OCC believes the prudential 

margin of safety would no longer be necessary. 

23Under the proposed Policy, ‘‘Pre-Funded 

Financial Resources’’ would be defined as the 

margin of the defaulted Clearing Member and the 

required Clearing Fund less any deficits. OCC 

would not include assessment powers as a PreFunded Financial Resource. 

24OCC notes that a 1-in-50 year hypothetical 

market event corresponds to a 99.9921% confidence 

interval under OCC’s chosen distribution of 2-day 

logarithmic S&P 500 index returns. The 

construction of Hypothetical stress test scenarios, 

including the 1-in-50 year market event used for 

OCC’s risk tolerance, is discussed in Section 4 

below. 

25 ‘‘Risk factors’’ refer broadly to all of the 

individual underlying securities (such as Google, 

IBM and Standard & Poor’s Depositary Receipts 

(‘‘SPDR’’), S&P 500 Exchange Traded Funds 

(‘‘SPY’’), etc.) listed on a market. The ‘‘risk drivers’’ 

are a selected set of securities or market indices 

(e.g., the SPX or the Cboe Volatility Index (‘‘VIX’’)) 

that are used to represent the main sources or 

drivers for the price changes of the risk factors. The 

use and application of risk factors and risk drivers 

in OCC’s proposed methodology are discussed 

further in Section 4 below. 

new Policy and Methodology 

Description to supplement its proposed 

Rules and provide further details 

around OCC’s Clearing Fund and stress 

testing methodology and the related 

governance framework. 

2. Adoption of a Cover 2 Standard for 

OCC’s Clearing Fund 

Under existing Rule 1001(a) and 

consistent with applicable Exchange Act 

requirements,18 OCC currently 

maintains a Cover 1 Standard with 

respect to the size of its Clearing Fund. 

The current methodology uses a sizing 

approach whereby OCC estimates draws 

against the Clearing Fund under a 

simulated idiosyncratic default scenario 

(representing simulated losses of a 

single Clearing Member Group) and a 

minor systemic default scenario 

(representing all pairings of two 

Clearing Member Groups, with each pair 

of distinct Clearing Member Groups 

being deemed equally likely). 

OCC is proposing to amend its Rules 

and adopt a new Policy and 

Methodology Description to implement 

a Cover 2 Standard with respect to 

sizing the Clearing Fund. As a result, 

new Rule 1001(a), which replaces 

existing Rule 1001(a), would provide, in 

part, that the size of the Clearing Fund 

shall be established on a monthly basis 

at an amount determined by OCC to be 

sufficient to protect it against losses 

stemming from the default of the two 

Clearing Member Groups that would 

potentially cause the largest aggregate 

credit exposure for OCC under stress 

test scenarios that represent extreme but 

plausible market conditions (subject to 

certain minimum sizing requirements) 

(such stress tests being ‘‘Sizing Stress 

Tests’’).19 The proposed Sizing Stress 

Tests would be supplemented by 

additional historical or hypothetical 

stress test scenarios (‘‘Sufficiency Stress 

Tests’’) and, in the event Sufficiency 

Stress Tests call for a larger Clearing 

Fund size, the Clearing Fund shall be resized based on such Sufficiency Stress 

Tests (as described in more detail in 

Section 4.e below). 

The adoption of a Cover 2 Standard 

for the Clearing Fund would continue to 

satisfy OCC’s existing obligations under 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’ or ‘‘Act’’),20 and also 

would be consistent with international 

standards and best practices for central 

counterparties (‘‘CCPs’’).21 OCC believes 

that moving to an industry best practice 

Cover 2 Standard would increase OCC’s 

resiliency and enable it to better 

withstand the default of multiple 

Clearing Members. OCC’s proposed 

approach of adopting a Cover 2 

Standard is reiterated in the proposed 

Policy and Methodology Description, 

and the stress tests referred to in new 

Rule 1001(a) are described in more 

detail in Section 4 below.22

3. New Risk Tolerance for OCC’s PreFunded Financial Resources 

OCC proposes to adopt a new risk 

tolerance with respect to credit risk that 

its Clearing Fund, along with OCC’s 

other Pre-Funded Financial 

Resources,23 should be sufficient to 

cover a wide range of foreseeable stress 

scenarios that include, but are not 

limited to, the default of the two 

Clearing Member Groups that would 

potentially cause the largest aggregate 

credit exposure in extreme but plausible 

market conditions. In developing a risk 

tolerance with regard to the sizing of the 

Clearing Fund, OCC believes that a 1-in50 year hypothetical market event 24

represents the outer range of extreme 

but plausible scenarios for OCC’s 

cleared products. Accordingly, OCC 

proposes to adopt a new risk tolerance 

with respect to sizing its Pre-Funded 

Financial Resources that would cover a 

1-in-50 year hypothetical market event 

on a Cover 2 Standard at a 99.5% 

confidence level over a two-year lookback period. The hypothetical scenarios 

used to establish the proposed risk 

tolerance would be based on the 

statistical fit of the historical returns for 

the ‘‘risk drivers’’ of equity products (or 

‘‘risk factors’’) for a 1-in-50 year decline 

and rally in the Standard & Poor’s S&P 

500 Index (‘‘SPX’’).25 OCC would then 

set the size of its Clearing Fund on a 

monthly basis at an amount sufficient to 

cover this risk tolerance, as described in 

more detail in Section 4.d below. 

4. Adoption of New Clearing Fund and 

Stress Testing Methodology 

OCC proposes to adopt a new 

methodology for sizing and monitoring 

its Clearing Fund and overall PreFunded Financial Resources, which 

primarily would be detailed in the 

proposed Policy and the Methodology 

Description. OCC believes that its 

proposed methodology would enable it 

to measure its credit exposure and to 

size its Pre-Funded Financial Resources 

at a level sufficient to cover potential 

losses under extreme but plausible 

market conditions. 

Under the requirements of the 

proposed Policy, OCC would base its 

determination of the Clearing Fund size 

on the results of stress tests conducted 

daily using standard predetermined 

parameters and assumptions. These 

daily stress tests would consider a range 

of relevant stress scenarios and possible 

price changes in liquidation periods, 

including but not limited to: (1) 

Relevant peak historic price volatilities; 

(2) shifts in other market factors 

including, as appropriate, price 

determinants and yield curves; and (3) 

the default of one or multiple Clearing 

Members. OCC also would conduct 

reverse stress tests for informational 

purposes aimed at identifying extreme 

default scenarios and extreme market 

conditions for which the OCC’s 

financial resources would be 

insufficient. 

As further described in the proposed 

Methodology Description, the stress 

scenarios used in the proposed 

methodology would consist of two types 

of scenarios: ‘‘Historical Scenarios’’ and 

‘‘Hypothetical Scenarios.’’ Historical 

Scenarios would replicate historical 

events in current market conditions, 

which include the set of currently 

existing securities, their prices and 

volatility levels. These scenarios 

provide OCC with information regarding 


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pre-defined reference points determined 

to be relevant benchmarks for assessing 

OCC’s exposure to Clearing Members 

and the adequacy of its financial 

resources. Hypothetical Scenarios 

would represent events in which market 

conditions change in ways that have not 

yet been observed. The Hypothetical 

Scenarios would be derived using 

statistical methods (e.g., draws from 

estimated multivariate distributions) or 

created based on expert judgment (e.g., 

a 15% decline in market prices and 50% 

in volatility). These scenarios would 

give OCC the ability to change the 

distribution and level of stress in ways 

necessary to produce an effective 

forward-looking stress testing 

methodology. OCC would use these predetermined stress scenarios in stress 

tests, conducted on a daily basis, to 

determine OCC’s risk exposure to each 

Clearing Member Group by simulating 

the profits and losses of the positions in 

their respective account portfolios 

under each such stress scenario. 

The proposed Methodology 

Description would also describe OCC’s 

proposed approach for constructing 

stress test portfolios. For purposes of the 

proposed methodology, OCC would 

construct portfolios based on 

‘‘liquidation positions,’’ which are 

designed to more closely reflect how 

positions would be internalized (or 

netted) as part of OCC’s default 

management process. The liquidation 

position set is created through an 

internalization process where long and 

short positions in the same contract 

series are closed out within an account 

type at the Clearing Member level. This 

replicates the process OCC would 

perform in the case of a Clearing 

Member default when offsetting 

positions are internalized before 

liquidating the remainder of the 

defaulter’s portfolio. For simplicity 

purposes, OCC developed its current set 

of liquidation positions by internalizing 

within an account type at the Clearing 

Member level but does not incorporate 

potential internalization that can occur 

across account types. As a result, 

liquidation positions only reflect a 

portion of the potential exposurereducing benefits associated with 

internalization and may lead to more 

conservative estimates of exposure. 

As described further below, the 

proposed Policy and Methodology 

Description would include stress tests 

designed to: (1) Determine the size of 

the Clearing Fund (i.e., Sizing Stress 

Tests run using OCC’s inventory of 

‘‘Sizing Scenarios’’), (2) assess OCC’s 

Clearing Fund size with respect to its 

risk tolerance and any other scenarios 

determined by the Risk Committee (i.e., 

Adequacy Stress Tests run using OCC’s 

inventory of ‘‘Adequacy Scenarios’’), (3) 

measure the exposure of the Clearing 

Fund to the portfolios of individual 

Clearing Member Groups and determine 

whether any such exposure is 

sufficiently large as to necessitate OCC 

calling for additional margin resources 

from that individual Clearing Member 

Group (or Groups) or from Clearing 

Members generally through an intramonth resizing of the Clearing Fund 

(i.e., Sufficiency Stress Tests run using 

OCC’s inventory of ‘‘Sufficiency 

Scenarios’’), and (4) monitor and assess 

OCC’s total financial resources under a 

variety of market conditions (i.e., 

Informational Stress Tests run using 

OCC’s inventory of ‘‘Informational 

Scenarios’’). 

OCC’s proposed stress testing model, 

the construction of Hypothetical and 

Historical Scenarios, and the variety of 

stress tests thereunder are described in 

more detail below. 

a. Proposed Stress Testing Model 

(i). Risk Drivers and Stress Scenarios 

As detailed in the proposed 

Methodology Description, the proposed 

stress testing methodology is a scenariobased risk factor model with the 

following principal elements. First, a set 

of risk drivers are selected based on the 

portfolio exposures of all Clearing 

Member Groups in the aggregate. 

Second, each individual underlying 

security contained in the portfolio of a 

Clearing Member Group (each a ‘‘risk 

factor’’) is mapped to a risk driver, and 

the sensitivity or ‘‘beta’’ of the security 

with respect to the corresponding risk 

driver is estimated (i.e., the sensitivity 

of the price of the security relative to the 

price of the risk driver). Third, a set of 

stress scenarios is generated by 

assigning a stress shock to each of the 

risk drivers, with the shocks of an 

individual underlying security or risk 

factor determined by the shock of its 

risk driver and its sensitivity (or beta) to 

the risk driver. Fourth, for each of the 

stress scenarios, the risk exposure or 

shortfall of each portfolio of a Clearing 

Member is calculated and aggregated at 

the Clearing Member Group level. 

Under the proposed stress testing 

methodology, each individual 

underlying security in the Clearing 

Members’ portfolios is represented by a 

risk factor (such as Google, IBM, 

Standard & Poor’s Depositary Receipts 

(‘‘SPDR’’), S&P 500 Exchange Traded 

Funds (‘‘SPY’’), etc.). The number of 

risk factors is typically in the thousands. 

Because the vast amount of OCC’s 

products are equity based, the risk 

drivers comprise a small set of 

underlying securities or market indices 

(e.g., Cboe S&P 500 Index (‘‘SPX’’), or 

the VIX) that are used to represent the 

main sources or drivers for the price 

changes of the risk factors. Other 

relevant risk drivers are included to 

cover U.S. and Canadian Government 

Security collateral positions, as well as 

commodity based exchange-traded 

funds (‘‘ETFs’’) and futures products. 

The risk drivers are selected based on 

the characteristics of the risk factors in 

the Clearing Members’ portfolios. 

After the risk drivers are selected, 

each risk factor would be mapped to one 

risk driver. This mapping allows OCC to 

simulate movements for a large number 

of risk factors by the movements of a 

smaller number of risk drivers. In 

general, the mapping depends on the 

type of risk factor. For example, equity 

price risk factors generally are mapped 

to SPX and volatility risk factors to VIX. 

Government bond risk factors generally 

would be mapped to either U.S. Dollar 

(‘‘USD’’) Treasury yields or Canadian 

Dollar (‘‘CAD’’) government bond yields 

depending on the currency. The 

Treasury ETFs generally would be 

mapped to one of the Treasury bond 

ETFs. The commodity products 

generally would be mapped to one of 

the representative ETFs of the 

corresponding commodity class. All 

other risk factors initially would be 

mapped by default to SPX. 

Under the proposed Methodology 

Description, risk drivers and the 

corresponding shocks would be 

reviewed regularly by OCC’s Stress 

Testing Working Group (‘‘STWG’’), a 

cross-departmental team including 

senior officers from FRM, Quantitative 

Risk Management (‘‘QRM’’), Model 

Validation Group (‘‘MVG’’), and 

Enterprise Risk Management. The 

addition of a new risk driver or change 

in an existing risk driver would most 

likely be driven by a change in OCC’s 

product exposure or by other changes in 

the market. Changes to risk drivers 

would be reviewed and approved by the 

STWG. QRM would recalibrate scenario 

shocks at least annually. In addition, on 

a quarterly basis (or more frequently if 

QRM or STWG determines that updates 

are necessary to capture significant 

market events in a timely fashion), QRM 

would recalibrate the risk driver shocks 

and report those results to the STWG 

who would review and approve any 

updates to the risk driver shocks. 

To simulate a stressed market 

scenario, OCC would construct two 

kinds of scenarios, namely Hypothetical 

Scenarios (including statistically 

derived scenarios) and Historical 

Scenarios. Hypothetical Scenarios 

constructed using statistical methods 


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26OCC would extend this dataset from March 

1957 to the present if OCC determines that price 

shocks need to be re-calibrated. As a general matter, 

OCC has established this look-back period primarily 

on the basis of the quality of available data. The 

SPX, in its current form, dates back to 1957, and 

OCC therefore uses all of the index’s data since that 

date. Furthermore, based on OCC’s analysis of 

various observation windows dating back to the 

Great Depression, OCC has observed that the price 

shocks vary with the different periods used in the 

calibration. OCC’s decision to use the entire history 

of the SPX is based on its desire to minimize the 

effects associated with a pre-defined observation 

window, and to avoid the subjective determination 

of higher or lower periods of volatility or the 

sudden exclusion of dates that fall outside of a fixed 

look back period. As noted above, QRM would 

recalibrate the risk driver shocks on a quarterly 

basis and report those results to the STWG who 

would review and approve any updates to the risk 

driver shocks. 

27A data set with a ‘‘fat tail’’ is one in which 

extreme price returns have a higher probability of 

occurrence than would be the case in a normal 

distribution. 

28 Generally speaking, the implied volatility of an 

option is a measure of the expected future volatility 

of the value of the option’s annualized standard 

deviation of the price of the underlying security, 

index, or future at exercise, which is reflected in the 

current option premium in the market. Using the 

Black-Scholes options pricing model, the implied 

volatility is the standard deviation of the 

underlying asset price necessary to arrive at the 

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

maturity, underlying asset price and given the 

current risk-free rate. In effect, the implied volatility 

is responsible for that portion of the premium that 

cannot be explained by the then-current intrinsic 

value (i.e., the difference between the price of the 

underlying and the exercise price of the option) of 

the option, discounted to reflect its time value. 

29For defined Historical Scenarios, the implied 

volatility shock leverages a beta based on the ratio 

of the risk factor price shock to the SPX price shock. 

would be based on various quantiles of 

the fitted distribution of the log returns 

of the main risk driver (e.g., SPX). 

Historical Scenarios on the other hand 

would be created using historic price 

moves for the risk factors on a given 

date where the scenario is defined. 

Additional details on the proposed 

stress testing model by asset class are 

discussed below. 

(i). Equity Risk Drivers and Shocks 

Under the proposed methodology, 

price shocks used for equity instruments 

in the statistically-derived Hypothetical 

Scenarios would be based on the 

quantiles of fitted statistical 

distributions of the 2-day returns of the 

risk driver (e.g., a 1-in-80 year event 

SPX down shock). For example, as 

noted above, OCC uses the SPX as a risk 

driver for equity price moves. OCC 

would construct the majority of its 

Hypothetical Scenarios by fitting an 

appropriate statistical distribution to 

SPX returns. OCC would construct a 

historical dataset of SPX 2-day log 

returns dating back to 1957,26 to 

characterize its fat-tailed 27 and 

asymmetric distribution. In order to 

reduce pro-cyclicality in Clearing Fund 

sizing and also to represent betas in a 

stressed market, OCC would shock risk 

factors using (1) a historical beta and (2) 

a beta equal to 1. The portfolio level 

profit and loss would be calculated with 

both betas separately for each 

Hypothetical Scenario, and OCC would 

use the calculation yielding the worst of 

the two outcomes in the subsequent 

Clearing Fund sizing. 

The proposed Methodology 

Description would describe in detail 

OCC’s proposed methodology for 

calculating price shocks for equity 

instruments, including leveraged 

products and any underlying baskets. 

(ii). Volatility Shock Model 

As noted above, under the proposed 

methodology, OCC would use the VIX 

as the key risk driver for volatility 

shocks in its proposed stress testing 

model. The VIX is a measure of the onemonth implied volatility 28 of the SPX, 

which represents the market’s 

expectation of stock market volatility 

over the next 30-day period. For risk 

factors with SPX as their risk driver, 

implied volatility shocks would be 

modeled from SPX implied volatility 

shocks and the price beta of the risk 

factor.29 For non-SPX driven risk 

factors, the implied volatility shock 

would be based on historical volatility 

beta regressed directly against the VIX. 

Accordingly, the proposed Methodology 

Description would describe in detail 

OCC’s proposed methodology for 

calibrating VIX shocks, including those 

risk factors with SPX as the key risk 

driver, those risk factors with a non-SPX 

risk driver, and implied volatilities of 

any underlying baskets. 

(iii). Price Shock Models for Other 

Instruments 

OCC’s proposed Methodology 

Description also would describe OCC’s 

proposed approach to modeling price 

shocks for fixed income instruments 

and futures products. Specifically, the 

Methodology Description would discuss 

OCC’s proposed approach for modeling 

foreign exchange currency shocks and 

yield curve shocks, which are used to 

shock U.S. Treasury bonds and 

Canadian government bonds held as 

collateral. The Methodology Description 

would also cover price and volatility 

shocks for commodity/energy products. 

The price shock model for commodity/ 

energy products is the same as that for 

equity class drivers and the volatility 

shock model used for options on 

commodities is the same as that for nonSPX driven risk factors. 

b. Stress Testing Scenario Construction 

OCC proposes to construct 

Hypothetical and Historical scenarios 

using two different methodologies: a 

statistical methodology and a historical/ 

defined shock methodology. Each of 

these approaches is discussed in further 

detail below. 

(i). Hypothetical Scenarios 

Under the proposed methodology, 

price shocks determined in the 

statistically-derived Hypothetical 

Scenarios would be based on the 

quantiles of fitted statistical 

distributions of the 2-day log returns of 

the risk driver. For example, Adequacy 

Scenarios would be based on the 

generated statistical down and up 

shocks for the SPX from a 1-in-50 year 

market event. On the other hand, Sizing 

Scenarios would be based on the 

generated statistical down and up 

shocks for the SPX from a 1-in-80 year 

market event. Specifically, OCC would 

use four Hypothetical Scenarios to guide 

the sizing of the Clearing Fund: (1) A 1- 

in-80 year market rally using a historical 

beta; (2) a 1-in-80 year market rally 

using a beta equal to 1; (3) a 1-in-80 year 

market decline using a historical beta; 

and (4) a 1-in-80 year market decline 

using a beta equal to 1. 

Not all Statistical Scenarios would be 

generated using fitted distributions, 

however. For example, the Statistical 

Scenarios for interest rates are based on 

the ‘‘Principal Component Analysis’’ 

methods (a commonly used statistical 

method to analyze the movements of 

yield curves of Treasury bonds), while 

the Statistical Scenarios for commodity 

ETFs would be based on the empirical 

price changes. 

The proposed Methodology 

Description would describe how OCC 

would calibrate price and volatility 

shocks for equities, fixed income 

products, and commodity/energy 

products in its Hypothetical Scenarios. 

(ii). Historical Scenarios 

OCC would construct Historical 

Scenarios using historically accurate 

price moves for risk factors on a given 

date, provided the underlying securities 

were available on the date for which the 

scenario is defined. Historical 

Scenarios, which are based on 

significant market events, would allow 

OCC to analyze how current portfolios 

would perform if a historical event were 

to occur again. Because not all of the 

securities or risk factors in current 

portfolios existed on past scenario dates, 

OCC has developed methodologies to 

approximate the past price and 

volatility movements of such risk 


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30With respect to volatility risk driver shocks, the 

exact volatility scenarios for a historical event may 

often be overridden by VIX shocks generated using 

OCC’s dynamic VIX calibration process because: (1) 

The historical volatility data is not available; and 

(2) even when the data is available, the sizes of the 

exact historical moves are too low to generate any 

realistic losses. 

31 In addition, OCC proposes conforming changes 

to delete Interpretation and Policy .02 of Rule 1001, 

which concerns the minimum confidence level 

used to size the Clearing Fund, as the confidence 

level used to size the Clearing Fund would now be 

addressed in the Policy and Methodology 

Description. 

32See supra note 21. 

factors. Under the proposed 

methodology, a technique known as 

‘‘Survival Method Pricing’’ would be 

used to backfill missing historical 

shocks. In the backfill technique, the 

observable 2-day returns of all risk 

factors would be averaged by industry 

sectors, and these sector averages would 

then be used to backfill the missing 

price returns of the securities (for 

example, Facebook stock would use the 

technology sector average under a 2008 

Historical Scenario).30

c. Clearing Fund Sizing and Stress 

Testing 

Under the proposed methodology, 

OCC would perform daily stress testing 

using a wide range of scenarios, both 

Hypothetical and Historical, designed to 

serve multiple purposes. Specifically, 

OCC’s proposed stress testing inventory 

would contain scenarios designed to: (1) 

Determine whether the financial 

resources collected from all Clearing 

Members collectively are adequate to 

cover OCC’s risk tolerance; (2) establish 

the monthly size of the Clearing Fund; 

(3) measure the exposure of the Clearing 

Fund to the portfolios of individual 

Clearing Member Groups, and 

determine whether any such exposure is 

sufficiently large as to necessitate OCC 

calling for additional resources so that 

OCC continues to maintain sufficient 

financial resources to guard against 

potential losses under a wide range of 

stress scenarios, including extreme but 

plausible market conditions; and (4) 

monitor and assess the size of OCC’s 

Pre-Funded Financial Resources against 

a wide range of stress scenarios that may 

include extreme but implausible and 

reverse stress testing scenarios. Each of 

these categories of stress tests is 

discussed in further detail below. 

(i). Adequacy Stress Tests 

Under the proposed Policy and 

Methodology Description, on a daily 

basis, OCC would perform a set of 

Adequacy Stress Tests designed to 

determine whether the financial 

resources collected from all Clearing 

Members collectively are adequate to 

cover OCC’s risk tolerance (and other 

specified scenarios as may be approved 

by the Risk Committee) (i.e., Adequacy 

Scenarios). The performance of these 

Adequacy Stress Tests would allow 

OCC to assess the size of its Clearing 

Fund against its risk tolerance; however, 

Adequacy Stress Tests would not drive 

calls for additional financial resources. 

Adequacy Scenarios would include, at a 

minimum, scenarios reflecting OCC’s 

proposed risk tolerance, which 

corresponds to a Clearing Fund size that 

would cover a 1-in-50 year market event 

on a Cover 2 Standard. Adequacy Stress 

Tests should demonstrate that OCC 

maintains sufficient Pre-Funded 

Financial resources to cover all 

Adequacy Scenarios at a 99.5% 

coverage level over a two-year look back 

period. 

(ii). Sizing Stress Tests 

Under the proposed Policy and 

Methodology Description, FRM would 

determine the monthly Clearing Fund 

size based on the results of Sizing Stress 

Tests conducted daily using standard 

predetermined parameters and 

assumptions. Specifically, OCC would 

use Sizing Stress Tests to project the 

Clearing Fund size necessary for OCC to 

maintain sufficient Pre-Funded 

Financial Resources to cover losses 

arising from the default of the two 

Clearing Member Groups that would 

potentially cause the largest aggregate 

credit exposure to OCC as a result of a 

1-in-80 year hypothetical market event, 

which OCC believes would provide 

sufficient coverage of OCC’s 1-in-50 year 

event risk tolerance (and any other 

Adequacy Scenarios as may be 

approved by the Risk Committee) and to 

guard against intra-month scenario 

volatility and procyclicality.31

Under existing Rule 1001(a), OCC’s 

Clearing Fund size determination is 

based on the peak five-day rolling 

average of its Clearing Fund sizing 

calculations observed over the 

preceding three calendar months plus a 

prudential margin of safety. As 

described in the proposed Policy and 

Methodology Description, OCC would 

continue to determine the Clearing 

Fund size for a given month by using a 

peak five-day rolling average of the 

Sizing Stress Test results over the prior 

three months but, as noted above, would 

no longer require a prudential margin of 

safety.32 OCC believes that sizing the 

Clearing Fund at a more conservative 1- 

in-80 year market event scenario (over 

the proposed 1-in-50 year risk tolerance) 

would help to reduce volatility in its 

Clearing Fund sizing methodology and 

ensure that OCC continues to maintain 

sufficient resources in the event of large 

peaks and volatile markets, thereby 

providing a similar anti-procyclical 

buffer to the current prudential margin 

of safety. 

In addition, under the proposed 

Policy, the minimum size of the 

Clearing Fund would continue to be set 

in accordance with OCC’s minimum 

liquidity resources to equal 110% of 

OCC’s committed liquidity facilities 

plus OCC’s Cash Clearing Fund 

Requirement. However, if a temporary 

increase to the Cash Clearing Fund 

Requirement is made pursuant to OCC’s 

Rules, the Executive Chairman, Chief 

Administrative Officer, or Chief 

Operating Officer would be authorized 

to determine whether such an increase 

should result in an increase in the 

minimum size of the Clearing Fund 

(which is tied to, in part, OCC’s Cash 

Clearing Fund Requirement). 

OCC also proposes to introduce some 

anti-procyclical measures for its 

monthly sizing process, which are 

discussed in Section 6 below. 

(iii). Sufficiency Stress Tests 

On a daily basis, OCC would run a set 

of Sufficiency Stress Tests to measure 

the exposure of the Clearing Fund to the 

portfolios of individual Clearing 

Member Groups and determine whether 

any such exposure is sufficiently large 

as to necessitate OCC calling for 

additional resources (1) from that 

individual Clearing Member Group (or 

Groups) in the form of margin or (2) 

from Clearing Members generally 

through an intra-month resizing of the 

Clearing Fund. OCC initially expects to 

implement a set of historically-based 

Sufficiency Scenarios that would 

include, among others, the worst twoday price moves, up and down, during 

the 2008 financial crisis, which 

constitute the two most extreme twoday price moves observed in the entire 

history of SPX with the exception of the 

1987 market crash, to be covered on a 

Cover 2 basis. OCC also would include 

as a Sufficiency Scenario a historical 

October 1987 market crash event to be 

covered on a Cover 1 basis. 

Under the proposed Sufficiency Stress 

Tests, the largest Clearing Fund Draw 

from each Sufficiency Scenario shall be 

compared against the Clearing Fund size 

on a daily basis to assess whether OCC 

maintains sufficient financial resources 

to cover the stress scenario. If a 

Sufficiency Stress Test indicates that a 

Clearing Fund Draw would breach 

certain established thresholds, OCC 

would initiate (depending on the 

threshold breached) the process of (1) 

conducting additional monitoring, (2) 


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33OCC notes that it performs a similar enhanced 

monitoring process under its current FRMC 

Procedure when Idiosyncratic Clearing Fund Draws 

exceed 65% of the Clearing Fund currently in 

effect. 

34 In the event only one Clearing Member Group’s 

Clearing Fund Draw exceeds 50% of Sufficiency 

Stress Test Threshold 1, that Clearing Member 

Group would pay the entire call. In the event both 

Clearing Member Groups’ Clearing Fund Draws 

exceed 50% of Sufficiency Stress Test Threshold 1, 

both Clearing Member Groups would pay an 

amount equal to the excess of their respective 

Clearing Fund Draw over 50% of the Sufficiency 

Stress Test threshold. 

35OCC notes that under the current FRMC 

Procedure, in the event that FRM observes a 

scenario where the Idiosyncratic Clearing Fund 

Draw exceeds 75% of the Clearing Fund, an intraday margin call would be issued against the 

Clearing Member or Clearing Member Group that 

caused such a draw, with the amount of the margin 

call being the difference between the projected 

draw and the ‘‘base amount.’’ See supra note 10 and 

accompanying text. 

36OCC notes that, under the current FRMC 

Procedure, for the days prior to the collection of any 

Clearing Fund payments due that result from the resizing of the Clearing Fund on the first business day 

of the month, both the base Clearing Fund 

requirement and the Clearing Fund in effect are 

further reduced by any outstanding deficits. The 

proposed changes would clarify that upon the 

collection of funds to satisfy such deficits, any 

margin calls would be (1) released or (2) 

recalculated based on the current Clearing Fund 

Draw. 

37OCC notes that, under its current FRMC 

Procedure, margin calls may be subject to a perClearing Member cap equal to the lesser of $500 

million or 100% of such Clearing Member’s net 

capital; however, OCC’s management retains 

discretion under the FRMC Procedure to call for 

additional margin beyond those amounts with 

certain reporting requirements when these caps are 

exceeded. Under the proposed Policy, these 

thresholds would no longer be characterized as 

‘‘caps’’ and there would no longer be a requirement 

for reporting to OCC’s Management Committee and 

Risk Committee as the $500 million threshold 

would no longer function as a cap and the 100% 

of net capital threshold would now require 

escalation to the OCEO for approval of further 

margin calls. OCC believes the proposed changes to 

the reporting and approval process are appropriate 

given that (1) OCC management (typically an officer 

of OCEO) currently has discretion to waive any 

margin call caps, (2) under the proposal, these 

thresholds would no longer be characterized as caps 

and therefore there would be an assumption that 

OCC would call for margin in excess of these 

thresholds, (3) since the adoption of OCC’s current 

FRMC Procedure, OCC has gained comfort in its 

Clearing Members’ ability to meet and maintain 

margin calls in excess of these thresholds and (4) 

OCEO would retain the ability to notify or escalate 

an issue to the Risk Committee if they determine 

such actions are necessary. 

collecting additional margin from the 

specific Clearing Member Group (or 

Groups) causing the breach, or (3) in 

extreme cases, resizing the Clearing 

Fund. Such thresholds have been 

designed to ensure that OCC’s PreFunded Financial Resources would 

remain sufficient to cover losses that 

may be incurred by its largest one or 

two Clearing Member Groups, 

depending on the scenario in question. 

Each proposed threshold is set forth 

below, and included with each 

threshold are mitigating actions that 

OCC would take in the event of a breach 

of the threshold. 

(1). Enhanced Monitoring 

Under the proposed Policy, in the 

event that Sufficiency Stress Tests 

identify a Clearing Fund Draw for one 

or two Clearing Member Groups that 

causes the largest aggregate credit 

exposure to OCC to exceed 65% of the 

current Clearing Fund requirement less 

deficits, but that does not breach a 

Sufficiency Stress Test Threshold (as 

defined below), FRM would promptly 

conduct enhanced monitoring and 

notify the relevant Clearing Member 

Group (or Groups) that they are 

approaching a margin call threshold in 

accordance with internal OCC 

procedures.33

(2). Sufficiency Stress Test Threshold 

1—Intra-Day Margin Calls 

OCC proposes to amend Rule 609 to 

provide that, in addition to its existing 

authority to require intra-day margin 

deposits, OCC may require additional 

margin deposits if a Sufficiency Stress 

Test identifies a breach that exceeds 

75% of the current Clearing Fund 

requirement less deficits (the ‘‘75% 

threshold’’ or ‘‘Sufficiency Stress Test 

Threshold 1’’). The proposed change is 

designed to ensure that OCC continues 

to maintain sufficient Pre-Funded 

Financial Resources to cover its largest 

one or two Clearing Member Group 

exposures under a wide range of stress 

scenarios, including extreme but 

plausible scenarios, where one of the 

proposed Sufficiency Stress Test 

scenarios identifies a potential breach in 

OCC’s Clearing Fund size. In the event 

of a breach of the 75% threshold, OCC 

would initially collateralize this 

potential stress exposure by collecting 

margin from the Clearing Member 

Group(s) driving the breach. 

Pursuant to the proposed Policy and 

Methodology Description, if a 

Sufficiency Stress Test identifies a 

Clearing Fund Draw for any one or two 

Clearing Member Groups that exceeds 

Sufficiency Stress Test Threshold 1, 

OCC would be authorized to issue a 

margin call against the Clearing Member 

Group(s) and/or Clearing Member(s) 

causing the breach in accordance with 

Rule 609. In the case of Cover 1 

Sufficiency Scenarios (e.g., the 

historical Cover 1 1987 scenario), the 

amount of the margin call for a Clearing 

Member Group would be equal to the 

excess of such Clearing Member Group’s 

projected Clearing Fund Draw over the 

75% threshold. In the case of Cover 2 

Sufficiency Scenarios (e.g., a historical 

Cover 2 2008 market event scenario) the 

total amount of the margin call shall be 

equal to the excess of the Cover 2 

Clearing Fund Draw over the 75% 

threshold.34 In the event a Clearing 

Member Group’s Clearing Fund Draws 

exceed the 75% threshold in more than 

one Sufficiency Scenario, the Clearing 

Member Group would be subject to the 

largest margin call resulting from 

scenarios. Margin calls would be 

allocated to Clearing Members and 

related accounts within the Clearing 

Member Group in accordance with OCC 

procedures.35

All margin calls would be required to 

be approved by a Vice President (or 

higher) of FRM and would remain in 

effect until the collection of additional 

funds associated with the next monthly 

resizing of the Clearing Fund, after 

which the margin call would be (1) 

released or (2) recalculated based on the 

current Clearing Fund Draw.36 If the 

margin call imposed on an individual 

Clearing Member exceeds $500 million, 

OCC’s Stress Testing and Liquidity Risk 

Management group (‘‘STLRM’’) would 

provide written notification to the 

Executive Chairman and Chief 

Executive Officer, President and Chief 

Operating Officer, and Chief 

Administrative Officer (collectively 

referred to as the ‘‘Office of the Chief 

Executive Officer’’ or ‘‘OCEO’’).37 If the 

margin call imposed on an individual 

Clearing Member would exceed 100% 

an individual Clearing Member’s net 

capital, the issue would be escalated to 

the OCEO, and each of the Executive 

Chairman, Chief Administrative Officer, 

and Chief Operating Officer would have 

the authority to determine whether OCC 

should continue calling for additional 

margin in excess of this amount. OCC 

believes that this notification and 

escalation process would enable OCC to 

appropriately require those Clearing 

Members that bring elevated risk 

exposures to OCC to bear the costs of 

those risks in the form of margin charges 

while also allowing OCC to take into 

consideration a particular Clearing 

Member’s ability to meet the call based 

on its financial condition, and the 

amount of collateral it has available to 

pledge when certain pre-identified 

thresholds have been exceeded. 

(3). Sufficiency Stress Test Threshold 

2—Intra-Month Clearing Fund Resizing 

Under proposed Rule 1001(c) (and as 

described in the proposed Policy and 

Methodology Description), if a 

Sufficiency Stress Test were to identify 

a Clearing Fund Draw for any one or 

two Clearing Member Groups that 

exceed 90% of the current Clearing 


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38 In the event that the Risk Committee would 

determine to permanently increase or change the 

methodology used to size the Clearing Fund, OCC 

would initiate any regulatory approval process 

required to effect such a change in Clearing Fund 

size. However, OCC would not decrease the size of 

its Clearing Fund while the regulatory approvals for 

such permanent increase are being obtained to 

ensure that OCC continues to maintain sufficient 

financial resources during that time. 

Fund size (after subtracting any monies 

deposited as a result of a margin call in 

accordance with a breach of Sufficiency 

Stress Test Threshold 1), OCC would 

effect an intra-month resizing of the 

Clearing Fund to ensure that OCC 

continues to maintain sufficient PreFunded Financial Resources to cover its 

exposures under a wide range of stress 

scenarios, including extreme but 

plausible market conditions. The 

amount of such an increase would be 

the greater of: (1) $1 billion or (2) 125% 

of the difference between the projected 

draw under the Sufficiency Stress Test 

(less any monies deposited pursuant to 

a margin call resulting from a breach of 

Sufficiency Stress Test Threshold 1) and 

the current Clearing Fund size. Each 

Clearing Member’s proportionate share 

of the increase would be based on its 

proportionate share of the Clearing 

Fund as determined pursuant to 

proposed Rule 1003(a), with the 

exception of those Clearing Members 

subject to the minimum contribution 

amount. OCC’s Executive Chairman, 

Chief Administrative Officer or Chief 

Operating Officer would be responsible 

for reviewing and approving any intramonth increase to the size of the 

Clearing Fund based on a breach of 

Sufficiency Stress Test Threshold 2 

prior to implementation, and any such 

intra-month increase due to a breach of 

Sufficiency Stress Test Threshold 2 

would remain in effect for any sizing 

calculations performed during the three 

month period subsequent to the intramonth increase to ensure that OCC 

continues to maintain sufficient 

financial resources to cover its credit 

exposures during that time. 

In addition to intra-month resizing 

based on Sufficiency Stress Testing, 

OCC proposes to include additional 

authority in proposed Rule 1001(d) to 

provide the Risk Committee, or each of 

the Executive Chairman, Chief 

Administrative Officer, or Chief 

Operating Officer, upon notice to the 

Risk Committee, with the authority to 

increase the size of the Clearing Fund at 

any time for the protection of OCC, 

Clearing Members or the general public. 

Any determination by the Executive 

Chairman, Chief Administrative Officer, 

or Chief Operating Officer to implement 

a temporary increase in Clearing Fund 

size would (1) be based upon thenexisting facts and circumstances, (2) be 

in furtherance of the integrity of OCC 

and the stability of the financial system, 

and (3) take into consideration the 

legitimate interests of Clearing Members 

and market participants. Under the 

proposed Policy, any temporary 

increase in Clearing Fund size would be 

reviewed by the Risk Committee at its 

next regularly scheduled meeting, or as 

soon as otherwise practical, and, if such 

temporary increase is still in effect at 

the time of that meeting, the Risk 

Committee would determine whether 

(1) the increase in Clearing Fund size is 

no longer required or (2) the Clearing 

Fund sizing methodology should be 

modified to ensure that OCC continues 

to maintain sufficient Pre-Funded 

Financial Resources to cover its 

established risk tolerance.38

(iv). Informational Stress Tests 

Under the proposed Policy and 

Methodology Description, OCC would 

run a variety of stress tests for 

informational purposes (i.e., 

Informational Stress Tests) to monitor 

and assess the size of OCC’s Pre-Funded 

Financial Resources against other stress 

scenarios. The Informational Stress 

Tests could be comprised of a number 

of Historical and Hypothetical 

scenarios, which may include extreme 

but implausible scenarios and reverse 

stress test scenarios (i.e., ‘‘Informational 

Scenarios’’). Informational Scenarios 

would not directly drive the size of the 

Clearing Fund or calls for additional 

margin; however, they would be an 

important risk monitoring tool that OCC 

would use to evaluate the 

appropriateness of its Adequacy, Sizing, 

and Sufficiency Scenarios and perform 

risk escalations and evaluations. 

OCC would continually evaluate its 

inventory of Informational Scenarios 

and could add additional Informational 

Scenarios, as needed, to ensure that it 

understands the limits of its Pre-Funded 

Financial Resources. Scenarios may 

later be reclassified as a different 

scenario type with the approval of 

OCC’s Risk Committee. For instance, a 

new scenario would typically be 

introduced as an Informational 

Scenario, but later may be elevated to a 

Sizing or Sufficiency Scenario. 

5. Clearing Fund and Stress Testing 

Governance, Monitoring and Review 

The proposed Policy would establish 

governance, monitoring and review 

requirements for OCC’s Clearing Fund 

and stress testing methodology. On a 

daily basis, STLRM would monitor the 

results of all of the Adequacy and 

Sufficiency Stress Tests, including 

whether the Adequacy Stress Test 

demonstrates that OCC maintains PreFunded Financial Resources above 

OCC’s Adequacy Scenarios, in 

accordance with internal OCC 

procedures. Under the proposed Policy, 

STLRM or the Executive Vice President 

of FRM (‘‘EVP–FRM’’) would 

immediately escalate any material 

issues identified with respect to the 

adequacy of OCC’s financial resources 

to the STWG (provided that STWG 

review is practical under the 

circumstances) and the Management 

Committee to determine if it would be 

appropriate to recommend a change to 

the Hypothetical Scenarios used to size 

the Clearing Fund in accordance with 

applicable OCC procedures. 

Under the proposed Policy, on a 

monthly basis, STLRM would prepare 

reports that provide details and trend 

analysis of daily stress tests with respect 

to the Clearing Fund, including the 

results of daily Adequacy Stress Tests, 

Sizing Stress Tests and Sufficiency 

Stress Tests and review the adequacy of 

OCC’s financial resources in accordance 

with internal procedures. On a monthly 

basis, STWG would perform a 

comprehensive analysis of these stress 

testing results, as well as information 

related to the scenarios, models, 

parameters, and assumptions impacting 

the sizing of the Clearing Fund. 

Pursuant to this review, STWG would 

consider, and may recommend at its 

discretion, modifications to OCC’s stress 

test scenario inventory and models for 

financial resources (including the 

creation and/or retirement of stress test 

scenarios, the reclassification of stress 

test scenarios, and/or modifications to 

the stress test scenarios’ underlying 

parameters and assumptions), as well as 

related Policies and Procedures, to 

ensure their appropriateness for 

determining OCC’s required level of 

financial resources in light of current 

and evolving market conditions, and as 

pursuant to the related Procedures 

established for this purpose. The 

reviews would be conducted more 

frequently than monthly when the 

products cleared or markets served 

display high volatility or become less 

liquid; the size or concentration of 

positions held by OCC’s participants 

increases significantly; or as otherwise 

appropriate. The Policy would require 

that OCC maintain procedures for 

determining whether, and in what 

circumstances, such intra-month 

reviews shall be conducted, and would 

indicate the persons responsible for 

making the determination. 

Pursuant to the proposed Policy, 

STLRM would report the results of 

stress tests and its monthly analysis to 


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39On June 5, 2000, the Commission approved a 

proposed rule change by OCC to merge the equity 

and non-equity elements of its Clearing Fund into 

a combined Clearing Fund with a minimum 

contribution requirement of $150,000. See 

Securities Exchange Act Release No. 42897 (June 5, 

2000), 65 FR 36750 (June 9, 2000) (SR–OCC–99–9). 

OCC notes that, as a practical matter, the $150,000 

minimum contribution amount dates back prior to 

June 2000 for the majority of its Clearing Members 

as most members already contributed to both the 

equity and non-equity elements of the Clearing 

Fund and were subject to a $75,000 minimum 

contribution for each element prior to the June 2000 

rule change. 

40For example, at the time of OCC’s analysis, ICE 

Clear US had a minimum contribution requirement 

of $2,000,000 and CME had minimum contribution 

requirements of $500,000 for exchange listed 

futures and options and $2.5 million for OTC 

products covered in its Base Guaranty Fund. 

41Based on this analysis, OCC determined that 

there are currently eleven Clearing Members either 

subject to the minimum Clearing Fund contribution 

requirement of $150,000 or below the proposed 

$500,000 requirement that would be impacted by 

the proposal. 

OCC’s Management Committee and Risk 

Committee on at least a monthly basis 

and would maintain procedures for 

determining whether, and in what 

circumstances, the results of stress tests 

must be reported to the Management 

Committee or the Risk Committee more 

frequently than monthly, and would 

indicate the persons responsible for 

making the determination. In the 

performance of monthly review of stress 

testing results and analysis and 

considering whether escalation is 

appropriate, due consideration would 

be given to the intended purpose of the 

proposed Policy to: (1) Assess the 

adequacy of, and adjust as necessary, 

OCC’s total amount of financial 

resources; (2) support compliance with 

the minimum financial resources 

requirements under applicable 

regulations; and (3) evaluate the 

adequacy of, and recommend 

adjustments to OCC’s margin 

methodology, margin parameters, 

models used to generate margin or 

guaranty fund requirements, and any 

other relevant aspects of OCC’s credit 

risk management. 

Under the proposed Policy, OCC’s 

Model Validation Group would be 

required to perform a model validation 

of OCC’s Clearing Fund model on an 

annual basis, and the Risk Committee 

would be responsible for reviewing the 

model validation report. The Risk 

Committee would also be required to 

review and approve the Policy on an 

annual basis. 

Under the proposed Policy, stress test 

inventories would be maintained by 

STLRM, and the STWG would be 

required to review and approve or 

recommend changes to stress test 

inventories recommended by STLRM 

staff in accordance with STWG 

procedures. The STWG would meet at 

least monthly and approve or 

recommend approval of changes to the 

inventory in accordance with the stress 

test procedures. The approval authority 

for such changes would be as follows: 

• Informational Stress Tests—The 

STWG may approve the creation or 

retirement of Informational Stress Tests; 

and 

• Sizing, Sufficiency, and Adequacy 

Stress Tests—The STWG may 

recommend approval to the 

Management Committee (however, if 

timing considerations make such 

recommendation to the Management 

Committee impracticable, then STWG 

would make its recommendation to the 

OCEO) and the Risk Committee the 

creation or retirement of Adequacy, 

Sizing, or Sufficiency Stress Tests. 

Pursuant to the proposed Policy, any 

request for an exception to the Policy 

must be made in writing to a member 

of the OCEO, who would then be 

responsible for reviewing the exception 

request and providing a decision in 

writing to the person requesting the 

exception. All requests for exceptions 

and their dispositions would be 

reported to the Board or Risk Committee 

no later than its next regularly 

scheduled meeting, in a format 

approved by the Chair of the Board or 

Risk Committee. Finally, the Policy 

would require that violations of the 

Policy be reported to the Policy owner 

and OCC’s Chief Compliance Officer. 

6. Limitations on Reduction in Monthly 

Clearing Fund Size 

OCC also proposes to adopt rules 

imposing certain anti-procyclical 

measures for its monthly Clearing Fund 

sizing process. Under proposed Rule 

1001(a), the size of the Clearing Fund 

would not be permitted to decrease 

more than 5% from month-to-month to 

avoid pro-cyclicality. This limitation, 

which is also reflected in the proposed 

Policy and Methodology Description, is 

designed to promote stability and to 

prevent the Clearing Fund from 

decreasing rapidly when a previous 

peak falls out of the look-back period. 

In addition, if the results of a daily 

Sufficiency Stress Test over the final 

five business days preceding the 

monthly Clearing Fund sizing exceed 

90% of the projected Clearing Fund size 

for the upcoming month, the Clearing 

Fund size must be set such that the peak 

Sufficiency Stress Test draw is no 

greater than 90% of the Clearing Fund 

size. The proposed change is designed 

to reduce the likelihood that the 

Clearing Fund would be set at a size 

such that a Clearing Member Group 

with stress test exposures that are 

trending upward at the end of the sizing 

period would exceed the threshold for 

an intra-month resize immediately 

following the decline. 

7. Clearing Fund Contribution 

Allocations 

a. Proposed Changes to Initial 

Contributions 

Pursuant to existing Article VIII, 

Section 2 of the By-Laws, the minimum 

initial Clearing Fund contribution of 

each newly admitted Clearing Member 

is set at an amount equal to at least 

$150,000, which is also equal to OCC’s 

minimum ‘‘fixed’’ contribution amount 

(discussed in detail below). Under 

proposed Rule 1002(d), which is based 

on existing Article VIII, Section 2(a), 

OCC would increase the initial Clearing 

Fund contribution amount to $500,000. 

OCC’s existing minimum contribution 

requirements have been in place since 

June 5, 2000,39 and as a result, OCC 

undertook an analysis to determine the 

appropriateness of this amount given 

the passage of time. As part of this 

analysis, OCC considered a number of 

factors such as the potential impact on 

Clearing Members that are at the 

minimum or otherwise below or just 

over the newly proposed $500,000 

requirement, the impact to those 

members in dollar and percentage terms 

as well as compared to their net capital, 

evolving market conditions, evolution 

in the size of the Clearing Fund, 

minimum contribution requirements of 

other CCPs, and heightened regulatory 

obligations on OCC given its status as a 

systemically important financial market 

utility. For example, OCC notes that the 

minimum initial (and fixed) 

contribution requirement has remained 

static over time while the Clearing Fund 

has grown from approximately $2 

billion in 2000 to several multiples of 

that, both currently and under the 

proposed changes described herein. 

Additionally, OCC reviewed the 

contribution requirements of other CCPs 

and noted that they were well in excess 

of OCC’s current minimum contribution 

requirement (and in several cases, 

would be in excess of the newly 

proposed minimum amount).40 OCC 

also performed an analysis of Clearing 

Members that had a Clearing Fund 

contribution requirement larger than the 

current minimum requirement of 

$150,000 but less than or equal to the 

proposed requirement of $500,000.41

OCC also reviewed the impact of this 

change and discussed it with potentially 

impacted Clearing Members firm, the 

majority of which did not express 

concerns over the proposed increase. As 

a result of this analysis, OCC 


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42OCC notes that the current exception for 

Futures-Only Affiliated Clearing Members in ByLaw Article VIII, Section 2 and Rule 1001(f) would 

be retained under proposed Rules 1002(d) and 

1002(f). 

43As noted above, ‘‘total risk’’ in this context 

means the margin requirement with respect to all 

accounts of the Clearing Member Group exclusive 

of the net asset value of the positions in such 

accounts aggregated across all such accounts. 

44Under the proposed Policy, this new allocation 

approach would be phased in over a three month 

period following implementation of the proposed 

changes herein by gradually shifting 35% of the 

weighting to total risk from open interest by 10% 

in the first month, 10% in the second month, and 

15% in the third month. Accordingly, OCC 

proposes conforming changes to delete 

Interpretation and Policy .03 of Rule 1001, which 

concerns the phase-in of the former allocation 

methodology, and would no longer be required. 

45For both volume and open interest, OCC would 

adjust stock loan shares by a factor of 100 to 

normalize them with the size of a standard option 

contract. Interpretation and Policy .04 of existing 

Rule 1001, which concerns the calculation used to 

determine cleared contract equivalent units for 

stock loan and borrow positions, would be 

relocated to Interpretation and Policy .01 of 

proposed Rule 1003 without change. 

determined $500,000 would be the 

appropriate initial and minimum 

Clearing Fund contribution amount 

required to maintain membership at 

OCC. Consistent with existing authority, 

OCC’s Risk Committee would also be 

able to fix a different initial contribution 

amount with regard to any new Clearing 

Member at the time its application is 

approved. In either case, the initial 

contribution amount would remain in 

effect for not more than three months 

after the admission of the relevant 

Clearing Member. After that time, or at 

an earlier time as may be determined by 

the Risk Committee, the Clearing 

Member’s contribution amount would 

instead be determined using the 

allocated contribution method in 

proposed Rule 1003. OCC also proposes 

to clarify in new Rule 1002(d) that 

initial contribution requirements would 

at all times remain subject to the 

minimum ‘‘fixed amount’’ of $500,000 

under proposed Rule 1003 and to 

adjustments by OCC under Rule 1004. 

b. Proposed Changes to Contribution 

Allocation Methodology 

Current Rule 1001(b) provides, in 

part, that each Clearing Member’s 

monthly contribution requirement is 

based on a sum of $150,000 (which is 

a fixed amount, equal to the current 

initial contribution amount) plus such 

Clearing Member’s proportionate share 

of the amount necessary for OCC to 

maintain the total Clearing Fund size 

required under Rule 1001(a) (which is a 

variable amount). OCC proposes to 

adopt new Rule 1003(a), which would 

increase the minimum ‘‘fixed’’ 

contribution amount to $500,000, 

consistent with the proposed increase in 

the minimum initial contribution 

described above. Specifically, proposed 

Rule 1003(a) would provide that each 

Clearing Member’s contribution to the 

Clearing Fund shall equal the sum of (x) 

$500,000 (a higher ‘‘fixed amount,’’ 

equal to the proposed initial 

contribution amount described above) 

and (y) such Clearing Member’s 

proportionate share of an amount 

sufficient to cause the amount of the 

Clearing Fund (after taking into account 

each Clearing Member’s fixed amount) 

to be equal to the Clearing Fund size 

determined pursuant to proposed Rule 

1001(a) (the ‘‘variable amount’’). The 

proposed change was determined under 

the same analysis and justification 

discussed above regarding the proposed 

change in the minimum initial 

contribution amount (i.e., OCC analyzed 

the potential impact on Clearing 

Members that are at the minimum fixed 

contribution amount or otherwise below 

or just over the newly proposed 

$500,000 requirement, the impact to 

those members in dollar and percentage 

terms as well as compared to their net 

capital, evolving market conditions, 

evolution in the size of the Clearing 

Fund, minimum contribution 

requirements of other CCPs, and 

heightened regulatory expectations on 

OCC given its status as a systemically 

important financial market utility). 

Collectively, proposed Rules 1002(d) 

and Rule 1003(a) would effectively 

provide for a new minimum Clearing 

Fund contribution amount of $500,000 

per Clearing Member.42

OCC also proposes to clarify in 

proposed Rule 1004, in line with its 

current operational practice, that OCC 

may adjust an individual Clearing 

Member’s Clearing Fund contributions 

due to mergers, consolidations, position 

transfers, business expansions, 

membership approval, or other similar 

events in order to ensure that Clearing 

Fund allocations are appropriately 

aligned with the change in risks 

associated with such events (e.g., the 

increased risk a Clearing Member may 

present after taking on positions of 

another Clearing Member through a 

merger or position transfer). 

8. Allocation Weighting Methodology 

Under existing Rule 1001(b), Clearing 

Fund contributions are allocated among 

Clearing Members based on a weighted 

average of each Clearing Member’s 

proportionate share of total risk,43 open 

interest, and volume in all accounts 

(including paired X–M accounts) 

according to the following weighting 

allocation methodology: 35% total risk, 

50% open interest, and 15% volume. 

OCC proposes to modify its allocation 

methodology in new Rule 1003 to more 

closely align Clearing Members’ 

Clearing Fund contribution 

requirements with the level of risk they 

bring to OCC. Specifically, OCC 

proposes that Clearing Fund 

contribution requirements would be 

based on an allocation methodology of 

70% total risk, 15% volume and 15% 

open interest.44 OCC also proposes to 

modify the volume component of the 

weighting allocation methodology to 

provide that OCC would use cleared 

volume, as opposed to executed volume, 

to base the allocation on where the 

position is ultimately cleared.45

In addition, OCC proposes to adopt 

new Interpretation and Policy .02 of 

Rule 1003, which would be based 

without material amendment on the 

clauses in paragraphs (d) and (e) of 

current Rule 1001 that address how 

OTC options are included within the 

fraction used to compute a Clearing 

Member’s proportionate share of open 

interest and volume, respectively. The 

numerator and denominator in each 

case would continue to include OTC 

option contracts within the number of 

open cleared contracts of a Clearing 

Member, with that number of OTC 

option contracts being adjusted to 

ensure that it is approximately equal to 

the number of options contracts, other 

than OTC option contracts, that would 

cover the same notional value or units 

of the same underlying interest. OCC 

believes that placing this aspect of the 

computation in an Interpretation and 

Policy would enhance the readability of 

Rule 1003(b). 

OCC’s contribution allocation and 

associated weighting methodology also 

would be generally described in the 

proposed Policy and Methodology 

Description documents. 

9. Reduction in Time To Fund Deficits 

OCC proposes to adopt new Rule 

1005(a), which would address the time 

within which a Clearing Member would 

generally be required to satisfy a deficit 

in its required Clearing Fund 

contribution to reduce the timeframe 

during which OCC potentially would be 

operating with less than its required 

amount of Pre-Funded Financial 

Resources. As a general rule, whenever 

a report made available by OCC as 

described in proposed Rule 1007 shows 

a deficit, the applicable Clearing 

Member(s) would be required to satisfy 

the deficit in a form approved by OCC 

no later than one hour after being 

notified by OCC of such deficit. 

Examples of deficits that would need to 

be satisfied by this deadline include 


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those caused by a decrease in the value 

of a Clearing Member’s contribution or 

by an adjusted contribution pursuant to 

proposed Rule 1004. The one-hour 

deadline would be subject to the 

application of alternative timing 

requirements specified in Chapter X, 

such as in the case of deficits arising 

due to regular monthly sizing or an 

intra-month resizing (as addressed in 

proposed Rule 1005(b)), and deficits 

arising due to amendments of OCC’s 

Rules (as addressed in proposed Rule 

1002(e)). Proposed Rule 1004 would 

also provide OCC with discretion to 

agree to alternative written terms 

regarding the satisfaction of a deficit 

that would otherwise be governed by 

the requirements described above. 

Proposed Rule 1005(b), which is 

based on existing Rule 1003 with certain 

modifications, would address deficits 

arising due to regular monthly sizing of 

the Clearing Fund under proposed Rule 

1001(a), as well as due to intra-month 

sizing adjustments under proposed Rule 

1001(c). The proposed provision would 

reduce the amount of time within which 

a Clearing Member must satisfy a deficit 

shown on a report made available by 

OCC under Rule 1007 from five business 

days of the date on which the report is 

made available to two business days of 

such date. OCC believes that this change 

is appropriate because it would expedite 

adjustment of Clearing Fund 

contributions to the appropriate size as 

determined by OCC and allow OCC to 

respond more quickly in rapidly 

changing or emergency market 

conditions. 

Proposed Rule 1002(e) would address 

the circumstance in which a Clearing 

Member’s contribution is increased as a 

result of an amendment of OCC’s Rules. 

The proposed provision is based on 

existing By-Law Article VIII, Section 

2(b), modified, however, to require that 

such an increased contribution be 

satisfied within two business days of the 

Clearing Member receiving notice of the 

amendment, rather than within five 

business days of such notice (as is 

required under current By-Law Article 

VII, Section 2(b)). For the reasons noted 

above, OCC believes that this change is 

appropriate because it would expedite 

both the effectiveness of the increased 

contribution requirement (and, 

indirectly, the size of the Clearing Fund) 

and the actual funding of Clearing 

Member contributions related thereto. 

Consistent with OCC’s current 

requirement, a Clearing Member would 

not be obligated to make such an 

increased contribution, however, if, 

before the effective date of the relevant 

amendment, it notifies OCC in writing 

that it is terminating its status as a 

Clearing Member and closes out or 

transfers all of its open long and short 

positions. In addition, newly proposed 

Interpretation and Policy .02 of Rule 

1002 would clarify that the authority of 

a Clearing Member to terminate its 

status as such under Rule 1006(h) 

regarding assessments by OCC is 

separate and distinct from the analogous 

authority under Rule 1002(e) concerning 

membership terminations in connection 

with an increase in Clearing Fund 

contributions due to a change in OCC’s 

Rules. 

In addition, and consistent with 

existing operational practice, new Rule 

1005(c) would establish that, upon the 

failure of a Clearing Member for any 

reason to timely satisfy a deficit 

regarding its required Clearing Fund 

contribution, OCC would be authorized 

to withdraw an amount equal to such 

deficit from the Clearing Member’s bank 

account maintained in respect of an 

OCC firm account. The proposed rule 

change is designed to ensure that OCC 

is able to obtain funds owed from its 

Clearing Members to satisfy a Clearing 

Fund deficit in a timely fashion so that 

OCC can continue to meet its overall 

financial resource requirements as 

stipulated under its rules and by 

applicable regulatory requirements. Any 

such withdrawn amount would 

thereafter be treated as a cash 

contribution to the Clearing Fund. The 

provision would also clarify that, if OCC 

is unable to withdraw an amount equal 

to the deficit, the Clearing Member’s 

failure to satisfy such deficit in 

accordance with OCC’s Rules may 

subject such Clearing Member to 

disciplinary action or suspension, 

including under Chapters XI and XII of 

OCC’s Rules. 

OCC also proposes to specify in 

proposed Rules 1005(b) and 1002(e) that 

Clearing Members shall have until 9:00 

a.m. Central Time on the second 

business day after the issuance of the 

Clearing Fund Status Report to meet 

their required Clearing Fund 

contribution if such contribution 

increases as a result of monthly Clearing 

Fund sizing or an intra-month resizing 

of the Clearing Fund. The proposed 

change would more closely align with 

the settlement time for the collection of 

other deficits (e.g., the required time for 

making good any deficiency generally 

under existing Article VIII, Section 6 of 

the By-Laws or for satisfying any margin 

deficits under Rule 605). The proposed 

change would also be reflected in the 

proposed Policy. 

Finally, OCC proposes to relocate the 

substance of current Rule 1002 

(regarding Clearing Fund reports) to 

proposed Rule 1007, with modifications 

that allow OCC to provide more realtime transparency to Clearing Members 

by mandating more frequent reporting, 

as well as certain modifications to 

address the intra-month resizing of the 

Clearing Fund. Current Rule 1002 

provides that OCC must make available 

to each Clearing Member, within ten 

days after the close of each calendar 

month, a report that lists the current 

amount and form of such Clearing 

Member’s contribution, the amount of 

the contribution required of such 

Clearing Member for the current 

calendar month, and any surplus over 

and above the amount required for the 

current calendar month. Under 

proposed Rule 1007, OCC would make 

available each business day certain 

reports listing the current amount and 

form of each Clearing Member’s 

contribution to the Clearing Fund, the 

current amount of the contribution 

required of such Clearing Member 

(including the Clearing Member’s 

required cash contribution to the 

Clearing Fund, as discussed in more 

detail in Section 10 below) and any 

deficit in the Clearing Member’s 

contribution or surplus over and above 

the required amount, as applicable. OCC 

would also issue a report whenever the 

calculated size of the Clearing Fund has 

changed, whether as the result of regular 

monthly sizing of the Clearing Fund or 

otherwise. 

10. Anti-Procyclicality Measures in 

OCC’s Margin Methodology 

OCC proposes to amend current Rule 

601(c), regarding margin requirements 

for accounts other than customers’ 

accounts and firm non-lien accounts, to 

clarify in OCC’s Rules that OCC’s 

existing methodology for calculating 

margin requirements incorporates 

measures designed to ensure that 

margin requirements are not lower than 

those that would be calculated using 

volatility estimated over a historical 

look-back period of at least ten years. 

The proposed change reflects an 

existing practice in OCC’s margin 

methodology and is intended only to 

provide more clarity and transparency 

regarding this anti-procyclicality 

measure in OCC’s Rules. 

11. Other Clarifying, Conforming, and 

Organizational Changes 

OCC also proposes a number of other 

clarifying, conforming, and 

organizational changes to its By-Laws, 

Rules, Collateral Risk Management 

Policy, Default Management Policy, and 

Clearing Fund-related procedures in 

connection with the proposed 

enhancements to its Pre-Funded 

Financial Resources and the relocation 


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46OCC notes that proposed Rule 1006(a) would 

contain a minor modification to clarify that matured 

futures contracts are included within the scope of 

other contracts or obligations issued, undertaken, or 

guaranteed by OCC or in respect of which OCC is 

otherwise liable. 

47Existing Interpretation and Policy .01 and .02 

of Article VIII, Section 5 concerning the share of 

any deficiency to be borne by each Clearing 

Member as a result of a charge against the Clearing 

Fund would be consolidated and relocated to new 

Interpretation and Policy .01 of Rule 1006 with only 

minor, non-substantive conforming changes and 

cross-references to new Interpretation and Policy 

.01 of Rule 1006 would be added to proposed Rules 

1006(b) and (c) to provide additional clarity in 

OCC’s rules. 

48A Cross-Guaranty Party is a party, other than 

OCC, to a Limited Cross Guaranty Agreement, 

which is an agreement between OCC and one or 

more other clearing corporations and/or clearing 

organizations relating to the cross-guaranty by OCC 

and the other party or parties of certain obligations 

of a suspended Common Member to the parties to 

the agreement. See Article I, Section 1.C.(35) of the 

By-Laws (defining Cross-Guaranty Party) and 

Section 1.L.(4) (defining Limited Cross-Guaranty 

Agreement). 

49A Common Member is ‘‘a Clearing Member that 

is concurrently a member or participant of a CrossGuaranty Party.’’ See Article I, Section 1.C.(27) of 

the By-Laws. 

50Under clause (i) of new Rule 1006(f), OCC 

would also be permitted to take possession of 

of OCC’s Clearing Fund-related By-Laws 

into Chapter X of the Rules. 

Specifically, proposed Rules 1006(a)–(c) 

would address both the purpose of the 

Clearing Fund and the seven conditions 

under which the Clearing Fund 

generally may be used by OCC to make 

good certain losses that it suffers. The 

proposed Rule is based on a 

consolidation of existing Article VIII, 

Section 1(a) (concerning the 

maintenance and purpose of the 

Clearing Fund) and Section 5(a)–(c) 

(concerning the application of the 

Clearing Fund) with minor 

modifications. Accordingly, under 

proposed Rule 1006, and consistent 

with existing authority, OCC would 

maintain, and be permitted to use, the 

Clearing Fund to make good losses 

relating to: (1) The failure of a Clearing 

Member to discharge an obligation on or 

arising from any confirmed trade 

accepted by OCC; (2) the failure of any 

Clearing Member or the Canadian 

Depository for Securities to perform its 

obligations under or arising from any 

exercised or assigned option contract or 

matured future or any other contract or 

obligation issued, undertaken, or 

guaranteed by OCC or in respect of 

which OCC is otherwise liable; 46 (3) the 

failure of any Clearing Member in 

respect of its stock loan or borrow 

positions to perform its obligations to 

OCC; (4) any liquidation of a Clearing 

Member’s open positions; (5) any 

protective transactions effected for 

OCC’s own account under Chapter XI of 

the Rules regarding the suspension of a 

Clearing Member; (6) the failure of any 

Clearing Member to make any required 

payment or render any required 

performance; or (7) the failure of any 

bank or securities or commodities 

clearing organization to perform 

obligations to OCC under certain 

conditions as set forth in proposed Rule 

1006(c).47

Proposed Rule 1006(g) would address 

payments to and from Cross-Guaranty 

Parties 48 in respect of Common 

Members.49 This provision is based on 

current Article VIII, Sections 5(f) and 

5(g) of OCC’s By-Laws, which would be 

transferred to Rule 1006(g) without 

material changes. OCC would, therefore, 

continue to use a suspended Clearing 

Member’s Clearing Fund contribution, 

after appropriately applying other funds 

in the accounts of the Clearing Member, 

to make a required payment to a CrossGuaranty Party pursuant to a Limited 

Cross-Guaranty Agreement in respect of 

such Clearing Member. Proposed Rule 

1006(g) would clarify, however, that 

OCC would credit funds to the Clearing 

Fund that it receives in respect of a 

suspended Clearing Member from a 

Cross-Guaranty Party pursuant to a 

Limited Cross-Guaranty Agreement, 

where OCC must still make a charge on 

a proportionate basis against other 

Clearing Members’ required 

contributions to the Clearing Fund even 

after application of such funds, or where 

OCC has already made a charge on a 

proportionate basis against other 

Clearing Members’ required 

contributions to the Clearing Fund. 

Proposed Interpretation and Policy 

.02–.04 to Rule 1006 would also address 

certain aspects of payments to and from 

Cross-Guaranty Parties in respect of 

Common Members. All of these 

proposed provisions are based without 

material amendment on existing 

Interpretations and Policies to Article 

VIII, Section 5 of OCC’s By-Laws, as 

described below. 

Proposed Interpretation and Policy 

.02 to Rule 1006 is based without 

material amendment on existing 

Interpretation and Policy .03 to Article 

VIII, Section 5 of OCC’s By-Laws. Under 

the proposed Interpretation and Policy, 

if OCC has a deficiency after it applies 

all the available funds of a suspended 

Common Member but cannot determine 

whether, when, or in what amount it 

will be entitled under a Limited CrossGuaranty Agreement to receive funds 

from a Cross-Guaranty Party, OCC may 

make a charge against other Clearing 

Members’ contributions for the 

deficiency in accordance with Rule 

1006(b). If OCC receives funds from a 

Cross-Guaranty Party after making such 

a charge, OCC would credit the funds to 

the Clearing Fund in accordance with 

Rule 1006(g). 

Proposed Interpretation and Policy 

.03 to Rule 1006 is based without 

material amendment on existing 

Interpretation and Policy .04 to Article 

VIII, Section 5 of OCC’s By-Laws. Under 

the proposed Interpretation and Policy, 

if OCC has a deficiency after it applies 

all the available funds of a suspended 

Common Member and OCC determines 

that it is likely to receive funds from a 

Cross-Guaranty Party under a Limited 

Cross-Guaranty Agreement, OCC may, 

in anticipation of receipt of such funds, 

forego making a charge, or make a 

reduced charge in accordance with 

proposed Rule 1006(b), against other 

Clearing Members’ Clearing Fund 

contributions. If OCC does not 

subsequently receive the funds or 

receives a smaller amount than 

anticipated, OCC may make a charge or 

additional charges against contributions 

in accordance with proposed Rule 

1006(b). 

Proposed Interpretation and Policy 

.04 to Rule 1006 is based without 

material amendment on existing 

Interpretation and Policy .05 to Article 

VIII, Section 5 of OCC’s By-Laws. Under 

the proposed Interpretation and Policy, 

if, under a Limited Cross-Guaranty 

Agreement, OCC receives funds from a 

Cross-Guaranty Party in respect of a 

suspended Common Member but is 

subsequently required to return such 

funds for any reason, OCC may make 

itself whole by making a charge or 

additional charges, as the case may be, 

against the contributions of Clearing 

Members, other than the suspended 

Common Member. 

Existing Article VIII, Section 1(b) of 

OCC’s By-Laws, which concerns the 

general lien on all cash, Government 

securities, and other property of the 

Clearing Member contributed to the 

Clearing Fund, would be moved without 

material change to new Rule 1006(i). 

Additionally, existing Interpretation and 

Policy .02 of Article VIII, Section 3 of 

OCC’s By-Laws, which concerns the 

treatment of securities deposited in an 

account of OCC at an approved 

custodian, would be relocated to new 

Rule 1006(j) without change. 

OCC also proposes to relocate existing 

Article VIII, Sections 5(c), and (e) of 

OCC’s By-Laws, which concern notice 

of any charges against the Clearing 

Fund, the use of current and retained 

earnings to address losses, and the use 

of the Clearing Fund to effect 

borrowings, to new Rules 1006(d), (e), 

and (f),50 respectively, without material 


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Government securities in anticipation of a potential 

default by or suspension of a Clearing Member, as 

is currently the case under existing Interpretation 

and Policy .06 to Article VIII, Section 5. 

51OCC notes that it would make a number of nonsubstantive clarifying changes to the rule text in 

proposed Rule 1006 so that existing rule text 

referencing ‘‘computed contributions to the 

Clearing Fund’’ and ‘‘as fixed at the time’’ would 

be rephrased as ‘‘required contributions to the 

Clearing Fund’’ and ‘‘as calculated at the time.’’ The 

proposed change is designed to more accurately 

reflect that these rules are intended to refer to a 

Clearing Member’s required Clearing Fund 

contribution amount as calculated under the 

proposed Rules, Policy and Methodology 

Description and eliminate any potential confusion 

with a Clearing Member’s ‘‘fixed amount’’ as 

determined under Rule 1003(a). 

52OCC notes that it would modify the rule text 

in question to clarify that a Clearing Member’s 

obligation to make good the deficiency in its 

Clearing Fund contribution, resulting from a 

proportionate charge or otherwise, would be in 

relation to its currently ‘‘required’’ contribution 

amount and not the amount of the contribution on 

deposit as of the time of the charge. 53See supra note 10. 

amendment.51 OCC would also relocate 

existing Article VIII, Section 6 of OCC’s 

By-Laws, which concerns the making 

good of any charges against the Clearing 

Fund (i.e., Clearing Fund replenishment 

and assessments) to new Rule 1006(h) 

without material changes.52 The 

proposed Policy and Methodology 

Description would also contain a 

discussion of OCC’s Clearing Fund 

replenishment and assessment powers 

generally intended to reflect this 

existing authority in the By-Laws. In 

addition, the proposed Policy would (1) 

provide the Executive Chairman, Chief 

Administrative Officer, or Chief 

Operating Officer with the authority to 

approve proportionate charges against 

the Clearing Fund and (2) require that 

OCC’s Accounting department maintain 

procedures for the allocation of losses 

due to a Clearing Member default and to 

replenish the Clearing Fund in the event 

a deficiency in the Clearing Fund results 

from events other than those specified 

in proposed Rule 1006. 

Additionally, OCC proposes to amend 

the definition of ‘‘Clearing Fund’’ in 

Article I and Article V, Section 3 of the 

By-Laws to reflect the fact that OCC’s 

Clearing Fund-related provisions would 

now be contained in Chapter X of the 

Rules. In addition, OCC proposes to 

change references to ‘‘Chapter 11’’ of the 

Rules in Article VI, Section 27 of OCC’s 

By-Laws to ‘‘Chapter XI’’ To conform 

the references to OCC’s Rules. OCC 

proposes conforming changes to Rule 

1106 to reflect the reorganization of 

Article VIII of the By-Laws into Chapter 

X of the Rules. OCC also proposes to 

amend Rule 609 to change the term 

‘‘securities’’ to ‘‘contracts’’ to clarify that 

its authority to call for intra-day margin 

also applies to non-securities products 

cleared by OCC. 

OCC also proposes conforming 

changes to delete existing 

Interpretations and Policies .02 and .03 

of Rule 1001, which deal with the 

minimum confidence level used to size 

the Clearing Fund and the phase-in of 

the former weighting allocation 

methodology, respectively. Under the 

proposed change, the confidence level 

used to size the Clearing Fund and the 

phase-in of the proposed weighting 

allocation methodology would be 

addressed in the Policy and 

Methodology Description (as described 

above). As a result, these Interpretations 

and Policies would no longer be needed. 

In addition, consistent with its effort 

to aggregate all Clearing Fund-related 

provisions to Chapter X of the Rules, 

OCC proposes to relocate Article VIII, 

Sections 7 (Contribution Refund) and 8 

(Recovery of Loss) of the By-Laws to 

new Rules 1009, and 1010, respectively, 

without material amendment. 

OCC also proposes to relocate certain 

By-Law provisions related to the form 

and method of Clearing Fund 

contributions into Chapter X of the 

Rules. Specifically, OCC proposes to 

relocate Article VIII, Section 3(a) and 

(c); Interpretation and Policy .04 to 

Article VIII, Section 3; and Article VIII, 

Section 4 to proposed Rule 1002 

concerning Clearing Fund contributions. 

These By-Law provisions would be 

relocated to Chapter X of the Rules 

without material amendment. OCC also 

would relocate Interpretation and Policy 

.01 to Rule 1001 concerning minimum 

Clearing Fund size into new Rule 

1001(b). The form and method of OCC’s 

Clearing Fund contributions also would 

be generally described in the proposed 

Policy and Methodology Description 

documents. In addition, and consistent 

with current OCC practice, the proposed 

Policy would impose a requirement that 

the specific securities eligible to be used 

as Clearing Fund contributions be 

permitted to be pledged in exchange for 

cash through one of OCC’s committed 

liquidity facilities so that OCC 

continues to maintain sufficient eligible 

securities to fully access such facilities. 

As noted above, under proposed Rule 

1007, OCC would make available on a 

daily basis certain reports listing the 

current amount and form of each 

Clearing Member’s contribution to the 

Clearing Fund, the current amount of 

the contribution required of such 

Clearing Member, and any deficit in the 

Clearing Member’s contribution or 

surplus over and above the required 

amount, as applicable. Proposed Rule 

1007 would also include reporting on 

the Clearing Member’s required cash 

contribution to the Clearing Fund. 

OCC also proposes to relocate existing 

Rule 1004 (Withdrawals) to new Rule 

1008 and would modify the proposed 

rule to reflect that Clearing Members 

may withdraw excess Clearing Fund 

deposits on the same day that OCC 

issues a report to the Clearing Member 

showing a surplus (as opposed to the 

following business day), which is 

consistent with current operational 

practices. 

In addition, OCC proposes to update 

references to Article VIII of the By-Laws 

in its Collateral Risk Management Policy 

and Default Management Policy to 

reflect the relocation of OCC’s Clearing 

Fund-related By-Laws into Chapter X of 

the Rules. 

Finally, OCC currently maintains 

procedures regarding its processes for (i) 

the monthly resizing of its Clearing 

Fund (Monthly Clearing Fund Sizing 

Procedure), (ii) the addition of financial 

resources through intra-day margin calls 

and/or an intra-month increase of the 

Clearing Fund to ensure that it 

maintains adequate financial resources 

in the event of a default of a Clearing 

Member/Clearing Members Group 

presenting the largest exposure to OCC 

(FRMC Procedure), and the execution of 

any intra-month resizing of the Clearing 

Fund (Clearing Fund Intra-Month Resizing Procedure).53 OCC proposes to 

retire its existing Clearing Fund IntraMonth Re-sizing Procedure, FRMC 

Procedure, and Monthly Clearing Fund 

Sizing Procedure as these procedures 

would no longer be relevant to OCC’s 

proposed Clearing Fund and stress test 

methodology and would be replaced by 

the proposed Rules, Policy and 

Methodology Description described 

herein. 

OCC’s Monthly Clearing Fund Sizing 

Procedure provides that the Clearing 

Fund is resized on the first business day 

of each month by identifying the peak 

five-day rolling average of Clearing 

Fund Draws (using OCC’s current 

Clearing Fund methodology) over the 

most recent three-month period. This 

peak five-day rolling average is 

supplemented with a prudential margin 

of safety of $1.8 billion. The Monthly 

Clearing Fund Sizing Procedure further 

describes the internal procedural and 

administrative steps taken by OCC staff 

in the monthly Clearing Fund sizing 

processes (e.g., the internal reports and 

processes used to populate relevant data 

and calculate the monthly Clearing 

Fund size and the internal reporting and 

notifications made by OCC staff during 

the resizing process). Under the 

proposed Policy and Methodology 

Description, OCC would continue to 


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54See supra note 21. 

55Section 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 mean, in addition 

to certain publicly facing statements, ‘‘any material 

aspect of the operation of the facilities of the 

[SRO].’’ 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. 

56OCC notes that it would adopt new internal 

procedures to address the procedural and 

administrative steps associated with the monthly 

Clearing Fund sizing, Clearing Fund sufficiency 

monitoring, and intra-month resizing processes; 

however, these procedures would not be filed as 

‘‘rules’’ of OCC under the Exchange Act. These 

procedures also would conform to the proposed 

changes described herein. 

57OCC notes that the weekly reporting process 

currently described in the FRMC Procedure would 

no longer be codified in the ‘‘rules’’ of OCC; 

however, the proposed Policy would establish new 

governance, monitoring and review requirements 

for OCC’s Clearing Fund and stress testing 

methodology, which are described in detail above. 

58The proposed Policy would contain a general 

requirement that Clearing Members be notified of 

any intra-day margin calls under the policy but the 

procedural details of such notification would be 

contained in the Clearing Fund Sufficiency 

Monitoring Procedure. 

59See e.g., supra notes 32–36 and associated text. 

60The proposed Policy would contain a general 

requirement that Clearing Members, OCC’s Risk 

Committee, and OCC’s regulators be notified of any 

intra-month Clearing Fund resizing but the 

procedural details of such notification would be 

contained in the Clearing Fund Sizing Procedure. 

61 15 U.S.C. 78q–1(b)(3)(F). 

62 Id. 

determine the Clearing Fund size for a 

given month by using a peak five-day 

rolling average of Clearing Fund Draws 

over the prior three months; however, 

these calculations would be done using 

the proposed Sizing Stress Test results 

and would no longer require a 

prudential margin of safety.54 The 

remaining internal procedural and 

administrative steps taken by OCC staff 

in the monthly Clearing Fund sizing 

processes would no longer be ‘‘rules’’ of 

OCC as defined by the Exchange Act 55

as those aspects of the procedure: (1) 

Would no longer be relevant to OCC’s 

proposed Clearing Fund and stress 

testing methodologies and processes, (2) 

would be reasonably and fairly implied 

by the proposed Rules, Policy, and 

Methodology Description, and/or (3) 

would otherwise not be deemed to be 

material aspects of OCC’s Clearing 

Fund-related operations.56

OCC’s FRMC Procedure outlines 

various responsibilities, deliverables 

and communications with respect to 

OCC’s financial resource monitoring 

and resource call processes. While the 

FRMC Procedure describes material 

aspects of OCC’s current financial 

resource monitoring and call-related 

operations, it also describes the nonmaterial procedural and administrative 

steps taken by OCC staff in carrying out 

these processes. For example, the FRMC 

Procedure contains procedural steps for 

(1) comparing Clearing Fund Draws 

against the Clearing Fund size and 

determining whether applicable 

thresholds are breached, (2) internal 

notifications and reporting within OCC 

regarding the imposition of enhanced 

monitoring or recommendations for 

margin calls or intra-month resizing of 

the Clearing Fund,57 (3) other external 

communications to Clearing Members 58

regarding margin calls, and (4) 

determining whether a cash draft is 

required to satisfy a deficit resulting 

from a margin call. Under the proposal, 

the proposed Policy would continue to 

describe the material aspects of OCC’s 

Clearing Fund operations as they relate 

to the financial resource monitoring and 

resource call process under the new 

Clearing Fund and stress testing 

methodology, subject to a number of 

modifications describe above.59 Any 

remaining procedural details would not 

be ‘‘rules’’ of OCC as OCC believes that 

those aspects of the procedures: (1) 

Would no longer be relevant to OCC’s 

proposed Clearing Fund and stress 

testing methodologies and processes, (2) 

would be reasonably and fairly implied 

by the proposed Rules, Policy, and 

Methodology Description, and/or (3) 

would otherwise not be deemed to be 

material aspects of OCC’s Clearing 

Fund-related operations. 

OCC’s Clearing Fund Intra-Month Resizing Procedure outlines the various 

internal responsibilities, deliverables 

and communications with respect to an 

intra-month re-sizing the Clearing Fund 

as determined under the FRMC 

Procedure. The procedure describes the 

procedural and administrative steps 

taken by OCC staff in the intra-month 

resizing process, including the 

procedural steps for (1) calculating 

increased contribution requirements 

based on various internal reports and 

processes, (2) preparing information 

memoranda announcing an intra-month 

resizing, (3) internal notifications and 

reporting within OCC regarding an 

intra-month resizing, (4) other external 

communications to Clearing Members 60

and OCC’s regulators regarding an intramonth resizing of the Clearing Fund, 

and (5) determining whether a cash 

draft is required to satisfy a deficit 

resulting from an intra-month resizing 

of the Clearing Fund. Under the 

proposed changes described herein, 

these procedural details would not be 

‘‘rules’’ of OCC as OCC believes that 

those aspects of the procedure: (1) 

Would no longer be relevant to OCC’s 

proposed Clearing Fund and stress 

testing methodologies and processes, (2) 

would be reasonably and fairly implied 

by the proposed Rules, Policy, and 

Methodology Description, and/or (3) 

would otherwise not be deemed to be 

material aspects of OCC’s Clearing 

Fund-related operations. 

(2) Statutory Basis 

Section 17A(b)(3)(F) of the Act 61

requires, among other things, that the 

rules of a clearing agency be designed to 

promote the prompt and accurate 

clearance and settlement of securities 

and derivatives transactions, to assure 

the safeguarding of securities and funds 

which are in its custody or control or for 

which it is responsible, and, in general, 

to protect investors and the public 

interest. OCC believes that the proposed 

changes, and in particular, the new 

Clearing Fund and stress testing 

methodology, would both enhance 

OCC’s risk management capabilities as 

well as promote OCC’s ability to more 

thoroughly size, monitor and test the 

sufficiency of its Pre-Funded Financial 

Resources under a wide range of 

hypothetical and historical stress 

scenarios. The proposed Clearing Fund 

and stress testing methodology is 

designed to improve OCC’s ability to 

calibrate its Pre-Funded Financial 

Resources to withstand a broader range 

of extreme but plausible circumstances 

under which its one or two largest 

Clearing Members may default, thereby 

reducing the risk that such resources 

would be insufficient in an actual 

default. As a result, the proposed rule 

change is designed, in general, to 

enhance OCC’s framework for 

measuring and managing its credit risks 

so that it can continue to provide 

prompt and accurate clearance and 

settlement of securities and derivatives 

transactions, assure the safeguarding of 

securities and funds which are in its 

custody or control or for which it is 

responsible, and, in general, protect 

investors and the public interest 

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

the Act.62

As noted above, the proposed 

Clearing Fund and stress testing 

methodology would enhance OCC’s 

framework for testing the sizing, 


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63 Id. 

64See supra note 38 and accompanying text. 

65See supra note 39. 

66 15 U.S.C. 78q–1(b)(3)(F). 

67 Id. 

adequacy, and sufficiency of its PreFunded Financial Resources by 

incorporating a wide range of extreme 

hypothetical and historical stress 

scenarios. Under the proposal, OCC 

would establish a new risk tolerance 

with respect to sizing OCC’s Pre-Funded 

Financial Resources to cover a 1-in-50 

year hypothetical market event at a 

99.5% confidence level over a two-year 

look-back period. As noted above, OCC 

believes that a 1-in-50 year hypothetical 

market event represents the outer range 

of extreme but plausible scenarios for 

OCC’s cleared products. As a result, 

OCC would size its Clearing Fund based 

on more conservative 1-in-80 year 

Hypothetical Scenarios, and would do 

so under a more conservative Cover 2 

Standard, so that OCC sizes its Clearing 

Fund on a monthly basis at a level 

designed to cover its potential 

exposures under extreme but plausible 

market conditions. Moreover, OCC 

would utilize Sufficiency Stress Tests to 

evaluate the sufficiency of its PreFunded Financial Resources against 

potential credit exposures arising from 

range of scenarios to determine whether 

OCC should: (1) Implement the 

enhanced monitoring of Clearing Fund 

Draws, (2) require additional margin 

deposits, or (3) re-size the Clearing Fund 

on an intra-month basis so that OCC 

continues to maintain sufficient 

financial resources to cover a wide 

range of foreseeable stress scenarios that 

include, but are not limited to, the 

default of the two Clearing Member 

Groups that would potentially cause the 

largest aggregate credit exposure in 

extreme but plausible market 

conditions. Moreover, the proposed 

changes would introduce a number of 

Informational Stress Tests that would 

serve as valuable risk management tools 

for OCC to monitor and assess its PreFunded Financial Resources against a 

wide range of scenarios, including but 

not limited to extreme but implausible 

and reverse stress test scenarios. 

The proposed changes also would 

introduce certain anti-procyclical 

measures into the monthly Clearing 

Fund sizing process designed to limit 

the potential decrease of the Clearing 

Fund’s size from month to month and 

therefore reduce the likelihood that a 

market shock would require OCC to call 

for further resources from Clearing 

Members on an intra-month basis. The 

measures would prevent the Clearing 

Fund from decreasing rapidly when a 

previous peak falls out of the three 

month look-back period, and also 

reduce the likelihood that the Clearing 

Fund would be set at a size such that 

a Clearing Member Group with stress 

test exposures that are trending upward 

at the end of the sizing period would 

exceed the threshold for an intra-month 

resize immediately following monthly 

resizing of the Clearing Fund. 

Taken together, OCC believes that the 

proposed changes to its Clearing Fund 

and stress testing methodology and 

Policy are designed to improve OCC’s 

ability to calibrate its Pre-Funded 

Financial Resources, and when 

necessary, call for additional financial 

resources from its Clearing Members, so 

that it can withstand a wide range of 

stress scenarios under which its one or 

two largest Clearing Members may 

default, thereby reducing the risk that 

such resources would be insufficient in 

an actual default and enhancing OCC’s 

ability to manage risks in its role as a 

systemically important financial market 

utility. As a result, OCC believes the 

proposed rule change is designed to 

enable OCC to manage its credit risks so 

that it can continue providing prompt 

and accurate clearance and settlement of 

securities and derivatives transactions, 

assuring the safeguarding of securities 

and funds which are in its custody or 

control or for which it is responsible, 

and, in general, protect investors and 

the public interest in a manner 

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

the Act.63

OCC also proposes to increase its 

minimum initial and fixed Clearing 

Fund contribution amounts from 

$150,000 to $500,000. The proposed 

change would require a small subset of 

OCC’s Clearing Members to contribute a 

relatively modest increase in their 

mutualized contribution to OCC’s 

Clearing Fund (at most, a $350,000 

increase). In proposing the new 

minimum contribution amounts, OCC 

analyzed, among other things, the 

potential impact on Clearing Members 

that are at the minimum or otherwise 

below or just over the newly proposed 

$500,000 requirement, the impact to 

those members in dollar and percentage 

terms as well as compared to their net 

capital, evolving market conditions, 

evolution in the size of the Clearing 

Fund, minimum contribution 

requirements of other CCPs, and 

heightened regulatory obligations on 

OCC given its status as a systemically 

important financial market utility. In 

particular, OCC notes that its existing 

initial and minimum fixed contribution 

requirements have been in place since 

June 5, 2000, while its Clearing Fund 

has grown from approximately $2 

billion in 2000 to several multiples of 

that, both currently and under the 

proposal described herein.64 OCC 

believes that the proposed increase is 

appropriate given the increase in OCC’s 

overall Clearing Fund size and is in line 

with or lower than the minimum 

requirements of other CCPs.65 OCC 

believes the proposed change to its 

minimum contribution amounts would 

require Clearing Members to contribute 

an appropriate amount of mutualized 

resources to OCC’s default waterfall and 

is therefore designed to protect investors 

and the public interest in a manner 

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

the Act.66

Additionally, OCC proposes to modify 

its allocation weighting methodology to 

more closely align Clearing Members’ 

Clearing Fund contribution 

requirements with the level of risk they 

present to OCC. Specifically, under the 

proposed Policy, Clearing Fund 

contribution requirements would be 

based on an allocation methodology of 

70% of total risk, 15% of volume and 

15% of open interest (as opposed to the 

current weighting of 35% total risk, 

50% open interest, and 15% volume). In 

addition, OCC proposes to modify the 

volume component of its Clearing Fund 

contribution allocation weighting 

methodology to provide that OCC would 

use cleared volume, as opposed to 

executed volume, to base the volume 

component of the allocation on where 

the position is ultimately cleared as 

opposed to where it was executed. OCC 

believes that these changes would better 

align incentives for each Clearing 

Member to reduce the risk it introduces 

to the Clearing Fund by determining 

each Clearing Member’s proportionate 

share of the Clearing Fund based on the 

risk it presents to OCC. As a result, OCC 

believes the proposed rule change is 

designed, in general, to protect investors 

and the public interest consistent with 

Section 17A(b)(3)(F) of the Act.67

OCC also proposes a number of 

changes to its Rules to generally reduce 

the time for Clearing Members to fund 

Clearing Fund deficits. Specifically, 

new Rule 1005(a) would require that a 

Clearing Member satisfy any deficit in 

its required Clearing Fund contribution 

resulting from a decrease in the value of 

a Clearing Member’s contribution or by 

an adjusted contribution pursuant to 

proposed Rule 1004 by no later than one 

hour after being notified by OCC of such 

deficit. In addition, OCC would reduce 

the amount of time within which a 

Clearing Member must satisfy a deficit 

from five business days of the date on 


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68 Id. 

69 Id. 

70 Id. 

71 17 CFR 240.17Ad–22(b)(3). 

72 17 CFR 240.17Ad–22(e)(4)(iii) and (iv). 

73 17 CFR 240.17Ad–22(e)(4)(i). 

74 17 CFR 240.17Ad–22(e)(4). 

75 Id. 

which the report is made available to 

two business days of such date for any 

deficit arising due to regular monthly 

sizing of the Clearing Fund, an intramonth resizing of the Clearing Fund, or 

in circumstance in which a Clearing 

Member’s contribution is increased as a 

result of an amendment of OCC’s Rules. 

Additionally, and consistent with 

existing operational practice, the 

proposed changes would specify that, 

upon the failure of a Clearing Member 

for any reason to timely satisfy a deficit 

regarding its required Clearing Fund 

contribution, OCC would be authorized 

to withdraw an amount equal to such 

deficit from the Clearing Member’s bank 

account maintained in respect of an 

OCC firm account. OCC also proposes to 

specify that Clearing Members shall 

have until 9:00 a.m. Central Time on the 

second business day after the issuance 

of the Clearing Fund Status Report to 

meet their required Clearing Fund 

contribution if such contribution 

increases as a result of monthly Clearing 

Fund sizing or an intra-month resizing 

of the Clearing Fund to more closely 

align with the settlement time for the 

collection of other deficits (e.g., the 

required time for making good any 

deficiency generally under existing 

Article VIII, Section 6 of the By-Laws or 

for satisfying any margin deficits under 

Rule 605). The proposed change is 

designed to ensure that OCC is able to 

obtain funds owed from its Clearing 

Members in a timely fashion so that 

OCC can continue to meet its overall 

financial resource requirements, thereby 

reducing the risk presented to OCC. As 

a result, OCC believes the proposed rule 

change is designed to enable OCC to 

manage its credit risks so that it can 

continue providing prompt and accurate 

clearance and settlement of securities 

and derivatives transitions, assuring the 

safeguarding of securities and funds 

which are in its custody or control or for 

which it is responsible, and, in general, 

protect investors and the public interest 

in a manner consistent with Section 

17A(b)(3)(F) of the Act.68

OCC also proposes a number of nonmaterial changes, such as relocating 

provisions of OCC’s By-Laws 

concerning the Clearing Fund to its 

Rules, making other clarifying and 

conforming changes to its Rules, 

Collateral Risk Management Policy and 

Default Management Policy, and 

clarifying certain pro-cyclicality 

measures in its existing margin 

methodology, which are not expected to 

have any impact on OCC’s risk 

management practices or the risk 

presented to OCC or its participants. 

OCC believes that making these 

clarifying and conforming changes to its 

rules would provide more clarity 

around, and enhance the readability of, 

OCC’s Clearing Fund requirements and 

thereby provide OCC’s members and the 

public a clearer understanding of OCC’s 

rules. OCC believes, therefore, that its 

rules following incorporation of the 

proposed changes, would be designed 

to, in general, protect the investors and 

the public interest in a manner 

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

the Act.69

Taken together, OCC believes the 

enhancements discussed in this 

proposed rule change would provide for 

a more comprehensive approach to 

managing OCC’s credit risks and would 

allow OCC to more accurately measure 

its credit risk exposures, better test the 

sufficiency of its financial resources, 

and respond quickly when OCC believes 

additional financial resources are 

required. Accordingly, for the reasons 

set forth above, OCC believes that the 

proposed rule change would enhance 

OCC’s ability to measure and manage its 

credit risks and is therefore designed to 

promote the promote and accurate 

clearance and settlement of securities 

and derivatives transactions, to assure 

the safeguarding of securities and funds 

in the custody or control of the clearing 

agency or for which it is responsible, 

and, in general, to protect investors and 

the public interest in accordance with 

Section 17A(b)(3)(F) of the Act.70

OCC further believes the proposed 

rule change is consistent with the Act 

and the rules thereunder for the reasons 

set forth below. 

Clearing Fund Sizing and Sufficiency 

Changes 

Rule 17Ad–22(b)(3) 71 requires a 

registered clearing agency that performs 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

maintain sufficient financial resources 

to withstand, at a minimum, a default 

by the participant family to which it has 

the largest exposure in extreme but 

plausible market conditions. Rules 

17Ad–22(e)(4)(iii) and (iv) 72 further 

require, in part, that a covered clearing 

agency establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

effectively identify, measure, monitor, 

and manage its credit exposures to 

participants and those arising from its 

payment, clearing, and settlement 

processes, including by maintaining 

additional financial resources (beyond 

those collected as margin or otherwise 

maintained to meet the requirements of 

Rule 17Ad–22(e)(4)(i) 73) at the 

minimum to enable it to cover a wide 

range of foreseeable stress scenarios that 

include, but are not limited to, the 

default of the participant family that 

would potentially cause the largest 

aggregate credit exposure for the 

covered clearing agency in extreme but 

plausible market conditions and do so 

exclusive of assessments for additional 

guaranty fund contributions or other 

resources that are not prefunded. 

OCC believes that the proposed 

changes to its By-Laws, Rules and 

Clearing Fund and stress testing 

methodology are reasonably designed to 

measure and manage OCC’s credit 

exposures to participants by 

maintaining sufficient Pre-Funded 

Financial Resources to cover a wide 

range of foreseeable stress scenarios that 

include, but are not limited to, the 

default of the two Clearing Member 

Groups that would potentially cause the 

largest aggregate credit exposure in 

extreme but plausible market 

conditions. In order to achieve this, 

OCC proposes to establish a risk 

tolerance with regard to the sizing of the 

Clearing Fund equal to a 1-in-50 year 

hypothetical market event, which OCC 

believes represents the outer range of 

extreme but plausible scenarios for 

OCC’s cleared products for purposes of 

Rule 17Ad–22(e)(4) under the Act.74 In 

order to ensure sufficient coverage of 

this risk tolerance, which OCC believes 

represents the outer range of extreme 

but plausible market conditions for the 

purposes of Rule 17Ad–22(e)(4) under 

the Act,75 and to guard against intramonth scenario volatility and 

procyclicality, OCC proposes to size its 

Clearing Fund based on a more 

conservative 1-in-80 year hypothetical 

market event (i.e., the Sizing Stress 

Tests) on a Cover 2 Standard. The 

proposed changes are designed to size 

the Clearing Fund at a level that would 

be expected to cover OCC’s potential 

exposures under extreme but plausible 

market conditions. In addition, OCC’s 

Rules, Policy, and Methodology 

Description would provide for the 

collection of additional resources on an 

intra-month basis if certain Sufficiency 

Scenario thresholds are breached, as 

discussed in more detail above. These 

stress tests are designed, in total, to 

result in the collection of sufficient PreFunded Financial Resources (which by 


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76 Id. 

77 17 CFR 240.17Ad–22(b)(3) and (e)(4)(iii) and 

(iv). 

78 17 CFR 240.17Ad–22(e)(4)(vi)(A). 

79 17 CFR 240.17Ad–22(e)(4)(iii). 

80 17 CFR 240.17Ad–22. 

81 17 CFR 240.17Ad–22(e)(4)(vi). 

82 17 CFR 240.17Ad–22(e)(4)(vi)(B)–(D) and (vii). 

definition in the Policy would exclude 

OCC’s replenishment and assessment 

powers), and when necessary call for 

additional financial resources, to cover 

a wide range of stress scenarios, 

including extreme but plausible market 

conditions. 

Additionally, the proposed changes to 

avoid pro-cyclicality in the Clearing 

Fund (e.g., preventing the Clearing Fund 

from decreasing more than 5% from 

month-to-month and using a threemonth look back period in sizing the 

Clearing Fund) are designed to promote 

stability and to prevent the Clearing 

Fund from decreasing rapidly when a 

previous peak falls out of the look-back 

period. OCC believes that this 

conservative approach to antiprocyclicality would help to ensure that 

OCC continues to maintain adequate 

Pre-Funded Financial Resources during 

periods where volatility decreases 

significantly, market conditions change 

rapidly, or Clearing Member business 

activity causes a significant decrease in 

stress test results. 

OCC further believes that the 

proposed changes to its Rules to 

generally reduce the timeframe in which 

Clearing Members must meet deficits in 

their Clearing Fund contributions are 

appropriate because it would expedite 

the adjustment of Clearing Fund 

contributions to the appropriate size as 

determined by OCC’s new Clearing 

Fund and stress test methodology, 

thereby allowing the Clearing Fund to 

respond more quickly in rapidly 

changing or emergency market 

conditions. Moreover, consistent with 

existing operational practice, new Rule 

1005(c) would establish that, upon the 

failure of a Clearing Member for any 

reason to timely satisfy a deficit 

regarding its required Clearing Fund 

contribution, OCC would be authorized 

to withdraw an amount equal to such 

deficit from the Clearing Member’s bank 

account maintained in respect of an 

OCC firm account. The proposed rule 

change is designed to ensure that OCC 

is able to obtain funds owed from its 

Clearing Members in a timely fashion so 

that OCC can continue to meet its 

overall financial resource requirements. 

OCC believes the proposed changes 

would help to ensure that OCC 

maintains sufficient resources to meet 

its financial resource requirements 

under Rule 17Ad–22.76

For these reasons, OCC believes the 

proposed changes are reasonably 

designed so that OCC can measure and 

manage its credit exposure to its 

participants through the maintenance of 

additional financial resources at a 

minimum to enable it to cover a wide 

range of foreseeable stress scenarios that 

include, but are not limited to, the 

default of the participant family that 

would potentially cause the largest 

aggregate credit exposure for OCC in 

extreme but plausible market 

conditions, and do so exclusive of 

assessments for additional Clearing 

Fund contributions or other resources 

that are not prefunded, in a manner 

consistent with Rule 17Ad–22(b)(3) and 

Rules 17Ad–22(e)(4)(iii) and (iv).77

Proposed Stress Testing and Clearing 

Fund Methodology 

Rule 17Ad–22(e)(4)(vi)(A) 78 requires, 

in part, that a covered clearing agency 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to effectively 

identify, measure, monitor, and manage 

its credit exposures to participants and 

those arising from its payment, clearing, 

and settlement processes, including by 

testing the sufficiency of its total 

financial resources available to meet the 

minimum financial resource 

requirements under Rule 17Ad– 

22(e)(4)(iii) 79 by conducting stress 

testing of its total financial resources 

once each day using standard 

predetermined parameters and 

assumptions. 

OCC proposes to adopt a new stress 

testing methodology, as described in the 

proposed Policy and Methodology 

Description, to enable OCC to conduct 

a variety of Sizing Stress Tests, 

Adequacy Stress Tests, Sufficiency 

Stress Tests and Informational Stress 

Tests, each of which play different but 

complementary roles in promoting 

OCC’s ability to more robustly identify, 

measure, monitor and manage its credit 

risks to its participants. These stress 

tests would be run on a daily basis using 

standard predetermined parameters and 

assumptions and would allow OCC to 

test the sufficiency of its Pre-Funded 

Financial Resources under a wide range 

of Historical Scenarios, which take into 

account stresses on a number of factors 

such as price and volatility, as well as 

testing the adequacy of OCC’s PreFunded Financial Resources with 

respect to its proposed risk tolerance. In 

turn, these stress tests would enable 

OCC to more effectively design margin 

and Clearing Fund requirements that are 

calibrated to cover Clearing Member 

defaults under such scenarios. The 

proposed Clearing Fund and stress 

testing methodology would also use 

Sufficiency Stress Tests to determine 

whether OCC should call for additional 

collateral to ensure that it consistently 

maintains sufficient financial resources. 

OCC believes that the proposed changes 

are therefore designed to allow OCC to 

effectively identify, measure, monitor, 

and manage its credit exposures to 

participants and those arising from its 

payment, clearing, and settlement 

processes, by testing the sufficiency of 

its Pre-Funded Financial Resources 

available to meet its minimum financial 

resource requirements under Rule 

17Ad–22 80 in a manner consistent with 

Rule 17Ad–22(e)(4)(vi).81

Clearing Fund and Stress Testing 

Governance, Monitoring, and Review 

Rule 17Ad–22(e)(4)(vi) and (vii) 82

require, in part, that a covered clearing 

agency establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

effectively identify, measure, monitor, 

and manage its credit exposures to 

participants and those arising from its 

payment, clearing, and settlement 

processes, including by (i) conducting a 

comprehensive analysis on at least a 

monthly basis of the existing stress 

testing scenarios, models, and 

underlying parameters and 

assumptions, and considering 

modifications to ensure they are 

appropriate for determining the covered 

clearing agency’s required level of 

default protection in light of current and 

evolving market conditions; (ii) 

conducting a comprehensive analysis of 

stress testing scenarios, models, and 

underlying parameters and assumptions 

more frequently than monthly when the 

products cleared or markets served 

display high volatility or become less 

liquid, or when the size or 

concentration of positions held by the 

covered clearing agency’s participants 

increases significantly; (iii) reporting the 

results of such analyses to appropriate 

decision makers at the covered clearing 

agency, including but not limited to, its 

risk management committee or board of 

directors, and using these results to 

evaluate the adequacy of and adjust its 

margin methodology, model parameters, 

models used to generate clearing or 

guaranty fund requirements, and any 

other relevant aspects of its credit risk 

management framework, in supporting 

compliance with the minimum financial 

resources requirements; and (iv) 

performing a model validation for its 

credit risk models not less than 

annually or more frequently as may be 


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83 Id. 

84 17 CFR 240.17Ad–22(e)(4). 

85 Id. 

86See Securities Exchange Act Release No. 78961 

(September 28, 2016), 81 FR 70786 (October 13, 

2016) (S7–03–14) (‘‘Standards for Covered Clearing 

Agencies’’) at 70813. 

87See supra note 38 and accompanying text. 

88See supra note 39. 

contemplated by the covered clearing 

agency’s risk management framework. 

The proposed Policy would set forth 

requirements for the daily and monthly 

monitoring, review, and reporting of 

stress test results. Specifically, under 

the Policy, STLRM would monitor the 

results of all of the Adequacy and 

Sufficiency Stress Tests on a daily basis 

and immediately escalate any material 

issues identified with respect to the 

adequacy of OCC’s financial resources 

to the STWG and the Management 

Committee to determine if it would be 

appropriate to recommend a change to 

the stress test scenarios used to size the 

Clearing Fund. In addition, the Policy 

would require that STWG perform a 

comprehensive monthly analysis of 

OCC’s stress testing results, as well as 

information related to the scenarios, 

models, parameters, and assumptions 

impacting the sizing of the Clearing 

Fund and evaluate their appropriateness 

for determining OCC’s required level of 

financial resources in light of current 

and evolving market conditions. 

Moreover, the Policy would require that 

such review be conducted more 

frequently than monthly when the 

products cleared or markets served 

display high volatility or become less 

liquid; the size or concentration of 

positions held by OCC’s participants 

increases significantly; or as otherwise 

appropriate. 

Pursuant to the proposed Policy, 

STLRM would report the results of 

stress tests and its comprehensive 

monthly analysis to OCC’s Management 

Committee and Risk Committee on at 

least a monthly basis and would 

maintain procedures for determining 

whether, and in what circumstances, the 

results of such stress tests should be 

reported to the Management Committee 

or the Risk Committee more frequently 

than monthly, and would indicate the 

persons responsible for making that 

determination. In the performance of the 

monthly review of stress testing results 

and analysis and considering whether 

escalation is appropriate, the Policy 

would require that due consideration be 

given to the intended purpose of the 

Policy to: (a) Assess the adequacy of, 

and adjust as necessary, OCC’s total 

amount of financial resources; (b) 

support compliance with the minimum 

financial resources requirements under 

applicable regulations; and (c) evaluate 

the adequacy of, and recommend 

adjustments to OCC’s margin 

methodology, margin parameters, 

models used to generate margin or 

guaranty fund requirements, and any 

other relevant aspects of OCC’s credit 

risk management. 

In addition, the proposed Policy 

would require that OCC’s Model 

Validation Group perform a model 

validation of OCC’s Clearing Fund 

model on an annual basis and that the 

Risk Committee would be responsible 

for reviewing the model validation 

report. 

Based on the foregoing, OCC believes 

that the proposed Policy is reasonably 

designed to ensure that OCC: (i) 

Conducts a comprehensive analysis on 

at least a monthly basis of the existing 

stress testing scenarios, models, and 

underlying parameters and 

assumptions, and considers 

modifications to ensure they are 

appropriate for determining OCC’s 

required level of default protection in 

light of current and evolving market 

conditions; (ii) conducts a 

comprehensive analysis of stress testing 

scenarios, models, and underlying 

parameters and assumptions more 

frequently than monthly when the 

products cleared or markets served 

display high volatility or become less 

liquid, or when the size or 

concentration of positions held by 

OCC’s participants increases 

significantly; (iii) reports the results of 

such analyses to appropriate decision 

makers, including but not limited to, 

OCC’s Management Committee and the 

Risk Committee of the Board, and uses 

these results to evaluate the adequacy of 

and adjust its margin methodology, 

model parameters, models used to 

generate Clearing Fund requirements, 

and any other relevant aspects of its 

credit risk management framework, in 

supporting compliance with the 

minimum financial resources 

requirements; and (iv) performs a model 

validation for its credit risk models not 

less than annually or more frequently as 

may be contemplated by OCC’s risk 

management framework in accordance 

with Rules 17Ad–22(e)(4)(vi) and (vii).83

Proposed Changes to Minimum 

Contribution Amount and Allocation 

Methodology 

Rule 17Ad–22(e)(4) 84 generally 

requires that a covered clearing agency 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to effectively 

identify, measure, monitor, and manage 

its credit exposures to participants and 

those arising from its payment, clearing, 

and settlement processes. With respect 

to the use of Clearing Funds and the 

requirements of Rule 17Ad–22(e)(4),85

the Commission has noted that, to the 

extent that a clearing agency uses 

guaranty or clearing fund contributions 

to mutualize risk across participants, the 

clearing agency generally should value 

margin and guaranty fund contributions 

so that the contributions are 

commensurate to the risks posed by the 

participants’ activity, and the clearing 

agency also generally should consider 

the appropriate balance of 

individualized and pooled elements 

within its default waterfall, with a 

careful consideration of whether the 

balance of those elements mitigates risk 

and to what extent an imbalance among 

those elements might encourage moral 

hazard, in that one participant may take 

more risks because the other 

participants bear the costs of those 

risks.86

OCC believes that the proposed 

changes to its initial and minimum 

Clearing Fund contribution amounts 

strike an appropriate balance between 

individualized and mutualized 

resources for new Clearing Members 

and those Clearing Members with 

minimal open interest. As noted above, 

OCC’s existing initial and minimum 

fixed contribution requirements have 

been in place since June 5, 2000, while 

its Clearing Fund has grown from 

approximately $2 billion in 2000 to 

several multiples of that, both currently 

and under the proposal described 

herein.87 As a result, OCC undertook an 

analysis to determine the 

appropriateness of this amount. As 

discussed in detail above, OCC 

considered a number of factors such as 

the potential impact on Clearing 

Members that are at the minimum or 

otherwise below or just over the newly 

proposed $500,000 requirement, the 

impact to those members in dollar and 

percentage terms as well as compared to 

their net capital, evolving market 

conditions, evolution in the size of the 

Clearing Fund, minimum contribution 

requirements of other CCPs, and 

heightened regulatory obligations on 

OCC given its status as a systemically 

important financial market utility. OCC 

believes that the proposed increase is 

appropriate given the increase in OCC’s 

overall Clearing Fund size and is in line 

with or lower than the minimum 

requirements of other CCPs.88 OCC 

therefore believes the proposed change 

is reasonably designed to ensure OCC is 

able to manage its credit exposures to 

participants and those arising from its 


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89 17 CFR 240.17Ad–22(e)(4). 

90 17 CFR 240. 17Ad–22(e)(1). 

91 Id. 

92See supra note 54. 

93See supra note 10. 

payment, clearing, and settlement 

processes in a manner that considers an 

appropriate balance of individualized 

and pooled elements within its default 

waterfall. 

Additionally, OCC proposes to modify 

its allocation weighting methodology to 

more closely align Clearing Members’ 

Clearing Fund contribution 

requirements with the level of risk they 

bring to OCC. Specifically, the proposed 

Clearing Fund contribution 

requirements would be based on an 

allocation methodology of 70% of total 

risk, 15% of volume and 15% of open 

interest (as opposed to the current 

weighting of 35% total risk, 50% open 

interest, and 15% volume). OCC 

believes that this change would better 

align incentives for each Clearing 

Member to reduce the risk it introduces 

to the Clearing Fund by determining 

each Clearing Member’s proportionate 

share of the Clearing Fund based on the 

risk it presents to OCC. OCC also 

proposes to modify the volume 

component of its Clearing Fund 

contribution allocation weighting 

methodology to provide that OCC would 

use cleared volume, as opposed to 

executed volume, to base the volume 

component of the allocation on where 

the position is ultimately cleared as 

opposed to where it was executed. OCC 

believes that the proposed change is 

designed to more appropriately allocate 

contribution requirements 

commensurate to the risks posed by its 

Clearing Members. 

For these reasons, OCC believes that 

the proposed changes are designed to 

manage its credit exposures to 

participants and those arising from its 

payment, clearing, and settlement 

processes in a manner consistent with 

Rule 17Ad–22(e)(4).89

Other Clarifying, Conforming and 

Organizational Changes 

Rule 17Ad–22(e)(1) 90 requires a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for a 

well-founded, clear, transparent, and 

enforceable legal basis for each aspect of 

its activities in all relevant jurisdictions. 

OCC believes that the proposed 

clarifying, conforming, and 

organizational changes to its By-Laws 

and Rules are designed to provide 

Clearing Members with enhanced 

transparency and clarity regarding their 

obligations associated with the Clearing 

Fund. As discussed above, the primary 

provisions that address OCC’s Clearing 

Fund are currently split between Article 

VIII of the By-Laws and Chapter X of the 

Rules. Consolidating all of these 

provisions to Chapter X of the Rules 

would provide Clearing Members with a 

single location in which to find and 

understand the primary obligations that 

are associated with the Clearing Fund. 

In addition, OCC would make a number 

of non-substantive changes to its rules 

designed to provide additional clarity 

and transparency, including for 

example: (1) Consolidating existing 

Interpretation and Policy .01 and .02 of 

Article VIII, Section 5 concerning the 

share of any deficiency to be borne by 

each Clearing Member as a result of a 

charge against the Clearing Fund into 

new Interpretation and Policy .01 of 

Rule 1006 with conforming changes and 

cross-references to new Interpretation 

and Policy .01 of Rule 1006 being added 

to proposed Rules 1006(b) and (c) to 

provide additional clarity in OCC’s 

rules; (2) making minor modifications to 

proposed Rule 1006(a) to clarify that 

matured futures contracts are included 

within the scope of other contracts or 

obligations issued, undertaken, or 

guaranteed by OCC or in respect of 

which OCC is otherwise liable; (3) 

clarifying in the proposed Policy that 

the Executive Chairman, Chief 

Administrative Officer, or Chief 

Operating Officer would have the 

authority to approve proportionate 

charges against the Clearing Fund; (4) 

clarifying in the proposed Policy that 

OCC’s Accounting department is 

responsible for maintaining procedures 

for the allocation of losses due to a 

Clearing Member default and to 

replenish the Clearing Fund in the event 

a deficiency in the Clearing Fund results 

from events other than those specified 

in proposed Rule 1006; (5) revising Rule 

609 to change the term ‘‘securities’’ to 

‘‘contracts’’ to clarify that OCC’s 

authority to call for intra-day margin 

also applies to non-securities products 

cleared by OCC; (6) codifying in the 

proposed Policy the existing OCC 

practice that the specific securities 

eligible to be used as Clearing Fund 

contributions be permitted to be 

pledged in exchange for cash through 

one of OCC’s committed liquidity 

facilities so that OCC continues to 

maintain sufficient eligible securities to 

fully access such facilities; (7) clarifying 

in proposed Rule 1002 that the 

circumstances and terms for a Clearing 

Member terminating its clearing 

membership due to an increase in 

Clearing Fund contribution resulting 

from an amendment of the Rules is 

separate from the circumstances and 

terms for a Clearing Member terminating 

its status as a result of a proportionate 

charge against the Clearing Fund; (8) 

clarifying in the introduction to Chapter 

X of the Rules that the size of the 

Clearing Fund shall at all times be 

subject to minimum sizing requirements 

and generally be calculated on a 

monthly basis by OCC; however, the 

calculated size of the Clearing Fund 

may be determined more frequently 

than monthly under certain conditions 

specified in proposed Rule 1001; and (9) 

rephrasing current rule text referencing 

‘‘computed contributions to the Clearing 

Fund’’ and ‘‘as fixed at the time’’ to be 

‘‘required contributions to the Clearing 

Fund’’ and ‘‘as calculated at the time’’ 

to more accurately reflect that these 

rules are intended to refer to a Clearing 

Member’s required Clearing Fund 

Contribution amount as calculated 

under the proposed Rules, Policy and 

Methodology Description and eliminate 

any potential confusion with a Clearing 

Member’s ‘‘fixed amount’’ as 

determined under Rule 1003(a). OCC 

believes that this additional clarity, 

transparency and enhanced readability 

regarding the primary provisions 

pertaining to the Clearing Fund help to 

provide for a well-founded, clear, 

transparent and enforceable legal basis 

for the rights and obligations of Clearing 

Members and OCC regarding the 

Clearing Fund consistent with Rule 

17Ad–22(e)(1).91

In addition, Section 19(b)(1) of the 

Exchange Act and Rule 19b–4 

thereunder set forth the requirements 

for SRO proposed rule changes, 

including the regulatory filing 

requirements for SPPIs.92 OCC proposes 

to retire its existing Clearing Fund IntraMonth Re-sizing Procedure, FRMC 

Procedure, and Monthly Clearing Fund 

Sizing Procedure, which were 

previously filed as ‘‘rules’’ with the 

Commission,93 as these procedures 

would no longer be relevant to OCC’s 

proposed Clearing Fund and stress 

testing methodology and processes. 

Under the proposal, the material aspects 

of OCC’s Clearing Fund-related 

operations would be contained in the 

proposed Rules, Policy and 

Methodology Description described 

herein. Any applicable procedural 

details would not be ‘‘rules’’ of OCC as 

those aspects of the procedures: (1) 

Would no longer be relevant to OCC’s 

proposed Clearing Fund and stress 

testing methodologies and processes, (2) 

would be reasonably and fairly implied 

by the proposed Rules, Policy, and 

Methodology Description, and/or (3) 


sradovich on DSK3GMQ082PROD with NOTICES
28038 Federal Register / Vol. 83, No. 116 / Friday, June 15, 2018 / Notices 

94 Id. 

95 Id. 

96 15 U.S.C. 78q–1(b)(3)(I). 

97OCC notes that, under its current methodology, 

the Clearing Fund has ranged in size from $5.7 

billion to $17.9 billion since January 2016, which 

can result in significant changes in Clearing Fund 

contribution requirements and the need for, and 

size of, intra-month margin calls or Clearing Fund 

resizing under its existing FRMC Procedure. 

98 17 CFR 240.17Ad–22(b)(3) and (e)(4). 

99OCC notes that there are currently eleven 

Clearing Members either subject to the minimum 

Clearing Fund contribution requirement of 

$150,000 or below the proposed $500,000 

requirement. OCC also notes that other Clearing 

Members with generally smaller contribution 

requirements, and for which the contribution 

requirement consists mostly of the minimum fixed 

amount, would be more significantly impacted by 

the introduction of a higher minimum amount into 

the allocation formula. In addition, firms preparing 

to withdraw from membership by reducing open 

positions as they wind down their business or new 

Clearing Members coming online and slowly 

increasing their business could be impacted by the 

change in minimum fixed and initial contributions, 

respectively. 

100See supra note 38. 101See supra note 39. 

would otherwise not be deemed to be 

material aspects of OCC’s Clearing 

Fund-related operations. Accordingly, 

OCC believes the proposed changes 

would be consistent with the 

requirements of Rule 17Ad–22(e)(1).94

For the reasons set forth above, OCC 

believes the proposed rule change is 

designed to assure the safeguarding of 

securities and funds at OCC and, in 

general, protect investors and the public 

interest consistent with Section 

17A(b)(3)(F) of the Act 95 and the rules 

promulgated thereunder. 

(B) Clearing Agency’s Statement on 

Burden on Competition 

Section 17A(b)(3)(I) of the Act 96

requires that the rules of a clearing 

agency not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. While certain 

aspects of the proposal would have an 

impact on certain Clearing Members, 

specifically in the form of higher 

Clearing Fund contribution 

requirements, OCC does not believe that 

the proposed rule change would impose 

any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act. The potential 

impact on Clearing Members, and the 

appropriateness of those changes to 

further of the purposes of the Act, is 

described in detail below. 

OCC is proposing a number of 

changes to its Clearing Fund and stress 

testing methodology (specifically, the 

implementation of a Cover 2 Standard 

for the Clearing Fund; newly proposed 

risk tolerance; newly proposed stress 

testing framework for developing and 

maintaining Sizing, Adequacy, 

Sufficiency and Informational Stress 

Tests; changes in timing for funding 

Clearing Fund deficits; and related 

governance, monitoring and review 

activities), which may have an impact 

on certain of its Clearing Members due 

to potential changes in the total amount 

of Pre-Funded Financial Resources OCC 

would be required to maintain on a 

monthly basis and the need for OCC call 

for additional resources from particular 

Clearing Members on an intra-month 

basis. For example, the proposed 

methodology changes could at times 

result in significant changes to OCC’s 

overall Clearing Fund size relative to the 

current methodology (resulting in either 

larger or smaller relative Clearing Fund 

sizes). In addition, OCC would adopt 

new Sufficiency Stress Tests to 

determine whether OCC should call for 

additional resources from its Clearing 

Members on an intra-month basis, 

which may impact a wider subset of 

OCC’s Clearing Members than those 

typically subject to margin calls under 

the current methodology and FRMC 

Procedure.97 OCC does not believe the 

proposed changes to its Clearing Fund 

and stress testing methodology 

(including the introduction of new 

Sufficiency Scenarios) would unfairly 

inhibit access to OCC’s services or 

disadvantage or favor any particular 

user in relationship to another user. The 

proposed changes are designed to 

improve OCC’s ability to measure, 

monitor and manage its credit exposures 

to its participants consistent with its 

regulatory requirements under Rules 

17Ad–22(b)(3) and (e)(4) 98 and thereby 

enhance OCC’s ability to manage risks 

in its role as a systemically important 

financial market utility. As a result, 

OCC believes that any impact on 

competition or OCC’s Clearing Members 

would be necessary and appropriate in 

furtherance of the protection of 

investors and the public interest under 

the Act. 

OCC also proposes a number of 

changes to its Clearing Fund 

contribution allocation requirements, 

which would have an impact on OCC’s 

Clearing Members. Under the proposed 

rule change, those Clearing Members 

currently contributing the minimum 

initial and fixed amounts (or amounts 

under or slightly higher than the 

proposed minimums) would primarily 

be impacted by the increase in the 

minimum Clearing Fund contribution 

requirement.99 As discussed above, 

OCC’s existing initial and minimum 

fixed contribution requirements have 

been in place since June 5, 2000,100 and 

as a result, OCC undertook an analysis 

to determine the appropriateness of its 

current minimum requirements given 

the passage of time and the evolution of 

OCC’s overall Clearing Fund size. As 

part of this analysis, OCC considered, 

among other things, the potential impact 

on Clearing Members that are at the 

minimum or otherwise close to the 

newly proposed $500,000 requirement, 

the impact to those members in dollar 

and percentage terms as well as 

compared to their net capital, evolving 

market conditions, evolution in the size 

of the Clearing Fund, minimum 

contribution requirements of other 

CCPs, and heightened regulatory 

obligations on OCC given its status as a 

systemically important financial market 

utility. In particular, OCC notes that its 

existing initial and minimum fixed 

contribution requirements have 

remained static since June 2000, while 

its Clearing Fund has grown from 

approximately $2 billion in 2000 to 

several multiples of that, both currently 

and under the proposal described 

herein. In addition, the proposed 

minimum contribution requirement of 

$500,000 is in line with or lower than 

the minimum requirements of other 

CCPs.101 As a result of this analysis, 

OCC determined $500,000 would be an 

appropriate initial and minimum 

Clearing Fund contribution amount to 

maintain membership at OCC. OCC 

believes that the proposed minimum 

contribution requirement considers a 

proper balance of individualized and 

pooled elements within its default 

waterfall and would not unduly inhibit 

access to OCC’s services or otherwise 

impose a burden competition. 

Moreover, OCC believes the proposed 

changes to its minimum contribution 

requirements are reasonably designed to 

ensure that OCC is able to manage its 

credit exposures to participants and 

those arising from its payment, clearing, 

and settlement processes and therefore 

any competitive impact would be 

necessary and appropriate in 

furtherance of the purposes of 

protecting investors and the public 

interest under the Act. 

Additionally, OCC proposes to modify 

its allocation weighting methodology to 

more closely align Clearing Members’ 

Clearing Fund contribution 

requirements with the level of risk they 

bring to OCC. Specifically, the proposed 

Clearing Fund contribution 

requirements would be based on an 

allocation methodology of 70% of total 

risk, 15% of volume and 15% of open 

interest (as opposed to the current 

weighting of 35% total risk, 50% open 

interest, and 15% volume). The 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 116 / Friday, June 15, 2018 / Notices 28039 

102 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

proposed change would result in 

potentially higher contribution 

requirements for Clearing Members with 

large shares of overall margin relative to 

open interest, which could be the result 

of a portfolio that contains directional 

exposures driving higher margin 

requirements or accounts that have 

significant exposures in futures subject 

to customer gross margining 

requirements. OCC believes that this 

change is prudent from a risk 

management perspective as it would 

better align each Clearing Member’s 

contribution requirement with the risk it 

presents to OCC by requiring those 

members that bring elevated levels of 

risk to contribute more to the Clearing 

Fund and thereby incentivize those 

firms to reduce the risk of their 

exposures. As a result, OCC believes 

that any impact on competition would 

be necessary and appropriate in 

furtherance of the purposes of 

protecting investors and the public 

interest under the Act. 

OCC also proposes to modify the 

volume component of its Clearing Fund 

contribution allocation weighting 

methodology to provide that OCC would 

use cleared volume, as opposed to 

executed volume, in allocating Clearing 

Fund contribution requirements. OCC 

believes that the proposed change also 

is designed to more appropriately 

allocate contribution requirements 

commensurate to the risks posed by its 

Clearing Members by basing the volume 

component of the allocation on where 

the position is ultimately cleared, and 

where the risk is ultimately maintained, 

as opposed to where it was executed. 

OCC notes that the Clearing Members 

most directly impacted by the proposed 

change are execution-only Clearing 

Members that directly give up trades 

through transfers to other Clearing 

Members and do not to clear or carry 

positions on a routine basis, and would 

therefore generally see reduced 

contribution requirements due to the 

change from executed volume to cleared 

volume. OCC believes the overall 

impact to non-execution-only Clearing 

Members due only to the change to 

cleared volume would be minimal. As a 

result, OCC does not believe the 

proposed change would have an impact 

or impose a burden on competition. 

OCC also proposes a number of nonmaterial changes, such as relocating 

provisions of OCC’s By-Laws 

concerning the Clearing Fund to its 

Rules, making other clarifying and 

conforming changes to its Rules, Policy 

and procedures, and clarifying certain 

pro-cyclicality measures in its existing 

margin methodology, which are not 

expected to have any impact on 

competition. 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants or Others 

Written comments on the proposed 

rule change 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 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–2018–008 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–OCC–2018–008. 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/components/ 

docs/legal/rules_and_bylaws/sr_occ_18_

008.pdf. 

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–2018–008 and should 

be submitted on or before July 6, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.102

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–12855 Filed 6–14–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83405; File No. SR– 

NASDAQ–2018–040] 

Self-Regulatory Organizations; The 

Nasdaq Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Amend the 

Descriptions of Certain Data Feeds 

Within the Nasdaq Options Market 

June 11, 2018. 

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

Securities Exchange Act of 1934 (the 

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

notice is hereby given that on May 30, 

2018, The Nasdaq Stock Market LLC 

(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 


sradovich on DSK3GMQ082PROD with NOTICES