37570 Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 

8 17 CFR 200.30–3(a)(12). 

1 12 U.S.C. 5465(e)(1). 

2 17 CFR 240.19b–4(n)(1)(i). 

3 15 U.S.C. 78a et seq. 

4See Notice of Filing infra note 6, at 83 FR 31594. 

5 In Amendment No. 1, OCC corrected formatting 

errors in Exhibits 5A and 5B without changing the 

substance of the proposed rule change. 

6Securities Exchange Act Release No. 83561 (Jun. 

29, 2018), 83 FR 31594 (Jul. 6, 2018) (‘‘Notice of 

Filing’’). On May 30, 2018, OCC also filed a related 

proposed rule change (SR–OCC–2018–008) with the 

Commission pursuant to Section 19(b)(1) of the 

Exchange Act and Rule 19b–4 thereunder, seeking 

approval of changes to its rules necessary to 

implement the Advance Notice (‘‘Proposed Rule 

Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b– 

4, respectively. The Proposed Rule Change was 

published in the Federal Register on June 15, 2018. 

Securities Exchange Act Release No. 83406 (Jun. 11, 

2018), 83 FR 28018 (Jun. 15, 2018). 

7 In Amendment No. 2, OCC made three nonsubstantive changes to the proposal. Specifically, 

OCC (1) updated a cross-reference in Article VI, 

Section 27 of the OCC By-Laws to reflect the 

relocation of OCC’s clearing fund-related rules, (2) 

added an Interpretation and Policy to proposed 

Rule 1001 to clarify the applicability of the 5 

percent month-over-month limitation in the 

reduction of clearing fund size is not intended to 

apply to the initial changes in to OCC’s clearing 

fund sizing resulting from implementation of the 

proposed methodology, and (3) clarified an 

implementation date of September 1, 2018 for the 

proposed changes in the filing. 

8See letter from Andrej Bolkovic, CEO, ABN 

AMRO Clearing Corporation LLC (‘‘AACC’’), dated 

June 26, 2018, to Brent Fields, Secretary, 

Commission (AACC Letter I) ; letter from Chris 

Concannon, President and COO, Cboe Global 

Markets (‘‘CBOE’’), dated July 6, 2018, to Brent 

Fields, Secretary, Commission (CBOE Letter I); 

letter from Matthew R. Scott, President, Merrill 

Lynch Professional Clearing Corp. (‘‘MLPRO’’), 

dated July 6, 2018, to Brent J. Fields, Secretary, 

Commission (MLPRO Letter I); letter from Kurt 

Eckert, Partner, Wolverine Execution Services 

(‘‘WEX’’), dated July 12, 2018, to Brent Fields, 

Secretary, Commission (WEX Letter I); and letter 

from Mark Dehnert, Managing Director, Goldman 

Sachs & Co. LLC (‘‘GS’’), dated July 17, 2018, to 

Brent J. Fields, Secretary, Commission (GS Letter I), 

available at https://www.sec.gov/comments/sr-occ2018-008/occ2018008.htm. 

Since the proposal contained in the Advance 

Notice was also filed as a proposed rule change, all 

public comments received on the proposal are 

considered regardless of whether the comments are 

submitted on the proposed rule change or the 

Advance Notice. 

9OCC’s By-Laws are available at https://

www.theocc.com/components/docs/legal/rules_

and_bylaws/occ_bylaws.pdf. 

10OCC’s Rules are available at https://

www.theocc.com/components/docs/legal/rules_

and_bylaws/occ_rules.pdf. 

11See Notice of Filing, 83 FR at 31594. 

12See id. 

the proposed rule change (SR– 

NASDAQ–2018–038). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.8

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16425 Filed 7–31–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83714; File No. SR–OCC– 

2018–803] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of No Objection to Advance Notice, as 

Modified by Amendments No. 1 and 2, 

Concerning Proposed Changes to the 

Options Clearing Corporation’s Stress 

Testing and Clearing Fund 

Methodology 

July 26, 2018. 

I. Introduction 

On May 30, 2018, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) advance 

notice SR–OCC–2018–803 (‘‘Advance 

Notice’’) pursuant to Section 806(e)(1) of 

Title VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

entitled Payment, Clearing and 

Settlement Supervision Act of 2010 

(‘‘Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) 3 to propose 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’’).4 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 

stress testing methodology and would 

be replaced by the proposed Rules, 

Policy, and Methodology Description 

described herein. 

On June 7, 2018, OCC filed 

Amendment No. 1 to the Advance 

Notice.5 The Advance Notice, as 

amended, was published for public 

comment in the Federal Register on July 

6, 2018.6 On July 11, 2018, OCC filed 

Amendment No. 2 to the Advance 

Notice.7 The Commission received five 

comment letters in support of the 

proposal contained in the Advance 

Notice.8 This publication serves as 

notice of no objection to the Advance 

Notice. 

II. Background 

The Advance Notice concerns 

proposed changes to OCC’s By-Laws 9

and Rules,10 the formalization of the 

substantially new Policy, and the 

adoption of OCC’s new Methodology 

Description.11 According to OCC, the 

changes comprising the Advance Notice 

are primarily designed to enhance 

OCC’s overall resiliency, particularly 

with respect to the level of OCC’s prefunded financial resources.12


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13See id. at 31594–95. 

14See Securities Exchange Act Release No. 65386 

(Sep. 23, 2011), 76 FR 60572 (Sep. 29, 2011) (Order 

Approving Clearing Fund I). 

15See Securities Exchange Act Release No. 75528 

(Jul. 27, 2015), 80 FR 45690 (Jul. 31, 2015) (Order 

Approving Clearing Fund II). 

16See Order Approving Clearing Fund I, 76 FR at 

60572–60573. Each day, OCC estimates credit 

exposures under the stressed margin model for two 

scenarios: the greater of the two estimates is the 

daily draw. The two scenarios are of (1) the single 

largest credit exposure that would arise out of the 

default of a single clearing member group 

(‘‘idiosyncratic default’’) and (2) the credit exposure 

that would arise out of the default of two-randomly 

selected clearing member groups (‘‘minor systemic 

default’’). See Notice of Filing, 83 FR at 31595. 

17See Order Approving Clearing Fund II, 80 FR 

at 45691. 

18See Notice of Filing, 83 FR at 31597. 

19See id. 

20See id. at 31598. 

21See id. Because not all of the underlying 

securities in current portfolios existed during the 

events on which historical scenarios are based, OCC 

has developed methodologies to approximate the 

past price and volatility movements as appropriate. 

See id. at 31600. 

22See id. at 31598. 

23See id. 

24See id. at 31599. Risk drivers are a selected set 

of securities or market indices (e.g., the Cboe S&P 

500 Index (‘‘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. 

See id. at 31597, n. 26. The term risk factor refers 

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. See id. 

25See id. at 31598. 

26See id. at 31599. 

As enumerated in the Notice of Filing, 

the specific modifications that OCC 

proposes are as follows: (1) Reorganize, 

restate, and consolidate the provisions 

of OCC’s By-Laws and Rules relating to 

the clearing fund into a 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 twoyear 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 proposed 

Policy and Methodology Description; (5) 

document governance, monitoring, and 

review processes related to the 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 from 

$150,000 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 intramonth resizing; (10) provide additional 

clarity in OCC’s Rules regarding certain 

anti-procyclicality measures in OCC’s 

margin model; and (11) make a number 

of other non-substantive clarifying, 

conforming, and organizational changes 

to OCC’s By-Laws, Rules and filed 

procedures, including retiring OCC’s 

existing Clearing Fund Intra-Month Resizing Procedure, Financial Resources 

Monitoring and Call Procedure, and 

Monthly Clearing Fund Sizing 

Procedure, as these procedures would 

be replaced by the proposed Rules, 

Policy, and Methodology Description.13

The remainder of this section will 

first provide an overview of OCC’s 

current process for sizing the clearing 

fund, followed by a more detailed 

discussion of the specific changes to 

that process being proposed in the 

Advance Notice, with particular focus 

on the following categories: (a) Stress 

testing; (b) total financial resources; (c) 

financial resource sufficiency; (d) 

allocation of clearing fund 

contributions; and (e) textual 

clarification and consolidation. 

A. OCC’s Current Process for Sizing the 

Clearing Fund 

OCC’s process for determining the 

size of its clearing fund was initially 

approved in 2011,14 and enhanced in 

2015,15 resulting in OCC’s current 

process. Currently, OCC resizes its 

clearing fund at the beginning of each 

month to maintain financial resources, 

in excess of margin, to cover its credit 

exposures to its clearing members. The 

current process is effectively an 

extension of OCC’s daily margin 

process, in which OCC calculates what 

it refers to as the ‘‘daily draw’’ based on 

observations from its margin model at 

specific confidence levels each day.16

OCC tracks the rolling five-day average 

of these daily draws and, at the 

beginning of each month, sets the 

clearing fund size to the sum of (1) the 

largest five-day rolling average observed 

over the last three months and (2) a $1.8 

billion buffer.17

As described in detail below, OCC is 

proposing three primary changes to the 

existing approach. First, instead of 

simply relying on its margin model, 

OCC would rely on the proposed stress 

testing framework, including both sizing 

and sufficiency stress tests. Second, 

OCC would set the size of its clearing 

fund based on a Cover 2 Standard. 

Third, OCC would eliminate the current 

$1.8 billion static buffer because it 

would be obsolete in light of the new 

sizing stress tests and increased 

coverage afforded by the move to a 

Cover 2 Standard that, together, would 

function as a dynamic buffer. 

B. Stress Testing 

OCC proposes to adopt a new stress 

testing methodology, as detailed in both 

the proposed Policy and the proposed 

Methodology Description.18 OCC 

believes that its proposed methodology 

would enable it to measure its credit 

exposure at a level sufficient to cover 

potential losses under extreme but 

plausible market conditions.19 To do so, 

OCC proposes to conduct daily stress 

tests that consider a range of relevant 

stress scenarios and related price 

changes, 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.20

The stress scenarios used in OCC’s 

proposed methodology would consist of 

two types of scenarios: historical 

scenarios and hypothetical scenarios.21

Historical Scenarios would replicate 

historical events in current market 

conditions, which include the set of 

currently existing securities and their 

prices and volatility levels.22

Hypothetical scenarios, rather than 

replicating past events, would simulate 

events in which market conditions 

change in ways that may have not yet 

been observed.23 Hypothetical 

Scenarios, constructed using statistical 

methods, would generally include price 

shocks specific to various instruments, 

such as equity products, volatility 

products, and fixed income products. 

Each scenario would represent a draw 

from a multivariate distribution fitted to 

historical data regarding the relevant 

instrument (e.g., returns of the S&P 

500).24 In a hypothetical scenario, the 

shock to a risk driver would be used to 

determine the relative shock to each 

associated risk factor (i.e., related 

underlying security).25 For example, 

OCC would establish the size of its 

clearing fund according to a scenario 

that is based on statistically generated 

up or down price shocks for the SPX 

assuming a 1-in-80 year market event.26

OCC’s proposed stress testing 

framework would categorize OCC’s 


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27See id. at 31600. 28See id. at 31600–02. 29OCC detailed the new methodology in the 

proposed Policy and Methodology Description. 30See Notice of Filing, 83 FR at 31596. 31See id. at 31599. 

32See id. at 31600. Specifically, OCC would 

identify its exposures under a 1-in-80-year 

hypothetical event. See id. 

33See id. at 31597. As discussed above, OCC’s 

hypothetical stress scenarios represent draws from 

a fitted distribution of 2-day log returns for a given 

risk driver. OCC noted in its proposal that a 1-in50-year hypothetical market event corresponds to a 

99.9921 percent confidence interval under OCC’s 

chosen distribution of 2-day logarithmic S&P 500 

index returns. See id., n. 25. 

34See id. at 31600. 

35See id. at 31597. 

36See id., n. 23. 

37See id. at 31603. 

38See id. As discussed below, OCC proposes to 

monitor the sufficiency of its financial resources 

daily by comparing the size of the clearing fund to 

the output of several historical stress tests. 

39See id. 

40See id. at 31605. 

41See id. 

42See id. 

43See id. at 31596. 

44See id. 

45See id. at 31595–96. As noted above, an 

idiosyncratic default is one of the two scenarios that 

OCC currently uses to determine the size of the 

clearing fund each month. See supra note 16. 

Specifically, the single largest credit exposure that 

would arise out of the default of a single clearing 

member group. 

46See id. at 31595. 

inventory of stress tests by each stress 

test’s intended purpose: Adequacy, 

sizing, sufficiency, and informational.27

Specifically, OCC would use the (1) 

‘‘Adequacy Stress Tests’’ to determine 

whether the financial resources 

collected from all clearing members 

collectively are adequate to cover OCC’s 

risk tolerance; (2) ‘‘Sizing Stress Tests’’ 

to establish the monthly size of the 

clearing fund; (3) ‘‘Sufficiency Stress 

Tests’’ to monitor whether OCC’s credit 

exposure to the portfolios of individual 

clearing member groups is at a level 

sufficiently large enough 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) ‘‘Informational 

Stress Tests’’ to 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.28

C. Total Financial Resources 

As noted above, OCC proposes to (i) 

to adopt a new clearing fund 

methodology, which would be 

underpinned by a new scenario-based 

one-factor risk model stress testing 

approach,29 modify the coverage level of 

OCC’s clearing fund sizing requirement 

to a Cover 2 Standard; (iii) provide for 

certain anti-procyclical limitations on 

the reduction in clearing fund size from 

month to month; and (iv) reduce from 

five business days to two business days 

the timeframe within which clearing 

members are required to satisfy clearing 

fund deficits due to monthly or intramonth resizing.30

1. Proposal To Change the Monthly 

Clearing Fund Size Calculation 

As discussed above, OCC proposes to 

replace the methodology by which it 

determines the monthly clearing fund 

size with an approach based on 

hypothetical stress scenarios that 

assume SPX shocks (up and down) 

associated with a 1-in-80-year market 

event.31 Under the proposal, OCC 

would continue determining the size of 

its clearing fund each month based on 

the peak-five daily rolling average of 

estimated stress exposures; however, 

such exposures would be based on the 

output from OCC’s stress testing 

framework going forward as opposed to 

the margin-derived approach described 

above.32

As its benchmark for identifying 

extreme but plausible market 

conditions, OCC proposes to adopt a 

credit risk tolerance defined by OCC’s 

largest potential aggregate credit 

exposure to two clearing member groups 

under a 1-in-50-year hypothetical 

market event as opposed to the greater 

of exposures arising under an 

idiosyncratic default or a minor 

systemic default.33 OCC further 

proposes to base its daily draw on the 

aggregate credit exposures estimated 

under a 1-in-80-year hypothetical 

market event.34 Additionally, OCC 

proposes to size the clearing fund to a 

Cover 2 Standard.35

OCC believes that sizing the clearing 

fund to cover a 1-in-80-year event 

would provide sufficient coverage in 

excess of the exposures estimated under 

a 1-in-50-year event to justify no longer 

collecting the $1.8 prudential margin of 

safety.36

2. Proposal To Limit Reductions in 

Clearing Fund Size From Month to 

Month 

Currently, OCC does not constrain 

month-over-month changes in the size 

of the clearing fund. OCC proposes to 

adopt two limitations on month-overmonth decreases in the size of the 

clearing fund. First, OCC proposes to 

prohibit a clearing fund decrease of 

more than 5 percent month-overmonth.37 Second, OCC proposes to limit 

the clearing fund decreases based on its 

daily monitoring of OCC’s financial 

resources. When determining the size of 

the clearing fund at the beginning of a 

given month, OCC would not allow that 

size to be less than 90 percent of the 

peak credit exposures estimated under 

the stress tests used for daily monitoring 

during the last five business days of the 

preceding month.38 These limitations 

are designed to reduce the potential for 

cyclical movements in the size of the 

clearing fund, as well as reduce the 

need for OCC to call for additional 

financial resources intra-month.39

3. Timing of Clearing Fund 

Contributions 

In addition to revising the 

methodology for sizing OCC’s total 

financial resources, OCC proposes 

generally to reduce the time in which 

each clearing member must make its 

clearing fund contribution.40 Clearing 

members currently have five business 

days to satisfy a clearing fund 

deficiency arising out of the monthly 

sizing or intra-month resizing processes. 

OCC proposes to reduce that time to two 

business days.41 OCC also proposes to 

require clearing members to satisfy any 

clearing fund deficit resulting from a 

decrease in the value of the clearing 

member’s existing contribution within 

one hour of notification by OCC.42

D. Financial Resource Sufficiency 

As noted above, OCC proposes to (i) 

adopt a new clearing fund methodology, 

as detailed in the newly-proposed 

Policy and Methodology Description 

and (ii) document governance, 

monitoring, and review processes 

related to the clearing fund and stress 

testing.43 Proposed changes to OCC’s 

clearing fund methodology include the 

assessment of OCC’s clearing fund 

against a wide range of historical 

scenarios.44

1. Proposal To Monitor the Sufficiency 

of OCC’s Financial Resources 

Currently, OCC monitors the 

sufficiency of its financial resources 

daily by estimating whether the size of 

the clearing fund is sufficient to cover 

a maximum potential loss from a 

simulated idiosyncratic default.45 Under 

its current procedures, when OCC 

observes credit exposures estimated 

under the idiosyncratic default in excess 

of 75 percent of the clearing fund size, 

OCC issues a margin call against the 

clearing member group generating the 

credit exposures.46 The size of such a 

margin call is the difference between the 

idiosyncratic default exposure and the 


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47See id. As noted above in section II.A., the base 

clearing fund amount is the size of the clearing fund 

less the $1.8 billion prudential margin of safety. 48See id., n. 13. 49See id. at 31595. 50OCC would reduce the size of the idiosyncratic 

default exposure by factoring in margin calls issued 

due to a breach of the 75 percent threshold 

described above. See id. at 31596. 51See id. 52See id. 53See id. at 31600. 54See id. at 31601. OCC proposes to measure the 

clearing fund against the two largest exposures 

under the 2008-like events and the one largest 

exposure under a 1987-like event. See id. 55See id. 56See id. 57See id. at 31601–02. 

58See id. 

59See id. 

60See id. at 31602. 

61See id. at 31601. Based on OCC’s procedures, 

staff understands that such monitoring would entail 

escalation within OCC’s Financial Risk 

Management group noting the relevant clearing 

member, the future potential for breach of the 75 

percent margin call threshold, and a summary of 

the apparent risk drivers resulting in the stress 

exposures. 

62See id. 

63See id. at 31602. 

64See id. 

65See id. at 31602–03. 

66See id. 

67See id. at 31603. 

68See id. 

69See id. 

70See id. at 31596. 

71See id. at 31604. The initial amount that a new 

clearing member must contribute to OCC’s clearing 

fund is also $150,000. See id. at 31603. 

72See id. at 31604. OCC similarly proposes to 

increase the initial contribution. See id. at 31603. 

73See id. (citing Securities Exchange Act Release 

No. 42897 (June 5, 2000), 65 FR 36750 (June 9, 

2000) (SR–OCC–99–9)). 

74See id. at 31603–04. 

75See id. at 31603. 

76See id. at 31604. 

base clearing fund amount.47 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 risk to OCC.48 OCC may limit the 

size of the margin call to each clearing 

member to the lesser of $500 million or 

100 percent of such clearing member’s 

net capital.49

OCC’s current procedures also call for 

increases to the total size of the clearing 

fund in more extreme scenarios. When 

OCC observes credit exposures 

estimated under the idiosyncratic 

default 50 exceeding 90 percent of the 

clearing fund size OCC must, under its 

procedures, increase the size of the 

clearing fund.51 The size of the increase 

to the clearing fund is the greater of $1 

billion or 125 percent of the difference 

between the idiosyncratic default 

exposure and the clearing fund.52

OCC proposes to revise this process 

by replacing the above-described 

idiosyncratic default approach with an 

approach that compares the size of the 

clearing fund to the exposures estimated 

under a set of historical scenario stress 

tests (‘‘Sufficiency Stress Tests’’).53 The 

Sufficiency Stress Tests proposed by 

OCC include the largest market moves 

up and down during 2008 on a cover 2 

basis and the market moves associated 

with the 1987 market crash on a cover 

1 basis.54

OCC proposes to call for additional 

margin when it observes that one or 

more clearing member groups’ exposure 

under a Sufficiency Stress Test exceeds 

75 percent of the clearing fund.55 Under 

the proposal, the size of the margin call 

would be the amount by which the 

Sufficiency Stress Test exposure 

exceeds the 75 percent threshold.56

Similar to the current process, OCC 

proposes to retain authority to limit 

such margin calls to each clearing 

member to $500 million or 100 percent 

of the clearing member’s net capital.57

OCC also proposes to revise the 

process for increasing the size of the 

clearing fund under more extreme 

scenarios. OCC proposes to increase the 

size of the clearing fund when it 

observes a Sufficiency Stress Test 

exposure in excess of 90 percent of the 

clearing fund.58 Similar to the current 

process, the size of the clearing fund 

increase would be the greater of $1 

billion or 125 percent of the difference 

between the Sufficiency Stress Test 

exposure and the clearing fund.59 OCC 

also proposes to provide new authority 

to its Chief Executive Officer, Chief 

Administrative Officer, and Chief 

Operating Officer to temporarily 

increase the size of the clearing fund, 

subject to notice and later review by 

OCC’s Board Risk Committee (‘‘RC’’).60

Additionally, OCC proposes to add a 

new threshold at which it would 

commence enhanced monitoring of a 

clearing member group.61 Where OCC 

observes that a clearing member group’s 

Sufficiency Stress Test exposure 

exceeds 65 percent of the clearing fund, 

OCC would commence enhanced 

monitoring of, and provide notice to the 

clearing member group.62

2. Proposal To Document Governance 

Processes Related to the Clearing Fund 

and Stress Testing 

OCC proposes to establish, as part of 

its rules, processes for the governance, 

monitoring, and review of the stress 

testing framework and clearing fund 

methodology described above.63 Such 

processes would cover daily, monthly, 

and annual review of OCC’s stress 

testing framework and clearing fund 

methodology. 

On a daily basis, OCC’s staff would 

monitor the size of the clearing fund 

against OCC’s risk tolerance and 

sufficiency stress tests.64 OCC staff 

would be required to report material 

issues to the Executive Vice President of 

OCC’s Financial Risk Management 

group (‘‘EVP–FRM’’). The EVP–FRM 

would further escalate issues with OCC 

management as applicable. 

On a monthly basis, OCC’s staff 

would provide reports and analyses of 

the daily stress tests to OCC’s 

Management Committee and RC.65

OCC’s staff would also be responsible 

for conducting a comprehensive 

analysis of stress test results, scenarios, 

models, parameters, and assumptions 

monthly or more frequently when the 

products cleared or markets served by 

OCC display high volatility or become 

less liquid or when the size or 

concentration of positions held by 

OCC’s participants increases 

significantly.66

On an annual basis, OCC’s Model 

Validation Group would be required to 

perform a model validation of OCC’s 

clearing fund methodology.67 The RC 

would review such validations.68 The 

RC would also be responsible for annual 

review and approval of the Policy.69

E. Allocation of Clearing Fund 

Contributions 

As noted above, OCC proposes to (i) 

increase the minimum clearing fund 

contribution requirement for clearing 

members to $500,000 and (ii) modify 

OCC’s allocation weighting 

methodology for clearing fund 

contributions.70

1. Proposal To Increase the Minimum 

Clearing Fund Contribution 

Currently, the minimum amount a 

clearing member must contribute to 

OCC’s clearing fund (the ‘‘fixed 

amount’’) is $150,000.71 OCC proposes 

to increase the fixed amount to 

$500,000.72 The minimum contribution 

requirement has been in place since 

June 5, 2000,73 and has remained static 

while the average size of OCC’s clearing 

fund has increased significantly.74 OCC 

also noted that other CCPs’ minimum 

requirements are well in excess of 

OCC’s minimum contribution 

requirement.75 OCC analyzed the 

impact of the proposed change on its 

clearing members and discussed such 

impacts with the potentially affected 

clearing members, the majority of which 

did not express concerns over the 

proposed increase.76


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77See id. Total risk refers to a clearing member’s 

margin requirement. See id., n. 44. Additionally, 

the current methodology calculates volume based 

on executed volume. See id. at 31604. 

78See id. 

79See id. The definition of total risk would 

remain the same, but OCC would calculate volume 

based on cleared volume as opposed to executed 

volume. See id. 

80See id. at 31596. 

81See id. 

82See id. 

83See id. 

84See id. 

85See id. at 31596–97. 

86See id. at 31606. 

87See id. 

88See id. 

89See id. 

90See id. at 31607, n. 52. 

91See id. at 31607. 

92See id. at 31607–08. 

93See id. at 31608. 

94See supra note 8. 

95AACC Letter I at 1; MLPRO Letter I at I. 

96AACC Letter I at 1. 

97 Id. at 2. 

98 Id. at 2–3. 

99MLPRO Letter I at 2. 

2. Proposal To Modify the Clearing 

Fund Allocation Weighting 

In addition to the fixed amount 

described above, most clearing members 

are required to contribute an additional 

amount to OCC’s clearing fund (the 

‘‘variable amount’’). The variable 

amount is based on the weighted 

average of each clearing member’s 

proportionate share of total risk, open 

interest, and volume.77 Currently, OCC 

uses the following weighting in its 

allocation of clearing fund 

requirements: 35 percent total risk; 50 

percent open interest; and 15 percent 

volume.78 OCC proposes to modify the 

allocation weighting as follows: 70 

percent total risk; 15 percent open 

interest; and 15 percent volume.79

F. Textual Clarification and 

Consolidation 

Finally, as noted above, OCC proposes 

to (i) reorganize, restate, and consolidate 

the provisions of OCC’s By-Laws and 

Rules relating to the Clearing Fund into 

a newly-revised Chapter X of OCC’s 

Rules; (ii) provide additional clarity in 

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

margin model; and (iii) make a number 

of other non-substantive clarifying, 

conforming, and organizational changes 

to OCC’s By-Laws, Rules, and filed 

procedures, including retiring OCC’s 

existing Clearing Fund Intra-Month Resizing Procedure, Financial Resources 

Monitoring and Call Procedure, and 

Monthly Clearing Fund Sizing 

Procedure, as these procedures would 

be replaced by the proposed Rules, 

Policy, and Methodology Description.80

1. Proposal To Reorganize, Restate, and 

Consolidate Certain Rule Text 

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.81 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.82 Given 

the scope of changes described above, 

OCC believes that it is appropriate to 

make such revisions at this time.83

The changes to the provisions 

currently residing in OCC’s 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 By-Laws; 

however, changes to OCC’s rules 

generally require only a majority vote of 

OCC’s Board of Directors.84 OCC 

proposes to amend its By-Laws to 

maintain the existing requirements for 

modifying those rules that would be 

moved from Article VIII of OCC’s ByLaws to Chapter X of its Rules.85

2. Proposal To Add Rule Text Clarifying 

Anti-Procyclicality Measures in OCC’s 

Margin Model 

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.86 OCC now proposes to 

amend its Rule 601(c) to reflect this 

practice.87 OCC believes that the 

proposed change would provide more 

clarity and transparency in its rules.88

3. Proposal To Make Other NonSubstantive Changes to OCC’s Rules 

OCC proposes a number of clarifying, 

conforming, and organizational changes 

to its By-Laws, Rules, Collateral Risk 

Management Policy, Default 

Management Policy, and Clearing Fundrelated procedures in connection with 

the proposed enhancements to its PreFunded Financial Resources and the 

relocation of OCC’s Clearing Fundrelated By-Laws into Chapter X of the 

Rules.89

In addition to the relocation of rules 

described above, OCC would also make 

minor, non-substantive revisions. For 

example, OCC would replace text 

referencing ‘‘computed contributions to 

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

time’’ with text stating ‘‘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.90

Further, 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.91

Finally, OCC proposes to replace 

procedures regarding its processes for (i) 

the monthly resizing of its Clearing 

Fund, (ii) the addition of financial 

resources, and (iii) the execution of any 

intra-month resizing of the Clearing 

Fund.92 OCC proposes to retire its 

existing procedures because the relevant 

rule requirements would be maintained 

in the proposed rules as well as the 

Clearing Fund Methodology Policy and 

Clearing Fund Methodology Description 

included as part of the Advance 

Notice.93

III. Summary of Comments 

As noted above, the Commission 

received five comment letters—AACC 

Letter I, CBOE Letter I, MLPRO Letter I, 

WEX Letter I, and GS Letter I— 

supporting the changes proposed in the 

Advance Notice.94 Two of the 

commenters urge the Commission to 

approve the proposal as expeditiously 

as possible.95 AACC believes that the 

proposal would remediate two problems 

with the current clearing fund 

methodology: (1) OCC’s current clearing 

fund sizing methodology failing to 

contain sufficient anti-procyclicality 

measures, and (2) OCC’s current 

clearing fund contribution allocation 

methodology failing to appropriately 

incentivize clearing member risk 

management.96

Regarding the clearing fund sizing 

methodology, AACC believes that the 

proposal would implement a number of 

measures intended to provide stability 

and consistency to the size of OCC’s 

clearing fund.97 Specifically, AACC 

supports (1) sizing the clearing fund 

based on a variety of risk factors, and (2) 

testing the size of the clearing fund on 

a daily basis against extreme but 

plausible market events, thereby 

lowering the likelihood that OCC’s 

clearing fund would be insufficient to 

protect OCC and market participants in 

the event of a clearing member 

default.98 MLPRO believes that the 

proposed changes would create a more 

transparent and predictable model.99


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100 GS Letter I at 2. In its letter, GS refers to OCC’s 

movement to a 1-in-80-year period from a 1-in-50- 

year model. The Commission notes that OCC’s 

current process is not based on a 1-in-50-year 

model, and that OCC is now proposing to adopt a 

new risk tolerance based on a 1-in-50-year 

hypothetical event. See Notice of Filing, 83 FR at 

31596. Further, OCC proposes to base the size of the 

clearing fund on the aggregate credit exposures 

estimated under a 1-in-80-year hypothetical market 

event (as opposed to an historical market event). 

See id. at 31600. 

101WEX Letter I at 1. 

102AACC Letter I at 3. 

103 Id. 

104CBOE Letter I at 1; MLPRO Letter I at 1–2. 

105CBOE Letter I at 1. 

106 GS Letter I at 2. 

107MLPRO Letter I at 1–2. 

108 Id. 

109AACC Letter I at 4; WEX Letter I at 1; GS 

Letter I at 1. 

110AACC Letter I at 4. 

111WEX Letter I at 2. 

112MLPRO Letter I at 2. 

113AACC Letter I at 4; GS Letter I at 1. 

114AACC Letter I at 5; WEX Letter I at 2. 

115MLPRO Letter I at 1. 

116 GS Letter I at 2. 

117See 12 U.S.C. 5461(b). 

118 12 U.S.C. 5464(a)(2). 

119 12 U.S.C. 5464(b). 

120 12 U.S.C. 5464(c). 

121 17 CFR 240.17Ad–22. See Securities Exchange 

Act Release No. 68080 (October 22, 2012), 77 FR 

66220 (November 2, 2012) (S7–08–11). See also 

Securities Exchange Act Release No. 78961 

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

2016) (S7–03–14) (‘‘Covered Clearing Agency 

Standards’’). The Commission established an 

effective date of December 12, 2016, and a 

compliance date of April 11, 2017, for the Covered 

Clearing Agency Standards. OCC is a ‘‘covered 

clearing agency’’ as defined in Rule 17Ad–22(a)(5). 

122 17 CFR 240.17Ad–22. 

123 12 U.S.C. 5464(b). 

Similarly, GS supports OCC’s proposal 

to include more comprehensive testing 

scenarios by including observed market 

events over a longer historical period, 

which would improve the overall 

quality of OCC’s stress testing and 

strengthen OCC’s ability to model risk 

scenarios.100 Additionally, WEX 

believes that the proposed changes, 

specifically changes regarding how the 

monthly clearing fund sizing process 

will address anti-procyclicality, should 

help reduce operational issues related to 

a clearing member’s obligations 

increasing and decreasing.101

AACC states that, from a theoretical 

perspective, OCC’s proposed sizing 

methodology constitutes a significant 

improvement over the current sizing 

methodology in that the size of the 

clearing fund would be less influenced 

by changes in volatility because OCC is 

introducing other risk drivers into the 

sizing methodology as well as 

monitoring and augmenting such risk 

drivers on a daily basis based on market 

conditions.102 AACC also comments 

that the proposal would cause the size 

of OCC’s clearing fund to become more 

stable because OCC would test for 

adequacy and sufficiency on a daily 

basis using a series of historical and 

hypothetical stress tests that are rooted 

in extreme but plausible market 

events.103

Commenters also believe that the 

proposal would improve OCC’s risk 

models by correcting existing 

shortcomings.104 CBOE comments that 

the adoption of a Cover 2 standard 

would ensure that the size of the 

clearing fund is sufficient to protect 

OCC against losses from the 

simultaneous default of its two largest 

Clearing Members under extreme, but 

plausible market conditions.105 GS also 

agrees with OCC’s proposal to adopt a 

Cover 2 Standard.106 MLPRO comments 

that the adoption of a Cover 2 standard 

in establishing a new model to measure 

the adequacy of the clearing fund and 

address potential default scenarios 

would address issues that MLPRO 

identifies with OCC’s current model.107

MLPRO also supports OCC’s (1) 

adopting risk tolerance and stress 

testing assumptions that are developed 

from extreme, but plausible scenarios, 

and (2) calibrating individual equity 

price movements to the price shock for 

the applicable equity index to address 

issues with the current model.108

Regarding the changes to the clearing 

fund allocation methodology, 

commenters believe that the proposal 

would better align clearing members’ 

required clearing fund contribution to 

the risk they present to OCC and other 

market participants.109 AACC states that 

the proposed changes would place more 

emphasis on the economic risk 

presented by a clearing member’s 

cleared contracts than the operational 

risk presented by a high volume clearing 

member, thereby better recognizing that 

certain types of clearing members 

present a relatively lower risk to OCC 

even though they may represent a 

higher percentage of overall activity 

(i.e., clearing members with marketmaker and other risk-neutral 

customers).110 Similarly, WEX supports 

allocation based on cleared volumes as 

opposed to executed volumes in 

consideration of where a positon is 

cleared as opposed to where it is 

executed.111 MLPRO also supports 

increases the weighting of total risk in 

the allocation process.112 Commenters 

also believe that the proposed changes 

make sense from a default and 

liquidation perspective.113

Commenters AACC and WEX believe 

that the proposed changes would have 

positive effects on the listed options 

market.114 Similarly, MLPRO believes 

that the proposed changes would 

increase liquidity in the listed options 

market.115 Additionally, GS believes 

that the proposed changes will greatly 

enhance OCC’s resiliency and risk 

management.116

IV. Discussion and Commission 

Findings 

Although the Act does not specify a 

standard of review for an advance 

notice, the stated purpose of the Act is 

instructive: to mitigate systemic risk in 

the financial system and promote 

financial stability by, among other 

things, promoting uniform risk 

management standards for SIFMUs and 

strengthening the liquidity of 

SIFMUs.117

Section 805(a)(2) of the Act 118

authorizes the Commission to prescribe 

regulations containing risk-management 

standards for the payment, clearing, and 

settlement activities of designated 

clearing entities engaged in designated 

activities for which the Commission is 

the supervisory agency. Section 805(b) 

of the Act 119 provides the following 

objectives and principles for the 

Commission’s risk-management 

standards prescribed under Section 

805(a): 

• To promote robust risk 

management; 

• to promote safety and soundness; 

• to reduce systemic risks; and 

• to support the stability of the 

broader financial system. 

Section 805(c) provides, in addition, 

that the Commission’s risk-management 

standards may address such areas as 

risk-management and default policies 

and procedures, among others areas.120

The Commission has adopted riskmanagement standards under Section 

805(a)(2) of the Act and Section 17A of 

the Exchange Act (the ‘‘Clearing Agency 

Rules’’).121 The Clearing Agency Rules 

require, among other things, each 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures that are 

reasonably designed to meet certain 

minimum requirements for its 

operations and risk-management 

practices on an ongoing basis.122 As 

such, it is appropriate for the 

Commission to review advance notices 

against the Clearing Agency Rules and 

the objectives and principles of these 

risk management standards as described 

in Section 805(b) of the Act. As 

discussed below, the Commission 

believes the proposal in the Advance 

Notice is consistent with the objectives 

and principles described in Section 

805(b) of the Act,123 and in the Clearing 


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124 17 CFR 240.17Ad–22(e)(1); 17 CFR 240.17Ad– 

22(e)(4). 

125 12 U.S.C. 5464(b). 

Agency Rules, in particular Rules 

17Ad–22(e)(1) and 17Ad–22(e)(4).124

A. Consistency With Section 805(b) of 

the Act 

The Commission believes that the 

proposal contained in OCC’s Advance 

Notice is consistent with the stated 

objectives and principles of Section 

805(b) of the Act. Specifically, as 

discussed below, the Commission 

believes that the changes proposed in 

the Advance Notice are consistent with 

promoting robust risk management in 

the area of credit risk, promoting safety 

and soundness, reducing system risks, 

and supporting the stability of the 

broader financial system.125

First, as described above, OCC’s 

current process for sizing the clearing 

fund was established in 2011 and 

strengthened under a 2015 interim 

approach. The current process is 

essentially an extension of OCC’s 

margin model. In general, margin 

requirements for clearing members are 

very reactive to market movements and 

changes in clearing member portfolios. 

Because OCC’s current process for 

sizing the clearing fund is based on a 

relatively dynamic daily margin 

process, the size of the clearing fund can 

at times be volatile and cyclical in 

nature. The changes proposed in the 

Advance Notice based the sizing and 

monitoring of OCC’s clearing fund on a 

stable inventory of stress tests rather 

than continuing to rely on a dynamic 

margin model. The Commission 

believes this new approach would 

provide OCC with a more precise, 

rigorous, and stable assessment of the 

financial resources it would need to 

hold in its clearing fund to cover its 

credit risk exposure to its members in 

extreme but plausible market 

conditions, which in turn would 

enhance OCC’s overall risk 

management. 

Second, with respect to the robustness 

of the new stress testing framework 

itself, the Commission believes that the 

stress tests proposed in OCC’s 

framework are an improvement over 

OCC’s current approach in this area, as 

the stress tests comprise a wide range of 

foreseeable stress scenarios. The 

scenarios cover historical events as 

extreme as the 2008 financial crisis and 

1987 market crash as well as 

hypothetical events derived from a 

dataset of historical S&P returns. OCC’s 

proposed stress testing framework 

would also include a category of stress 

tests designed specifically for review of 

OCC’s financial resources against 

implausible scenarios and reverse stress 

tests. Such stress tests would not 

directly affect the total amount of OCC’s 

financial resources, but would facilitate 

a more forward looking risk 

management process. Accordingly, 

while as an ongoing supervisory matter 

the Commission expects OCC to 

consider and, as necessary, implement 

future enhancements to its suite of 

stress tests, the Commission believes 

that the suite of stress tests that OCC 

proposes to establish in its risk 

management framework pursuant to the 

Advance Notice represents a material 

improvement to OCC’s current risk 

management practices for estimating 

potential future losses in extreme but 

plausible market conditions. 

Third, as described above, OCC 

proposes to adopt several enhancements 

to its methodology for determining the 

size of its clearing fund. OCC proposes 

to adopt an internal credit risk tolerance 

based on hypothetical stress scenarios, 

which would provide OCC with a 

benchmark that it believes represents 

extreme but plausible market 

conditions. The Commission believes 

that establishing such a tolerance is a 

valuable step in accurately estimating 

the total financial resources necessary to 

cover OCC’s exposures in extreme but 

plausible market conditions. Next, OCC 

proposes to set the size of its clearing 

fund to cover a scenario that is more 

extreme than its internal tolerance to 

ensure consistent coverage, which the 

Commission believes would be another 

valuable step in accurately estimating 

OCC’s necessary total financial 

resources. Further, OCC proposes to 

cover its two largest credit exposures 

when setting the size of the clearing 

fund, which goes further than OCC’s 

current practice of covering the greater 

of OCC’s single largest exposure or two 

random exposures. For the same 

reasons, the Commission believes this, 

too, would improve OCC’s risk 

management practices. Finally, OCC 

proposes to limit the potential 

reductions in the size of the clearing 

fund month-over-month. Such 

limitations would avoid large drops in 

the clearing fund size over a short 

period of time and unnecessary 

reductions followed by immediate calls 

for additional resources at the beginning 

of each month. Taken together, the 

Commission believes that all of these 

enhancements to the calculation of 

OCC’s clearing fund requirements 

would enhance OCC’s risk management 

practices and allow it to more accurately 

estimate the total financial resources 

necessary to cover its exposures in 

extreme but plausible market 

conditions. 

Fourth, the proposal discussed above 

would expand and improve upon the 

scope of stress scenarios against which 

OCC monitors is financial resources. 

Under the proposal OCC would 

continue to review the size of its 

clearing fund against exposures under a 

stress scenario designed to replicate the 

1987 market crash, and would also 

introduce monitoring against other 

historical scenarios such as the largest 

market moves up and down observed 

during the 2008 financial crisis. In 

addition, OCC would continue its 

practice of collecting additional 

resources in margin collateral and 

clearing fund requirements where stress 

exposures exceed 75 percent and 90 

percent, respectively, of the size of the 

clearing fund. Based on a review of the 

parameters of the scenario replicating 

the 1987 market crash, the Commission 

believes that the scenario presents 

potential losses that are extreme while 

also plausible in light of their historical 

basis. Additionally, the Commission 

believes that the scenario would provide 

stress exposure estimates that would be 

meaningful for the monitoring of OCC’s 

total financial resources. The 

Commission also believes that the 

introduction of new historical scenarios, 

such as those replicating the financial 

crisis, would provide additional depth 

to the monitoring of OCC’s financial 

resources. The Commission believes, 

therefore, that the changes proposed in 

the Advance Notice include the 

adoption of a wide range of stress 

scenarios for the testing of OCC’s 

financial resources. Consequently, the 

Commission believes that the expansion 

of the scope of stress scenarios, along 

with the inclusion of a scenario 

replicating the 1987 market crash, will 

result in a stress testing framework that 

promotes robust risk management at 

OCC. 

Fifth, OCC would document its 

periodic review and analysis of its stress 

testing framework and clearing fund 

methodology, which would include (1) 

daily review of stress test outputs, (2) 

monthly (or more frequently as needed) 

analysis of the stress test results, 

scenarios, models, parameters, and 

assumptions, and (3) annual validation 

of the clearing fund methodology. OCC 

also would clearly define the process for 

escalating the results of its daily and 

monthly analyses and require on an 

annual basis Board level review and 

approval of the Clearing Fund 

Methodology Policy. The Commission 

believes that these governance processes 

would help ensure that OCC is in a 

position to continuously monitor, 


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126See Notice of Filing, 83 FR at 31605. 

127OCC’s overall clearing fund size has increased 

significantly since the current initial and minimum 

contributions were set in 2000. See id. at 31603– 

04. 

128 12 U.S.C. 5464(b). 129 17 CFR 240.17Ad–22(e)(4)(i) and (iii). 

analyze, and adjust as necessary both 

the stress testing framework and the 

clearing fund methodology, thereby 

helping to ensure the accuracy and 

reliability of the methodology by which 

OCC tests the sufficiency of its financial 

resources. 

Taken together, and for the reasons 

discussed above, the Commission 

believes that these proposals would 

promote robust risk management at OCC 

by better ensuring that OCC maintains 

sufficient financial resources in excess 

of margin to enable it to cover a wide 

range of 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. 

By enhancing the precision with 

which OCC estimates the total financial 

resources that it must maintain, 

reducing the time it takes OCC to fund 

clearing fund contributions, and 

limiting month-to-month reductions in 

the size of the clearing fund, the 

Commission also believes the changes 

proposed in the Advance Notice 

promote safety and soundness. The 

Commission agrees that, by shortening 

the timeframe within which each 

clearing member must make its required 

clearing fund contribution, OCC would 

be able to better ensure that it is able to 

obtain the funds owed from clearing 

members in a timely fashion so that 

OCC can continue to meet its overall 

financial resource requirements.126

Reducing the period of time between the 

identification of credit exposures and 

the collection of collateral to cover such 

exposures reduces the period of time 

during which OCC could be under 

collateralized. Ensuring that OCC is able 

to obtain collateral in a timely manner 

promotes safety and soundness. 

Similarly, limiting large reductions and 

cyclical swings in the size of OCC’s 

clearing fund reduces the potential for 

OCC to give up resources only to find 

that they are necessary to cover its 

credit exposures to participants. 

Consequently, the Commission believes 

that the proposed reduction in funding 

time and limitations designed to 

constrain procyclical changes in the size 

of the clearing fund promote safety and 

soundness. 

In addition, the Commission believes 

that the limitations on clearing fund size 

reductions described above, as well as 

the proposed allocation methodology 

changes, are designed to reduce 

systemic risk and promote the stability 

of the broader financial system. 

Reducing the likelihood of procyclical 

swings in the size of OCC’s clearing 

fund should provide more certainty and 

stability to OCC’s clearing members. For 

example, such increased certainty 

should help reduce the risk that clearing 

members would be surprised and 

destabilized by a request from OCC for 

a clearing fund size increase, thereby 

limiting the likelihood that such 

requests could destabilize the broader 

financial system or heighten systemic 

risk. The Commission believes that the 

increases of the initial and minimum 

contributions to the clearing fund are 

commensurate with the growth of OCC’s 

clearing fund over time.127 Finally, the 

Commission believes that the proposed 

changes to OCC’s allocation weighting 

will allow OCC to better manage its 

credit exposures to its clearing members 

by better aligning each clearing 

member’s contributions to the credit 

risk it poses to OCC, thereby allowing 

OCC to better manage its credit 

exposures to its participants. The 

Commission believes that increased 

certainty and the alignment of 

obligations with risk would both reduce 

potential systemic risks and promote the 

stability of the broader financial system 

by reducing the likelihood of 

unexpected and potentially 

destabilizing clearing fund obligations 

for clearing members. 

Finally, the Commission believes that 

OCC’s proposed textual clarifications 

and reorganization would also support 

the stability of the broader financial 

system. The reorganization and 

consolidation of rule provisions related 

to OCC’s clearing fund would enhance 

the readability of OCC’s public-facing 

rules, and additional clarification of 

OCC’s margin rules would promote 

transparency by providing the public 

with information about OCC’s risk 

management processes. The 

Commission believes that the additional 

clarity and transparency provided by 

these proposed change would support 

the stability of the broader financial 

system by removing potential sources of 

confusion or misunderstanding 

regarding the operations and potential 

consequences of OCC’s risk 

management processes in respect of the 

clearing fund. 

Accordingly, and for the reasons 

stated, the Commission believes the 

changes proposed in the Advance 

Notice are consistent with Section 

805(b) of the Act.128

B. Consistency With Rule 17Ad–22(e)(4) 

Under the Exchange Act 

1. Total Financial Resources 

Rules 17Ad–22(e)(4)(i) and (iii) under 

the Exchange Act requires, among other 

things, that OCC 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 by, among other things, 

maintaining financial resources at the 

minimum to enable OCC 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.129

As described above, the proposal 

includes enhancements to OCC’s 

methodology for sizing its clearing fund 

to ensure that it maintains sufficient 

financial resources, including: (i) 

Adoption of an internal credit risk 

tolerance that OCC believes represents 

extreme but plausible market 

conditions; (ii) sizing the clearing fund 

to cover credit exposures under 

scenarios that are more extreme than 

OCC’s risk tolerance, (iii) sizing the 

clearing fund to cover the default of the 

two clearing member groups that that 

would potentially cause the largest 

aggregate credit exposure for OCC; (iv) 

limiting the potential reduction in 

clearing fund size month-over-month; 

and (v) shortening the time by which 

each clearing member must fund its 

clearing fund contribution. 

Taken together, the Commission 

believes that proposed changes 

described above are designed to 

improve the process by which OCC 

sizes its total financial resources and are 

consistent with the requirements of 

Rules 17Ad–22(e)(4)(i) and (iii) under 

the Exchange Act. First, the proposal is 

designed to cover credit exposures in 

excess of those posed by any one 

clearing member group because OCC is 

proposing to cover the largest aggregate 

exposure to two clearing member 

groups. Second, the proposal is 

designed to cover credit exposures in 

extreme but plausible market conditions 

because OCC proposes to size its 

clearing fund based on scenarios that 

are more extreme than those that OCC 

believes to represent extreme but 

plausible market conditions. Further, 

based on the Commission’s detailed 

analysis of the relevant scenarios 


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37578 Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 

130 Id. 

131 17 CFR 240.17Ad–22(e)(4)(vi) (citing 17 CFR 

240.17Ad–22(e)(4)(i)–(iii)). 

132 17 CFR 240.17Ad–22(e)(4)(vi)(A)–(D). 

133 17 CFR 240.17Ad–22(e)(4)(vii). 

134 17 CFR 240.17Ad–22(e)(4)(vi) and (vii). 

135 Id. 

136 17 CFR 240.17Ad–22(e)(4). 

through the supervisory process, the 

Commission believes that OCC has 

defined extreme but plausible scenarios 

in an acceptable manner for the markets 

served. Finally, the Commission 

believes that proposal would support 

the consistent and stable maintenance of 

an appropriate level of total financial 

resources by limiting month-over-month 

reductions in the size of clearing fund 

and requiring clearing members to make 

clearing fund contributions within two 

business days. Accordingly, the 

Commission believes that the proposed 

modifications to OCC’s clearing fund 

sizing methodology are consistent with 

Exchange Act Rule 17Ad–22(e)(4)(i) and 

(iii).130

2. Financial Resource Sufficiency 

Rule 17Ad–22(e)(4)(vi) under the 

Exchange Act requires OCC to 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 by testing the 

sufficiency of its total financial 

resources available to meet the 

minimum financial resource 

requirements under paragraphs Rules 

17Ad–22(e)(4)(i) through (iii).131 Such 

testing must include (A) conducting 

stress testing of OCC’s total financial 

resources once each day using standard 

predetermined parameters and 

assumptions; (B) 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; (C) 

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; and (D) reporting 

the results of such analyses to 

appropriate decision makers at OCC, 

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 set forth in 

paragraphs (e)(4)(i) through (iii) of Rule 

17Ad–22.132 Additionally, pursuant to 

Rule 17Ad–22(e)(4)(vii) of the Exchange 

Act, the policies and procedures 

required under Rule 17Ad–22(e)(4) must 

include the performance of a model 

validation of OCC’s credit risk models 

not less than annually or more 

frequently as may be contemplated by 

OCC’s risk management framework.133

After reviewing and assessing the 

proposal, the Commission believes that 

the proposed changes described above 

are consistent with Rules 17Ad– 

22(e)(4)(vi) and (vii) under the Exchange 

Act,134 because, among other reasons, (i) 

they are designed to improve the testing 

of OCC’s financial resources; (ii) 

expanding the scope of stress scenarios 

against which OCC monitors its 

financial resources would increase the 

likelihood that OCC maintains sufficient 

financial resources at all times; and (iii) 

the formalization of OCC’s processes for 

the periodic review and analysis its 

stress testing framework and clearing 

fund methodology is designed to 

support OCC’s monitoring of its 

financial resources. 

In addition, the Commission believes 

that (i) the daily testing of OCC’s 

financial resources against the 

sufficiency stress tests, including stress 

tests based on market movements in the 

2008 financial crisis and the 1987 

market crash included in the proposal 

would be consistent with the daily 

stress testing requirements of Rule 

17Ad–22(e)(4)(vi)(A), as described 

above; (ii) the at least monthly analysis 

of stress test results, scenarios, models, 

parameters, and assumptions, with more 

frequent review and analysis as required 

would be consistent with the monthly 

comprehensive analysis requirements 

set forth in Rule 17Ad–22(e)(4)(vi)(B) 

and (C) as described above; and (iii) the 

annual validation of OCC’s clearing 

fund methodology discussed in more 

detail above would be consistent with 

model validation requirements of Rule 

17Ad–22(e)(4)(vii). The proposal also 

contemplates the reporting and 

escalation of such testing, analyses, and 

validations to OCC’s management and 

Board of Directors, which the 

Commission believes would be 

consistent with the reporting 

requirements of Rule 17Ad– 

22(e)(4)(vi)(D). 

Accordingly, taken together and for 

the reasons discussed above, the 

Commission believes that the proposed 

stress testing and clearing fund 

methodology governance changes are 

consistent with Exchange Act Rules 

17Ad–22(e)(4)(vi) and (vii).135

3. Proposal To Modify the Clearing 

Fund Allocation Methodology 

As noted above, Rule 17Ad–22(e)(4) 

under the Exchange Act requires that 

OCC establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to, 

among other things, effectively manage 

its credit exposures to participants.136

As discussed above, OCC manages its 

credit exposures not covered by margin 

through the allocation of clearing fund 

requirements to its clearing members. 

OCC proposes to determine the size of 

is clearing fund based on the 

measurement of its credit exposures 

under hypothetical stress scenarios, and 

to monitor such exposures under 

historical stress scenarios. OCC also 

proposes to increase the initial and 

minimum clearing fund contribution 

amounts from $150,000 to $500,000, 

and to modify the allocation weighting 

used to determine the variable amount 

that most clearing members contribute 

to the clearing fund. Specifically, under 

the proposal, the proposed clearing fund 

contribution requirements would be 

based on an allocation methodology of 

70 percent of total risk, 15 percent of 

open interest and 15 percent of open 

interest (as opposed to the current 

weighting of 35 percent total risk, 50 

percent open interest, and 15 percent 

volume). 

The Commission believes that the 

changes described above are reasonably 

designed to improve OCC’s management 

of its credit exposures to participants. 

First, OCC’s overall clearing fund size 

has increased significantly since the 

current initial and minimum 

contributions were set in 2000 and 

OCC’s requirements are lower than the 

minimum requirements imposed by 

other CCPs. The Commission believes 

that the proposed changes to OCC’s 

initial and minimum clearing fund 

contribution amounts are designed to 

better manage the risks posed by 

clearing members with minimal open 

interest, and are commensurate with the 

growth of OCC’s clearing fund over 

time. The Commission also believes that 

the changes to OCC’s allocation 

weighting will allow OCC to better 


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137 Id. 

138 17 CFR 240.17Ad–22(e)(1). 

139Covered Clearing Agency Standards at 70802. 

140 17 CFR 240.17Ad–22(e)(1). 

1BZX made this filing under Section 19(b)(1) of 

the Securities Exchange Act of 1934, 15 U.S.C. 

78s(b)(1) (‘‘Exchange Act’’) and Rule 19b–4 

thereunder, 17 CFR 240.19b–4. The Commission 

published notice of the proposed rule change in the 

Federal Register on July 14, 2016. See Exchange 

Act Release No. 78262 (July 8, 2016), 81 FR 45554 

(July 14, 2016) (SR–BatsBZX–2016–30). On August 

23, 2016, the Commission designated a longer 

period within which to act on the proposed rule 

change. See Exchange Act Release No. 78653 (Aug. 

23, 2016), 81 FR 59256 (Aug. 29, 2016). On October 

12, 2016, the Commission instituted proceedings 

under Section 19(b)(2)(B) of the Exchange Act, 15 

U.S.C. 78s(b)(2)(B), to determine whether to 

approve or disapprove the proposed rule change. 

See Exchange Act Release No. 79084 (Oct. 12, 

2016), 81 FR 71778 (Oct. 18, 2016). On October 20, 

2016, BZX filed Amendment No. 1 to the proposed 

rule change, replacing the original filing in its 

entirety, and Amendment No. 1 was published for 

comment in the Federal Register on November 3, 

2016. See Exchange Act Release No. 79183 (Oct. 28, 

2016), 81 FR 76650 (Nov. 3, 2016) (‘‘Amendment 

No. 1’’). On January 4, 2017, the Commission 

designated a longer period for Commission action 

on the proposed rule change. See Exchange Act 

Release No. 79725 (Jan. 4, 2017), 82 FR 2425 (Jan. 

9, 2017). On February 22, 2017, BZX filed 

Amendment No. 2 to the proposed rule change 

(‘‘Amendment No. 2’’). Amendment No. 2 is 

available on the Commission’s website at https://

www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx

201630-1594698-132357.pdf. 

2See 17 CFR 200.30–3(a)(12). 

3See Exchange Act Release No. 80206 (Mar. 10, 

2017), 82 FR 14076 (Mar. 16, 2017) (‘‘March 

Disapproval Order’’). 

4On March 17, 2017, pursuant to Rule 430 of the 

Rules of Practice, see 17 CFR 201.430(b)(1), BZX 

submitted a Notice of Intention to Petition for 

Review of Order Disapproving a Proposed Rule 

Change, and on March 24, 2017, BZX submitted its 

Petition for Review (‘‘Petition for Review’’). BZX’s 

Notice of Intention to Petition for Review is 

available on the Commission’s website at: https:// 

www.sec.gov/rules/sro/batsbzx/2017/batsbzxpetitionforreview.pdf. BZX’s Petition for Review is 

available on the Commission’s website at: https:// 

www.sec.gov/rules/sro/batsbzx/2017/petition-forreview-sr-batsbzx-2016-30.pdf. 

5On April 24, 2017, pursuant to Rule 431 of the 

Rules of Practice, see 17 CFR 201.431, the 

Commission issued an order granting the Petition 

for Review, see Exchange Act Release No. 80511 

(Apr. 24, 2017), 82 FR 19770 (Apr. 28, 2017) 

(‘‘Review Order’’), and designated May 15, 2017, as 

the date by which any party to the action or any 

other person could file a written statement in 

support of or in opposition to the March 

Disapproval Order. See id. 

6Commissioner Peirce dissents from the 

Commission’s disapproval of this proposal, and her 

written dissent can be found on the Commission’s 

website, https://www.sec.gov. 

7Pursuant to Rule 431(a) of the Commission’s 

Rules of Practice, the Commission may affirm, 

reverse, modify, set aside, or remand for further 

proceedings, in whole or in part, an action made 

pursuant to delegated authority. 17 CFR 201.431(a). 

8Section 19(b)(2)(C) of the Exchange Act directs 

the Commission to approve a proposed rule change 

of an SRO, such as a national securities exchange, 

if the Commission finds that the proposed rule 

change is consistent with the requirements of the 

Exchange Act and the rules and regulations 

thereunder applicable to the SRO and directs the 

Commission to disapprove the proposed rule 

change if it is unable to make such a finding. See 

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

9 15 U.S.C. 78f(b)(5). 

manage its credit exposures to its 

clearing members by better aligning 

each clearing member’s contributions to 

the credit risk it poses to OCC, thereby 

allowing OCC to better manage its credit 

exposures to its participants. 

Accordingly, based on the foregoing, 

the Commission believes that the 

proposed changes pertaining to the 

sizing, monitoring, and allocation of 

clearing fund requirements are 

consistent with Exchange Act Rule 

17Ad–22(e)(4).137

C. Consistency With Rule 17Ad–22(e)(1) 

Under the Exchange Act 

Rule 17Ad–22(e)(1) under the 

Exchange Act requires that OCC 

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.138 The Commission has 

stated that, in establishing and 

maintaining policies and procedures to 

address legal risk, a covered clearing 

agency generally should consider 

whether its rules, policies and 

procedures, and contracts are clear, 

understandable, and consistent with 

relevant laws and regulations.139

The Commission believes that the 

proposed consolidation and 

reorganization of OCC’s Rules described 

above would improve readability by 

locating all rules related to the clearing 

fund in one place, thereby enhancing 

the clarity, transparency, consistency, 

and understandability of OCC’s Rules 

related to the clearing fund. 

Additionally, by amending the Rules to 

accurately reflect OCC’s current margin 

practices, the Commission believes 

OCC’s Rules will be more transparent 

and understandable. 

Accordingly, the Commission believes 

that the proposed textual reorganization 

and clarifications are consistent with 

Rule 17Ad–22(e)(1).140

V. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Payment 

Supervision Act, that the Commission 

does not object to Advance Notice (SR– 

OCC–2018–803) and that OCC is 

authorized to implement the proposed 

change. 

By the Commission. 

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16417 Filed 7–31–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83723; File No. SR– 

BatsBZX–2016–30] 

Self-Regulatory Organizations; Bats 

BZX Exchange, Inc.; Order Setting 

Aside Action by Delegated Authority 

and Disapproving a Proposed Rule 

Change, as Modified by Amendments 

No. 1 and 2, To List and Trade Shares 

of the Winklevoss Bitcoin Trust 

July 26, 2018. 

I. Introduction 

On June 30, 2016, Bats BZX Exchange, 

Inc. (‘‘BZX’’) filed a proposed rule 

change with the Commission, seeking to 

list and trade shares of the Winklevoss 

Bitcoin Trust.1 The Commission, acting 

through authority delegated to the 

Division of Trading and Markets,2

disapproved the proposed rule change 

on March 10, 2017,3 and BZX then filed 

a timely petition seeking Commission 

review of the disapproval by delegated 

authority.4 The Commission granted 

BZX’s Petition for Review, seeking 

public comments in support of or in 

opposition to the March Disapproval 

Order.5 Today’s order sets aside the 

March Disapproval Order, and, for the 

reasons discussed below, disapproves 

BZX’s proposed rule change.6

In response to BZX’s Petition for 

Review, the Commission has conducted 

a de novo review of BZX’s proposal 7— 

giving careful consideration to the entire 

record, including BZX’s amended 

proposal and Petition for Review and all 

comments and statements submitted by 

BZX and other persons—to determine 

whether the proposal is consistent with 

the requirements of the Exchange Act 

and the rules and regulations issued 

thereunder that are applicable to a 

national securities exchange.8

Specifically, the Commission has 

considered whether the BZX proposal is 

consistent with Exchange Act Section 

6(b)(5), which requires, in relevant part, 

that the rules of a national securities 

exchange be designed ‘‘to prevent 

fraudulent and manipulative acts and 

practices’’ and ‘‘to protect investors and 

the public interest.’’ 9

Under the Commission’s Rules of 

Practice, the ‘‘burden to demonstrate 

that a proposed rule change is 

consistent with the Exchange Act and 

the rules and regulations issued 


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