Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / Notices 76171 

23 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 100584 

(July 24, 2024), 89 FR 61211 (July 30, 2024) (File 

No. SR–OCC–2024–009) (‘‘Notice of Filing’’). 

4OCC describes itself as ‘‘the sole clearing agency 

for standardized equity options listed on a national 

securities exchange registered with the Commission 

(‘listed options’).’’ See Securities Exchange Act 

Release No. 96533 (Dec. 19, 2022), 87 FR 79015 

(Dec. 23, 2022) (File No. SR–OCC–2022–012). 

5Capitalized terms have the same meaning as 

provided in OCC’s By-Laws and Rules, which can 

be found on OCC’s public website: https://

www.theocc.com/Company-Information/ 

Documents-and-Archives/By-Laws-and-Rules. 

6Under the rules applicable to OCC, backtesting 

means an ex-post comparison of actual outcomes 

with expected outcomes derived from the use of 

margin models. 17 CFR 240.17ad–22(a) 

(‘‘Backtesting’’). 

7See Notice of Filing, 89 FR at 61212. 

8Under the Proposed Rule Change, OCC also 

would make conforming changes to its rules and 

internal policies and procedures to reflect these 

amendments and facilitate implementation, 

including consolidating internal procedures for all 

backtesting into a Backtesting Procedure and 

associated technical document, updating references 

and descriptions, and inserting headings. See 

Notice of Filing, 89 FR at 61219–20. OCC provided 

the new Backtesting Procedure as confidential 

Exhibit 3B, and the updated technical document as 

confidential Exhibit 3C to File No. SR–OCC–2024– 

009. 

9OCC’s margin methodology, adopted in 2006, is 

titled the System for Theoretical Analysis and 

Numerical Simulation (‘‘STANS’’). See Notice of 

Filing, 89 FR at 61212–13. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.23

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–21036 Filed 9–16–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–100998; File No. SR–OCC– 

2024–009] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Granting Approval of Proposed Rule 

Change by The Options Clearing 

Corporation Concerning Its 

Backtesting Framework and To 

Establish a Resource Backtesting 

Margin Charge 

September 11, 2024. 

I. Introduction 

On July 11, 2024, the Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change SR–OCC–2024– 

009 (‘‘Proposed Rule Change’’) pursuant 

to Section 19(b) of the Securities 

Exchange Act of 1934 (‘‘Exchange 

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

The Proposed Rule Change would 

amend the OCC rules to more 

comprehensively describe its approach 

to backtesting, including underlying 

assumptions; establish a new category of 

backtesting regarding the maintenance 

of sufficient margin resources; 

implement a new margin add-on charge 

based on breaches of the new category 

of resource backtesting; and clarify 

governance and escalation criteria 

related to the updated backtesting 

framework. The Proposed Rule Change 

was published for public comment in 

the Federal Register on July 30, 2024.3

The Commission has received no 

comments regarding the Proposed Rule 

Change. This order approves the 

Proposed Rule Change. 

II. Description of the Proposed Rule 

Change 

OCC is a central counterparty 

(‘‘CCP’’), which means that as part of its 

function as a clearing agency it 

interposes itself as the buyer to every 

seller and the seller to every buyer for 

certain financial transactions. As the 

CCP for the listed options markets in the 

U.S.,4 as well as for certain futures and 

stock loans, OCC is exposed to certain 

risks arising from providing settlement 

and clearing services to its Clearing 

Members.5 Because OCC is obligated to 

perform on the contracts it clears even 

where one of its Clearing Members 

defaults, one such risk to which OCC is 

exposed is credit risk in the form of 

exposure to its members’ trading 

activities. OCC manages such credit 

risk, in part, by collecting collateral 

from its members in the form of margin. 

OCC evaluates the margin requirements 

it imposes on members by periodically 

comparing such requirements to the 

potential risk of loss arising out of a 

member default (i.e., backtesting).6

While backtesting does not directly 

establish a member’s margin 

requirements, OCC maintains authority 

under its rules to collect additional 

margin if OCC identifies—through 

backtesting results or otherwise—issues 

with its margin coverage.7

OCC’s current backtesting framework 

measures its Clearing Members’ losses 

in excess of calculated margin 

requirements to evaluate the adequacy 

of OCC’s model performance, improve 

margin methodology and risk 

assessment processes, and identify 

trends in exceedances that may indicate 

broader behavioral changes by market 

participants. However, OCC’s current 

backtesting framework does not provide 

detailed descriptions of the backtesting 

process, nor does it require OCC to 

measure whether it has collected 

sufficient margin resources in the event 

of a Clearing Member default (a process 

often referred to as ‘‘resource 

sufficiency’’ evaluation), or detail the 

underlying assumptions and governance 

process for the framework. To address 

these issues, the Proposed Rule Change 

would update OCC’s current backtesting 

framework by: 

• updating the current backtesting 

framework to more comprehensively 

describe material aspects of model 

backtesting; 

• providing for a new category of 

backtesting—‘‘Resource Backtesting’’— 

that assesses the adequacy of OCC’s 

margin resources to cover its credit 

exposure at the Clearing Member level; 

and 

• detailing the underlying 

assumptions and reporting structure for 

the entire backtesting framework to 

provide for clearer governance 

procedures, including escalation 

criteria. 

Additionally, OCC lacks a mechanism 

with which to collect additional margin 

resources in instances where backtesting 

suggests that OCC may otherwise not 

have sufficient resources to cover its 

credit exposure during a Clearing 

Member’s default. To that end, OCC 

proposes to implement a new add-on 

charge called the ‘‘Resource Backtesting 

Margin Charge.’’ Although this add-on 

would not be part of the backtesting 

framework, OCC would use the 

proposed Resource Backtesting category 

of backtesting to determine if additional 

margin in the form of the Resource 

Backtesting Margin Charge is necessary 

and in what amount. Specifically, OCC 

would apply the Resource Backtesting 

Margin Charge to Clearing Members 

who experience Resource Backtesting 

deficiencies that bring their margin 

coverage rates below a 99% coverage 

target. OCC also proposes to include in 

the backtesting framework governance 

procedures related to the Resource 

Backtesting Margin Charge.8

A. OCC’s Current Backtesting 

Framework 

OCC conducts daily backtesting of 

collateral requirements generated by its 

margin methodology using standard 

predetermined parameters and 

assumptions. OCC uses such backtesting 

to update its credit risk management 

and margin methodology 9 or to adjust 

model parameters. OCC relies on 

backtesting to evaluate the accuracy of 

its margin models by comparing the 

calculated margin coverage for each 

margin account against the realized 

profit and loss on the margined 


ddrumheller on DSK120RN23PROD with NOTICES1
76172 Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / Notices 

10See generally Securities Exchange Act Release 

Nos. 73749 (Dec. 5, 2014), 79 FR 73673 (Dec. 11, 

2014) and 75290 (June 24, 2015), 80 FR 37323 (June 

30, 2015) (File No. SR–OCC–2014–810). 

11OCC provided the Margin Policy as 

confidential Exhibit 5B to File No. SR–OCC–2024– 

009. OCC stated that, generally, ‘‘the Margin Policy 

establishes a process for ongoing monitoring, 

review, testing and verification of OCC’s risk-based 

margin system, including by requiring OCC to 

conduct daily backtesting, conduct analysis of 

exceedances, and report results at least monthly 

through OCC’s governance process. . .’’ See Notice 

of Filing, 89 FR at 61212. 

12See Notice of Filing, 89 FR at 61213. 

13OCC indicated that such technical issues may 

arise from corporate actions and special dividends. 

Id. 

14See Notice of Filing, 89 FR at 61214 (‘‘OCC 

conducts Model Backtesting at this level because 

Model Backtesting exceedances potentially indicate 

issues that could be actively impacting OCC’s 

margin requirements for the margin accounts. In 

addition, backtesting at this level is consistent with 

OCC’s obligations in its capacity as a derivatives 

clearing organization (‘DCO’) registered with the 

Commodity Futures Trading Commission.’’) 

portfolios. However, OCC’s policies and 

procedures do not currently identify the 

categories of relevant assumptions, 

provide for how they are established or 

modified, or explain how assumptions 

may differ across different types of 

backtesting depending on the purpose of 

those backtesting variants. 

Currently, OCC conducts both 

backtesting of hypothetical portfolios 

(which OCC currently refers to as 

‘‘Model Backtesting’’) and actual 

portfolios (which OCC currently refers 

to as ‘‘Business Backtesting’’).10 OCC’s 

internal backtesting procedures address 

data acquisition, application of 

statistical tests, analyses initiated to 

address root causes of exceedances, 

reporting of results, annual 

methodology reviews, and issue 

escalation. 

OCC’s backtesting framework 

includes its Margin Policy.11 The 

Margin Policy requires that OCC’s 

Financial Risk Management Department 

(‘‘FRM’’) continually evaluates the 

effectiveness of its margin models 

through daily backtesting of each 

margin account.12 The Margin Policy 

requires further that OCC’s Quantitative 

Risk Management business unit 

(‘‘QRM’’) design backtests to focus on 

satisfying OCC’s regulatory obligations, 

identifying potential opportunities to 

improve the margin methodology, and 

identifying trends in exceedances that 

may be indicative of behavioral changes 

by market participants. Acknowledging 

that problems may arise from both 

technical 13 and model-related issues, 

the Margin Policy directs QRM to design 

backtests to find potential opportunities 

to improve OCC’s risk-assessment 

processes. Under the current backtesting 

framework, FRM performs Business 

Backtesting to measure whether the 

losses observed for a constant set of 

positions over OCC’s two-day margin 

period of risk were in excess of the total 

risk charges (i.e., aggregate of expected 

shortfall, stress test charges and add-on 

charges) required for the account. FRM 

is then directed to classify any 

observation in which losses are in 

excess as an exceedance. 

With regard to governance, the 

current Margin Policy directs QRM to 

report identified problems and overall 

performance to FRM and the Model Risk 

Working Group (‘‘MRWG’’), which then 

determines whether the results require 

escalation to OCC’s Management 

Committee (‘‘MC’’). The Margin Policy 

further requires routine reporting from 

QRM to the MRWG that accumulate 

daily backtesting results and detailed 

descriptions of the accounts that have 

incurred exceedances, trends, and 

causes of the exceedances. As with the 

escalation of identified problems and 

overall performance, the Margin Policy 

directs QRM to provide notable results 

from these reviews to the Chief 

Financial Risk Officer, who is the head 

of FRM, and the MRWG; and that the 

MRWG similarly determines whether 

escalation is warranted to the MC, 

which may decide what remedial 

actions may be taken. Under the current 

Margin Policy, QRM must also perform 

a monthly review of parameters and 

assumptions for Business Backtesting, 

and report such review to the MRWG to 

discuss and escalate issues as necessary. 

B. Proposed Updates to the Backtesting 

Framework 

OCC’s current backtesting framework 

does not specify certain materials 

aspects of OCC’s backtesting processes, 

namely, a comprehensive description of 

the different types of backtesting OCC 

performs and their respective purposes, 

and how OCC establishes and modifies 

its assumptions for backtesting. 

Importantly, the current framework does 

not require OCC to conduct backtesting 

to measure margin resource sufficiency, 

but rather, is designed to identify 

technical and model-based issues as 

described above. OCC’s current 

backtesting framework also lacks 

detailed guidance around governance, 

specifically the reporting process and 

escalation criteria and thresholds, 

which could lead to inconsistencies in 

the escalation of similar backtesting 

exceedances or deficiencies, and 

reviews of backtesting assumptions. 

To help mitigate these issues, OCC 

proposes to: 

• more comprehensively describe 

material aspects of its model backtesting 

framework, including the purpose and 

scope of the backtesting OCC performs; 

• introduce a new category of 

backtesting, Resource Backtesting, to 

measure whether OCC’s margin 

resources adequately cover its credit 

exposure at the Clearing Member level; 

• list the assumptions underlying 

OCC’s backtesting and the process for 

reviewing and modifying those 

assumptions; and 

• outline in more detail the 

backtesting reporting process, including 

which decision-makers are involved and 

escalation criteria for exceedances or 

deficiencies and reviews. 

1. Model Backtesting 

Under the Proposed Rule Change, 

OCC would consolidate discussion of its 

two current ‘‘Model’’ and ‘‘Business’’ 

backtesting programs under the heading 

of Model Backtesting, without changing 

its current process for conducting daily 

backtesting of hypothetical and actual 

portfolios to evaluate the performance of 

its margin methodology. OCC proposes 

to add descriptions in the Margin Policy 

to explain that FRM conducts Model 

Backtesting of hypothetical portfolios to 

target specific aspects of the models that 

may be masked by the backtesting of 

actual portfolios, because margin 

accounts may have thousands of 

positions in many diverse products. 

Under the Proposed Rule Change, the 

Margin Policy would include additional 

details consistent with OCC’s current 

backtesting practices. Such details 

would include that OCC would conduct 

Model Backtesting (i) over a set 

liquidation horizon; (ii) at the 

marginable account level; 14 and (iii) at 

a 99 percent confidence level. The 

Margin Policy would add a definition of 

‘‘exceedance’’ to mean a daily outcome 

in which the loss in portfolio value over 

the applicable time horizon is larger in 

magnitude than what the daily STANS 

model predicted at the start of that time 

horizon. 

OCC would continue to limit the 

purpose of Model Backtesting to 

assessing the performance of OCC’s 

margin models in calculating margin 

requirements, as opposed to assessing 

the performance of other aspects of 

OCC’s credit risk management. 

Consistent with this intent, the Margin 

Policy would state that OCC would 

continue to exclude collateral from 

Model Backtesting that is not modeled 

by STANS, such as collateral that is 

valued using the more traditional 

method of fixed collateral haircuts 

outside of the STANS margin 

methodology, or collateral that does not 

capture changes in market risk factors, 

such as add-ons that are unrelated to 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / Notices 76173 

15Notwithstanding the inclusion of such 

collateral in Resource Backtesting rather than in 

Model Backtesting, OCC also would have the 

authority under the proposed Margin Policy to 

maintain variations of Model Backtesting for 

diagnostic or informational purposes that include 

such add-ons. See Notice of Filing, 89 FR at 61214. 

16Although the type of assumptions would be 

listed in the Margin Policy, OCC would maintain 

the specific assumptions in its underlying 

documentation. 

17The monthly reviews are part of the current 

backtesting framework, as described in Section II.A. 

above. The Proposed Rule Change does not seek to 

change this monthly cadence. 

18OCC’s internal procedures would include 

further detail regarding escalation criteria for 

backtesting results and assumptions. 

changes in market risk factors (e.g., 

when a Clearing Member’s operational 

or financial condition presents elevated 

risks). The collateral that is not 

modelled by STANS instead would be 

accounted for under the new backtesting 

category of Resource Backtesting, as 

described in Section II.B.2. below.15

2. Resource Backtesting 

In addition to formalizing the process 

of performing daily Model Backtesting 

in the Margin Policy, OCC would add a 

new category of backtesting, called 

Resource Backtesting, to evaluate 

whether OCC’s financial resources are 

sufficient to cover its credit exposures 

during a Clearing Member default. 

Pursuant to the proposed Margin Policy, 

FRM would be required to conduct 

Resource Backtesting using actual 

portfolios at the Clearing Member level 

to evaluate whether OCC maintains 

sufficient financial resources to cover its 

credit exposure to the liquidation 

portfolio of each Clearing Member from 

the last deposit of margin assets until 

the end of the liquidation horizon 

following the Clearing Member’s 

default. Since Resource Backtesting 

would be designed to determine 

whether the liquidating value of a 

Clearing Member’s portfolios would be 

positive or negative at the end of OCC’s 

liquidation horizon, it would take into 

account observed intraday position 

changes from the time of the last good 

margin collection until the assumed 

point of default. 

The proposed Margin Policy would 

set the coverage target for Resource 

Backtesting at 99 percent, meaning that 

any Resource Backtesting deficiencies 

should be no more than one percent in 

the rolling 12-month lookback period 

for each Clearing Member. The 

proposed changes to the Margin Policy 

would define a ‘‘deficiency’’ as a daily 

result where the prefunded financial 

resources collected from the Clearing 

Member would have been insufficient to 

cover the potential loss in case of its 

default (i.e., a negative liquidating value 

of the Clearing Member’s portfolios). 

While OCC conducts Model 

Backtesting at the account level, OCC 

would consider resources and exposures 

across a given member’s account for 

Resource Backtesting. Because OCC’s 

By-Laws and Rules provide for different 

types of liens over different types of 

accounts, OCC would consider the liens 

on a particular account when netting 

deficits and surpluses across account 

types to ensure that surpluses in an 

account over which OCC maintains a 

restricted lien do not offset losses in 

another account for purposes of 

Resource Backtesting. 

In contrast with Model Backtesting, 

OCC would include collateral that is not 

modelled by STANS in Resource 

Backtesting. The margin resources that 

would be considered by Resource 

Backtesting would be limited to a 

member’s margin requirements; 

accordingly, any excess margin 

collateral would be excluded. OCC 

would continue to exclude Clearing 

Fund deposits from all margin 

backtesting. 

3. Backtesting Assumptions and 

Reporting 

The proposed Margin Policy would 

explicitly list certain assumptions that 

inform OCC’s backtesting practices: the 

timing of default, liquidation horizon, 

available resources, confidence level, 

lookback period, and the backtesting 

portfolio.16 The proposed changes to the 

Margin Policy would define OCC’s 

process for evaluating and changing 

such assumptions. Specifically, changes 

to backtesting assumptions would 

require escalation by MRWG and the 

MC, with ultimate approval by the Risk 

Committee (‘‘RC’’). Under the proposed 

changes to the Margin Policy, changes to 

backtesting assumptions that would 

result in or arise from changes to OCC’s 

margin methodology, in such a way as 

to require a rule change proposal to be 

filed with the Commission, would 

continue to require the approval of 

OCC’s Board of Directors. 

As proposed, the Margin Policy 

would provide that, at least monthly,17

FRM will review the results of 

backtesting to identify any Model 

Backtesting exceedances or Resource 

Backtesting deficiencies and present a 

detailed analysis of such information, as 

well as a review of backtesting 

assumptions, to the MRWG to determine 

whether OCC’s backtesting practices are 

appropriate for measuring the adequacy 

of margin requirements. The proposed 

changes to the Margin Policy state that 

escalation criteria for backtesting results 

would include (i) thresholds related to 

the size and number of exceedances for 

Model Backtesting of actual portfolios; 

(ii) thresholds related to statistical tests 

for Model Backtesting of hypothetical 

portfolios; and (iii) thresholds related to 

the size of an individual Clearing 

Member’s Resource Backtesting 

deficiency and the coverage rate across 

all Clearing Members in the aggregate. 

Further, escalation criteria for 

backtesting assumptions would include 

(i) market conditions, (ii) changes to 

OCC’s risk methodologies, and (iii) 

unusual exceedances.18 Under the 

proposed Margin Policy, FRM would 

prepare and present to MRWG a review 

of the backtesting assumptions more 

frequently than monthly in the event of 

triggers related to high market volatility, 

low market liquidity, and significant 

increases or decreases in position size or 

concentration risk. 

The amended Margin Policy would 

provide that, annually, QRM will 

present to MRWG a backtesting 

framework evaluation, including QRM’s 

recommendations regarding whether 

OCC should change any of its 

assumptions or exceedance escalation 

criteria. The Margin Policy would 

require that changes to the escalation 

criteria must be approved by the 

governing body to which the escalation 

must be made. That is, the MRWG 

would be authorized to approve changes 

to the criteria for escalation to the 

MRWG, and the MC would be 

authorized to approve changes to the 

escalation criteria to the MC. The 

MRWG also would be responsible for 

determining whether to escalate any 

changes to backtesting assumptions or 

the escalation criteria to the MC or RC 

for consideration. On an annual basis, 

the MC would report to the RC the 

results of the annual Backtesting 

Framework evaluation, including any 

changes it believes should be made to 

OCC’s backtesting assumptions or the 

escalation criteria to the RC. The RC 

would be authorized to approve such 

assumption changes and escalation 

criteria to the RC for implementation, as 

proposed in the Margin Policy. 

C. Establishing the Resource Backtesting 

Margin Charge 

In addition to the Model Backtesting 

and Resource Backtesting amendments 

described above, OCC proposes to 

implement a margin add-on charge to 

help ensure it has sufficient financial 

resources as a method of managing its 

credit risk exposure. OCC determined 

that the proposed Resource Backtesting 

would identify deficiencies showing 

whether its Clearing Members fall below 


ddrumheller on DSK120RN23PROD with NOTICES1
76174 Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / Notices 

19See Notice of Filing, 89 FR at 61217. 

(‘‘[. . .B]ased on 2023 historical data, 

approximately 25% of Clearing Members would 

have fallen below the Resource Backtesting 

coverage target.) 

20OCC represented that the Resource Backtesting 

Margin Charge is modeled on the implementation 

of similar add-ons by other clearing agencies to 

collect additional financial resources when a 

Clearing Member’s margin coverage falls below the 

agency’s coverage target. See Notice of Filing, 89 FR 

at 61217, citing Securities Exchange Act Release 

No. 79167 (Oct. 26, 2016), 81 FR 75883, 75884 

(Nov. 1, 2016) (SR–FICC–2016–006; SR–NSCC– 

2016–004). 

21 Implementation of the proposed charge would 

also require revisions to OCC’s internal 

documentation, including the Backtesting 

Procedure and associated technical document, 

which OCC provided as confidential Exhibits 3B 

and 3C, respectively, to File No. SR–OCC–2024– 

009. 22See Notice of Filing, 89 FR at 61217–18. 

23This may occur when the account driving the 

third largest deficiency, such as a customer account, 

is experiencing losses that cannot be offset by funds 

is a different type of account, such as a firm 

account. See Notice of Filing, 89 FR at 61218, n. 55 

and accompanying text. 

24See Notice of Filing, 89 FR at 61217. 

Additionally, OCC would test the sufficiency of the 

Resource Backtesting Margin Charge against a 

Resource Backtesting variant that includes that 

charge as a financial resource for purposes of: (i) 

confirming that the charge, as allocated 

proportionally to the accounts contributing to the 

third-largest Resource Backtesting deficiency, 

would be sufficient to achieve the 99 percent 

coverage target, and (ii) increasing the Resource 

Backtesting Margin Charge for a particular account 

that may be contributing a proportionally greater 

amount to other Resource Backtesting deficiencies 

if the coverage target is not met. Id., at 61218–19. 

25This review and determination would be 

conducted at least monthly but could be done on 

an intramonth basis based on the daily backtesting 

results reviewed by FRM. 

26Such adjustments are distinct from the routine 

process of setting the charge on a monthly basis. 

the 99 percent coverage threshold 

described above.19 To address such 

deficiencies, OCC proposes to adopt a 

new margin charge to increase the 

likelihood that OCC’s margin resources 

would be sufficient to cover fully its 

potential future exposure to each 

participant.20

To implement the Resource 

Backtesting Margin Charge, OCC 

proposes to add subsection (h) to its 

Rule 601 and amend its Margin Policy.21

Under the Proposed Rule Change, Rule 

601(h)(1) would provide that OCC may 

require a Clearing Member to deposit 

additional margin assets to mitigate 

OCC’s exposures that may not otherwise 

be covered by calculated margin 

requirements in accordance with Rule 

601 and OCC’s policies and procedures. 

Additionally, Rule 601(h)(1) would state 

that OCC may assess this charge as part 

of a Clearing Member’s daily margin 

requirement, as needed, to enable OCC 

to achieve its Resource Backtesting 

coverage rate. As proposed, Rule 

601(h)(1) would state that this add-on 

may apply to Clearing Members that 

have a 12-month trailing Resource 

Backtesting coverage rate below OCC’s 

99 percent backtesting coverage target. 

Rule 601(h)(2) would provide that, 

generally, the Resource Backtesting 

Margin Charge will be equal to the 

third-largest Resource Backtesting 

deficiency during the previous 12 

months, rounded up to the nearest 

$1,000. Rule 601(h)(2) also would grant 

OCC the discretion to adjust the 

Resource Backtesting Margin Charge if it 

determines that circumstances 

particular to a Clearing Member’s 

clearance and settlement activity and/or 

market volatility warrant a different 

approach to determining or applying 

such charge in a manner consistent with 

achieving OCC’s Resource Backtesting 

coverage target. 

Under proposed Rule 601(h)(3), in 

calculating a Clearing Member’s 

Resource Backtesting coverage for 

purposes of the Resource Backtesting 

Margin Charge and in calculating the 

third-largest Resource Backtesting 

deficiency, OCC will not include 

amounts already collected as a Resource 

Backtesting Margin Charge from that 

Clearing Member. 

Lastly, under the proposal, Rule 

601(h)(4) would provide that for the 

purposes of this rule, ‘‘Resource 

Backtesting’’ means backtesting 

pursuant to OCC’s policies and 

procedures that is designed to evaluate, 

with a high degree of confidence, 

whether OCC maintains sufficient 

financial resources to cover its credit 

exposure to the liquidation portfolio of 

each Clearing Member from the last 

margin collection until the end of the 

liquidation horizon following the 

Clearing Member’s default. 

In addition to new Rule 601(h), OCC 

proposes amendments to its Margin 

Policy governing how the Resource 

Backtesting Margin Charge would be 

applied, calculated and, in certain 

circumstances, adjusted. OCC states that 

the Resource Backtesting Margin Charge 

would apply to any Clearing Member 

whose 12-month trailing Resource 

Backtesting falls below the 99 percent 

coverage target, using three or more 

confirmed Resource Backtesting 

deficiencies over the previous 12 

months.22 At least once per month, and 

more often in circumstances described 

below, OCC would review and 

determine which Clearing Member may 

be subject to the Resource Backtesting 

Margin Charge, or which Clearing 

Member’s existing Resource Backtesting 

Margin Charge is subject to change, 

based on the trailing 12-month Resource 

Backtesting coverage rate. The Resource 

Backtesting Margin Charge would be 

applied daily to the accounts of Clearing 

Members that contributed to the 

deficiencies. If in the subsequent month 

an affected Clearing Member’s trailing 

12-month coverage rises above 99 

percent, the Resource Backtesting 

Margin Charge would be removed. 

The Resource Backtesting Margin 

Charge would be calculated as the 

equivalent of a member’s third largest 

Resource Backtesting deficiency in the 

rolling 12-month lookback period 

rounded up to the nearest $1,000, 

subject to adjustment described below. 

The Resource Backtesting Margin 

Charge generally would be allocated 

proportionally to the Clearing Member’s 

accounts contributing to the thirdlargest Resource Backtesting deficiency, 

with the goal of restoring the Clearing 

Member’s margin coverage to the 99 

percent target. If applying and allocating 

the Margin Resource Backtesting Margin 

Charge would not bring the Clearing 

Member above this coverage target 

based on the third largest deficiency,23

the proposed rules would allow OCC to 

increase the add-on for a particular 

account in an amount necessary to meet 

the coverage target. For purposes of 

application, calculation, or adjustment, 

OCC would not take into account any 

Resource Backtesting Margin Charge(s) 

already in effect, but would take into 

account the number and size of 

deficiencies subsequent to the Resource 

Backtesting Margin Charge(s) already 

applied.24

OCC proposes to amend the Margin 

Policy further to outline the governance 

around the calculation of and 

adjustment to the Resource Backtesting 

Margin Charge, as defined in proposed 

Rule 601(h)(2). As proposed, the Margin 

Policy would require FRM to review the 

Resource Backtesting results at least 

monthly 25 to determine whether a 

Clearing Member should be assessed a 

Resource Backtesting Margin Charge 

and, if so, the amount of the add-on. 

Imposing a Resource Backtesting Margin 

Charge on a Clearing Member would 

require an FRM Officer’s approval, 

which the FRM Officer would grant 

unless an adjustment to the charge is 

necessary. Any adjustment to increase 

the charge would require approval by an 

FRM Officer, while any adjustment to 

reduce the charge would require 

escalation to and approval by the 

MRWG.26 Under the Proposed Rule 

Change, the MRWG may authorize such 

adjustment under certain circumstances, 

including, but not limited to, differences 

in magnitude of the deficiencies 

observed over the last 12-month period, 

variability in the Clearing Member’s 


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Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / Notices 76175 

27OCC stated that such a reevaluation is designed 

to avoid double-margining Clearing Members if 

and/or when OCC would begin to collect additional 

margin resources after a margin methodology 

change. See Notice of Filing, 89 FR at 61219. 

28 15 U.S.C. 78s(b)(2)(C). 

29Rule 700(b)(3), Commission Rules of Practice, 

17 CFR 201.700(b)(3). 

30 Id. 

31 Id. 

32Susquehanna Int’l Group, LLP v. Securities and 

Exchange Commission, 866 F.3d 442, 447 (D.C. Cir. 

2017) (‘‘Susquehanna’’). 

33 15 U.S.C. 78q–1(b)(3)(F). 

34 17 CFR 240.17Ad–22(e)(6). 

35 17 CFR 240.17Ad–22(e)(4). 

36 17 CFR 240.17Ad–22(e)(2). 

37 15 U.S.C. 78q–1(b)(3)(F). 

38OCC provided impact data as confidential 

Exhibit 3A to File No. SR–OCC–2024–009. 

39 Id. 

40 17 CFR 240.17Ad–22(e)(6)(vi)(A). 

activity since the observed deficiencies, 

cyclicality of observed deficiencies, 

and/or market volatility. Under the 

Proposed Rule Change, if OCC 

implements changes to its margin 

methodology that affect Clearing 

Members’ margin requirements, FRM 

would reevaluate Resource Backtesting 

coverage within the 12-month lookback 

period based on the margin resources 

OCC would have collected under the 

revised methodology to determine 

whether a Resource Backtesting Margin 

Charge for a particular Clearing Member 

is required and, if so, in what amount.27

III. Discussion and Commission 

Findings 

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

Act directs the Commission to approve 

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

such proposed rule change is consistent 

with the requirements of the Exchange 

Act and the rules and regulations 

thereunder applicable to such 

organization.28 Under the Commission’s 

Rules of Practice, the ‘‘burden to 

demonstrate that a proposed rule change 

is consistent with the Exchange Act and 

the rules and regulations issued 

thereunder . . . is on the self-regulatory 

organization [‘SRO’] that proposed the 

rule change.’’ 29

The description of a proposed rule 

change, its purpose and operation, its 

effect, and a legal analysis of its 

consistency with applicable 

requirements must all be sufficiently 

detailed and specific to support an 

affirmative Commission finding,30 and 

any failure of an SRO to provide this 

information may result in the 

Commission not having a sufficient 

basis to make an affirmative finding that 

a proposed rule change is consistent 

with the Exchange Act and the 

applicable rules and regulations.31

Moreover, ‘‘unquestioning reliance’’ on 

an SRO’s representations in a proposed 

rule change is not sufficient to justify 

Commission approval of a proposed rule 

change.32

After carefully considering the 

Proposed Rule Change, the Commission 

finds that the proposal is consistent 

with the requirements of the Exchange 

Act and the rules and regulations 

thereunder applicable to OCC. More 

specifically, the Commission finds that 

the proposal is consistent with Section 

17A(b)(3)(F) of the Exchange Act,33 and 

Rules 17Ad–22(e)(6),34 17Ad–22(e)(4),35

and 17Ad–22(e)(2) 36 thereunder, as 

described below. 

A. Consistency With Section 

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

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

Act requires, among other things, that a 

clearing agency’s rules are designed to 

assure the safeguarding of securities and 

funds which are in the custody or 

control of the clearing agency or for 

which it is responsible.37 Based on its 

review of the record, and for the reasons 

described below, the changes described 

above are consistent with assuring the 

safeguarding of securities and funds 

which are in OCC’s custody or control 

or for which it is responsible. 

As discussed above, OCC’s 

backtesting framework is used, in part, 

to monitor whether STANS-calculated 

margin requirements are adequate, as 

well as to evaluate the adequacy of 

credit risk assessment procedures. As 

described above, OCC proposes to 

improve its current backtesting by, 

among other things, clearly defining 

terms and parameters. However, the 

current backtesting focuses on the 

identification of technical or modelrelated issues, rather than on the 

sufficiency of OCC’s resources to cover 

its credit exposure during a Clearing 

Member’s default. 

To address the gap in its current 

backtesting, OCC proposes to implement 

a new category of backtesting, Resource 

Backtesting, that would measure 

whether OCC maintains sufficient 

financial resources to cover its credit 

exposure to the liquidation portfolio of 

each Clearing Member from the last 

deposit of margin assets until the end of 

the liquidation horizon following the 

Clearing Member’s default. Based on the 

information OCC provided to the 

Commission,38 the proposed Resource 

Backtesting would reveal that OCC does 

not always meet its coverage target at 

the member level. 

To address the gap in coverage, which 

suggests OCC may not be holding 

sufficient margin collateral, OCC also 

proposes to implement a new margin 

add-on, the Resource Backtesting 

Margin Charge, that is designed to 

increase the likelihood that OCC 

collects margin sufficient to cover its 

potential future exposure to each 

participant in the interval between the 

last margin collection and the close-out 

of positions following a participant 

default. Working in tandem, the 

proposed backtesting category and addon would support OCC’s efforts to 

collect sufficient margin resources to 

maintain a 99 percent coverage. 

Improving OCC’s current backtesting 

processes as well as adoption of the 

proposed Resource Backtesting and 

Resource Backtesting Margin Charge 

add-on would increase the likelihood 

that OCC collects sufficient margin 

collateral to mitigate OCC’s credit 

exposure to a Clearing Member default. 

Increasing the likelihood that OCC 

collects sufficient margin collateral to 

address a member default would, in 

turn, assure the safeguarding of nondefaulting Clearing Members’ collateral 

by reducing the likelihood that OCC 

would be forced to charge losses to the 

Clearing Fund. 

Accordingly, the changes proposed to 

the backtesting framework are 

consistent with the requirements of 

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

Act.39

B. Consistency With Rule 17Ad– 

22(e)(6)(vi)(A) Under the Exchange Act 

Rule 17Ad–22(e)(6)(vi)(A) under the 

Exchange Act requires that a covered 

clearing agency establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

cover, if the covered clearing agency 

provides central counterparty services, 

its credit exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum is monitored by 

management on an ongoing basis and 

regularly reviewed, tested, and verified 

by conducting backtests of its margin 

model at least once each day using 

standard predetermined parameters and 

assumptions.40 In adopting Rule 17Ad– 

22(e)(6), the Commission provided 

guidance that a covered clearing agency 

generally should consider in 

establishing and maintaining policies 

and procedures for margin, including 

whether the covered clearing agency 

analyzes and monitors its model 

performance and overall margin 

coverage by conducting rigorous daily 

backtesting and at least monthly, and 

more frequent when appropriate, 

sensitivity analysis; as well as whether, 

in conducting sensitivity analysis of the 

model’s coverage, the covered clearing 

agency has taken into account a wide 


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76176 Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / Notices 

41Securities Exchange Act Release No. 78961 

(Sept. 28, 2016), 81 FR 70786, 70819 (Oct. 13, 2016) 

(File No. S7–03–14) (‘‘Standards for Covered 

Clearing Agencies’’). 

42 Id. 

43 17 CFR 240.17Ad–22(e)(6)(vi)(A). 44 17 CFR 240.17Ad–22(e)(4)(i). 45See Standards for Covered Clearing Agencies, 

81 FR at 70814–15. 46 Id. 

47 17 CFR 240.17Ad–22(e)(2)(v). 

48 Id. 

49 In approving this Proposed Rule Change, the 

Commission has considered the proposed rules’ 

impact on efficiency, competition, and capital 

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

50 15 U.S.C. 78s(b)(2). 

51 17 CFR 200.30–3(a)(12). 

range of parameters and assumptions 

that reflect possible market 

conditions.41

As described above, OCC’s Proposed 

Rule Change is designed to improve the 

level of detail about the material aspects 

of OCC’s backtesting framework 

included in the overall framework, 

including how OCC establishes and 

modifies its assumptions for 

backtesting. OCC’s proposal also is 

designed to establish a process for 

assessing the adequacy of OCC’s margin 

resources to cover its credit exposure at 

the Clearing Member level, and would 

detail the assumptions underlying 

OCC’s margin backtesting framework 

and the process for reviewing and 

modifying those assumptions. 

As described above, OCC proposes to 

codify in the framework its current 

backtesting procedures, including 

incorporating definitions, detailing 

coverage level measurements of actual 

and hypothetical portfolios, and 

establishing which types of collateral 

would be reviewed. Further, OCC’s 

proposal would consolidate its current 

backtests under one heading (Model 

Backtesting) that would be governed by 

a single set of rules and internal 

procedures. The proposed revisions 

would improve clarity and consistency 

across OCC’s current backtesting 

framework. Likewise, OCC proposes 

adding to the framework a new category 

of backtesting, Resource Backtesting, as 

well as related definitions and 

descriptions of material aspects of how 

this new resource sufficiency 

measurement would apply at a Clearing 

Member level. The proposed rules 

would also address how OCC would 

consider different types of accounts and 

liens when netting, and would provide 

OCC with more accurate insights into 

the collected margin levels of its 

Clearing Members, that could, in turn, 

affect OCC’s credit exposures. OCC’s 

proposal to specifically list the 

assumptions on which Model 

Backtesting and Resource Backtesting 

would rest, and how these assumptions 

would be reviewed and, if necessary, 

escalated according to set criteria, 

would standardize these assumptions 

and parameters, incorporates the 

Commission’s guidance provided in the 

adopting release,42 and provide OCC’s 

management with clear guidelines to 

continue its monitoring on an ongoing 

basis. 

Accordingly, the proposed changes to 

OCC’s backtesting framework are 

consistent with the requirements of Rule 

17Ad–22(e)(6)(vi)(A) under the 

Exchange Act.43

C. Consistency With Rule 17Ad– 

22(e)(4)(i) Under the Exchange Act 

Rule 17Ad–22(e)(4)(i) under the 

Exchange Act 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, including by maintaining 

sufficient financial resources to cover its 

credit exposure to each participant fully 

with a high degree of confidence.44 In 

adopting Rule 17Ad–22(e)(4), the 

Commission provided guidance that a 

covered clearing agency generally 

should consider in establishing and 

maintaining policies and procedures 

that address credit risk, including 

whether, if providing central 

counterparty services, the covered 

clearing agency has covered its current 

and potential future exposures to each 

participant fully with a high degree of 

confidence using margin and other 

prefunded financial resources.45

As described above, OCC proposes to 

adopt the Resource Backtesting Margin 

Charge to address coverage gaps 

identified by the proposed Resource 

Backtesting. The proposed Resource 

Backtesting Margin Charge would be 

applied daily based on an at-least 

monthly assessment of a Clearing 

Member’s 12-month trailing deficiencies 

to the extent they fall below OCC’s 99 

percent coverage rate. Collecting 

additional margin based on such 

deficiencies would reduce the 

likelihood of future margin deficiencies 

for each member. This, in turn, would 

increase the likelihood that OCC would 

maintain sufficient financial resources 

to cover its credit exposure to each 

participant fully with a high degree of 

confidence. 

Accordingly, the proposed adoption 

of the Resource Backtesting Margin 

Charge is consistent with the 

requirements of Rule 17Ad–22(e)(4)(i) 

under the Exchange Act.46

D. Consistency With Rule 17Ad– 

22(e)(2)(v) Under the Exchange Act 

Rule 17Ad–22(e)(2)(v) under the 

Exchange Act requires that a covered 

clearing agency establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

provide for governance arrangements 

that specify clear and direct lines of 

responsibility.47

OCC’s backtesting framework 

documentation lacks explicit guidance 

around the reporting process as well as 

escalation criteria and thresholds, 

which could lead to inconsistencies in 

the escalation of similar backtesting 

exceedances or deficiencies, and 

inconsistencies in reviews of 

backtesting assumptions. The Proposed 

Rule Change would list the escalation 

criteria considered during reviews of 

backtesting results and assumptions and 

would clearly specify which business 

units, working groups, and committees 

would be involved in such reviews, as 

well as each group’s respective 

authorities and obligations. The 

Proposed Rule Change also would 

describe OCC’s reporting process and 

timelines for review of backtesting 

results, assumptions, and parameters. 

Adding such detail to OCC’s rules 

would more clearly specify the lines of 

responsibly governing OCC’s 

backtesting framework. 

Accordingly, the proposed changes to 

further detail OCC’s processes for 

governing its backtesting framework are 

consistent with the requirements of Rule 

17Ad–22(e)(2)(v) under the Exchange 

Act.48

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the Proposed 

Rule Change is consistent with the 

requirements of the Exchange Act, and 

in particular, the requirements of 

Section 17A of the Exchange Act 49 and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,50

that the proposed rule change (SR– 

OCC–2024–009), hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.51

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–21035 Filed 9–16–24; 8:45 am] 

BILLING CODE 8011–01–P 


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