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[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90155-90157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26413]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101551; File No. SR-OCC-2024-010]

Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change, as Modified by Partial Amendment No. 
1, by the Options Clearing Corporation To Establish a Margin Add-On 
Charge That Would Be Applied to All Clearing Member Accounts To Help 
Mitigate the Risks Arising From Intraday and Overnight Trading Activity

November 7, 2024.

I. Introduction

    On July 25, 2024, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2024-010 pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder to establish a margin add-on charge that would be 
applied to all Clearing Member accounts to assist with mitigating the 
risks arising from intraday and overnight trading activity, 
particularly activity attributable to short-dated options trading. 
Proposed rule change SR-OCC-2024-010 was published for public comment 
in the Federal Register on August 12, 2024.\3\ The Commission has 
received comments regarding the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 100664 (Aug. 6, 2024), 
89 FR 65695 (Aug. 12, 2024) (File No. SR-OCC-2024-010) (``Notice of 
Filing'').
    \4\ Comments on the proposed rule change are available at 
https://www.sec.gov/comments/sr-occ-2024-010/srocc2024010.htm.
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    On September 4, 2024, OCC amended the proposed rule change to 
include as Exhibit 2 an information memorandum OCC published on its 
website informing OCC's membership of the details of the margin add-on 
charge.\5\ On September 25, 2024, pursuant to Section 19(b)(2) of the 
Exchange Act,\6\ the Commission issued a Notice of Filing of Partial 
Amendment No. 1 and designated a longer period within which to approve, 
disapprove, or institute proceedings to determine whether to approve or 
disapprove the proposed rule change.\7\ This order institutes 
proceedings, pursuant to Section 19(b)(2)(B) of the Exchange Act,\8\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Partial Amendment No. 1 (hereinafter ``Proposed Rule 
Change'').
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    \5\ See OCC Info Memo #55123, Intraday Risk Monitoring (dated 
Aug. 30, 2024), available at https://infomemo.theocc.com/infomemos?number=55123. The amendment did not change the purpose or 
basis of the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 101193 (Sept. 25, 2024), 
89 FR 79977 (Oct. 1, 2024) (File No. SR-OCC-2024-010).
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary 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 United 
States,\9\ as well as for certain futures and stock loans, OCC is 
exposed certain risks arising from providing clearing and settlement 
services to its Clearing Members.\10\ 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 a Clearing

[[Page 90156]]

Member's trading activities. OCC manages such credit risk, in part, by 
collecting collateral from its Clearing Members in the form of margin, 
which may include certain add-on charges designed to address specific 
risks.
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    \9\ OCC 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).
    \10\ Capitalized 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.
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    At the start of each business day, OCC collects the required margin 
for each marginable account calculated by OCC's proprietary System for 
Theoretical Analysis and Numerical Simulation (``STANS'') based on the 
account's end-of-day positions from the previous business day. OCC also 
has broad authority to require additional margin deposits and to make 
intraday margin calls if, for example, the value of securities 
deposited as margin collateral does not accurately address changes in a 
Clearing Member's account during the business day,\11\ circumstances 
warrant protective measures in the form of adjusting the amount or 
composition of margin,\12\ and when unrealized losses exceed a certain 
threshold of an account's total risk charges \13\ during standard 
trading hours or extended trading hours (``ETH'').\14\
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    \11\ See OCC Rule 609(a) (``[OCC] may require the deposit of 
additional margin (`intra-day margin') by any Clearing Member in any 
account at any time during any business day to reflect changes in: . 
. . (3) the value of securities deposited by the Clearing Member as 
margin . . .'').
    \12\ See OCC Rule 307C(b) (providing for protective measures in 
the form of requiring Clearing Members to adjust the amount or 
composition of margin, including but not limited to requiring the 
deposit of additional margin).
    \13\ See Securities Exchange Act Release No. 82658 (Feb. 7, 
2018), 83 FR 6646, 6648 (Feb. 14, 2018) (File No. SR-OCC-2017-007) 
(``Pursuant to the Margin Policy, OCC issues margin calls during 
standard trading hours when unrealized losses exceeding 50% of an 
account's total risk charges are observed for that account based on 
start-of-day positions.''). See also Securities Exchange Act Release 
No. 82355 (Dec. 19, 2017), 82 FR 61060, 61064 (Dec. 26, 2017) (File 
No. SR-OCC-2017-007) (codifying in the Margin Policy the extended 
trading hour intraday margin call OCC would issue prior to 9:00 a.m. 
Central Time when: (1) unrealized losses observed for an account, 
based on new ETH positions, exceed 25% of that account's total risk 
charges and (2) the overall Clearing Member portfolio is also 
experiencing losses).
    \14\ ETH refers to trades executed in extended and overnight 
trading sessions offered by exchanges for which OCC provides 
clearance and settlement services. See Securities Exchange Act 
Release No. 73343 (Oct. 14, 2014), 79 FR 62684 (Oct. 20, 2014) (File 
No. SR-OCC-2014-805).
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    Since these margin collection processes were established, OCC 
observed a significant increase in the volume of contracts it clears, 
particularly of short-dated option (``SDO'') contracts, including those 
traded on the day of their expiration (``zero-days-to-expiration'' or 
``0DTE'' options).\15\ According to OCC, the average daily cleared 
volume increased steadily after 2018 and doubled by 2022, reaching more 
than 40 million cleared contracts, of which a significant portion were 
SDO contracts.\16\ OCC conducted a study that reflects the evolution of 
SDOs and 0DTE options in the broader market, which evolved from weekly 
options in 2005 being listed on the S&P 500 Index (``SPX'') and 
expiring each Friday of the month, to options now expiring on every 
trading day of the year.\17\
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    \15\ According to OCC, the average daily cleared volume 
increased steadily after 2018 and doubled by 2022, reaching more 
than 40 million cleared contracts, of which a significant portion 
were SDO contracts. See Notice of Filing, 89 FR at 65695-96. 
Additionally, OCC has provided a confidential Exhibit 3A to File No. 
SR-OCC-2024-010, which is a 2023 study OCC conducted of its risk 
exposure to short-dated options.
    \16\ As an example, daily option trading volume transactions 
examined between February 2023 and July 2023 show that options with 
less than a one-month time-to-expiration contributed around 30 
percent of daily trading volume across the days examined. See Notice 
of Filing, 89 FR at 65695-96. For 0DTE options during that time on 
the expiration dates (e.g., Fridays or third Fridays of a month), 
the daily trading volume increased to 40 percent. Id.
    \17\ In 2005, the Chicago Board Options Exchange (``Cboe''), one 
of the participant exchanges for which OCC provides clearance and 
settlement services, began listing weekly options on the SPX 
expiring each Friday of the month. See Notice of Filing, 89 FR at 
65695-96. Then, in 2016, Cboe introduced Monday and Wednesday weekly 
SPX expirations, and in 2022 it added Tuesday and Thursday weekly 
SPX expirations. Id.
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    The proliferation of SDOs and 0DTE options has increased OCC's 
exposure to risks from its Clearing Members' intraday and ETH trading 
activity. OCC collects margin at the start of each business day using 
the STANS margin calculation, which is based on end-of-day positions 
from the previous trading session. This margin collection does not 
account for overnight trading activity. Nor does it encompass intraday 
trading activity, including any possible increases in the clearance of 
SDOs or 0DTE options. Although OCC's current portfolio revaluation 
process captures changes related to price movements, it does not 
capture the intraday credit risk related to position changes that 
exists between the point of margin collection at the beginning of each 
business day and the point of margin collection at the beginning of the 
next business day, resulting in a margin requirement that may not be 
sufficient to cover any additional risk arising from intraday trading 
activity during the trading session. Such intraday credit risk could be 
a result of Clearing Member(s) trading in and out of SDOs and 0DTE 
options, exercising these options positions, or the options expiring by 
the end of the day.
    To help address such credit risk exposure, OCC proposes to 
implement (1) a margin add-on charge (the ``Intraday Risk Charge''); 
and (2) monitoring and escalation criteria to facilitate margin calls 
for any Clearing Member whose intraday activity exceeds certain 
thresholds relative to its Intraday Risk Charge (``Intraday Risk Charge 
Monitoring Thresholds''). The monitoring, escalation, and calculation 
of the Intraday Risk Charge would be conducted through OCC's current 
Watch Level surveillance system, which is governed by OCC's Third-Party 
Risk Management Framework.\18\ Specifically, OCC would utilize its 
Watch Level surveillance to track Clearing Members' overnight trading 
activity and identify patterns of risk-increasing activity in SDOs and 
0DTE options. Under the current monitoring system, if OCC observes that 
certain thresholds are breached relative to a Clearing Member's net 
capital, OCC will calculate, and potentially impose, protective 
measures in the form of additional margin. The Intraday Risk Charge 
would extend this monitoring and surveillance approach to all products 
cleared by OCC and to all Clearing Members, regardless of net capital 
thresholds.
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    \18\ See Securities Exchange Act Release No. 90797 (Dec. 23, 
2020), 85 FR 86592 (Dec. 30, 2020) (File No. SR-OCC-2020-014).
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \19\ to determine whether the Proposed 
Rule Change should be approved or disapproved. Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the Proposed Rule Change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
providing the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\20\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
Proposed Rule Change's consistency with Section 17A of the Exchange 
Act,\21\

[[Page 90157]]

and the rules thereunder, including the following provisions:
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    \20\ Id.
    \21\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(E) of the Exchange Act, which requires, 
among other things, that the rules of a clearing agency do not impose 
any schedule of prices, or fix rates or other fees, for services 
rendered by its participants; \22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(E).
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     Section 17A(b)(3)(F) of the Exchange Act, which requires, 
among other things, that the rules of a clearing agency 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; \23\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(2) of the Exchange Act, which requires, 
among other things, 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; \24\ and
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    \24\ 17 CFR 240.17Ad-22(e)(2)(v).
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     Rule 17Ad-22(e)(4) of the Exchange Act, which requires, 
among other things, 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.\25\
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    \25\ 17 CFR 240.17Ad-22(e)(4)(i).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Sections 17A(b)(3)(E) and 17A(b)(3)(F) 
of the Exchange Act,\26\ and Rules 17Ad-22(e)(2) \27\ and 17Ad-22(e)(4) 
\28\ thereunder, or any other provision of the Exchange Act, or the 
rules and regulations thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4(g) under the Exchange 
Act,\29\ any request for an opportunity to make an oral 
presentation.\30\
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    \26\ 15 U.S.C. 78q-1(b)(3)(E) and 15 U.S.C. 78q-1(b)(3)(F).
    \27\ 17 CFR 240.17Ad-22(e)(2).
    \28\ 17 CFR 240.17Ad-22(e)(4).
    \29\ 17 CFR 240.19b-4(g).
    \30\ Section 19(b)(2) of the Exchange Act grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by November 29, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 13, 2024.
    The Commission asks that commenters address the sufficiency of 
OCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice of Filing,\31\ in addition to any other comments 
they may wish to submit about the Proposed Rule Change.
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    \31\ See Notice of Filing, supra note 3.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking); 
or
     Send an email to [email protected]. Please include 
file number SR-OCC-2024-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to: Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to file number SR-OCC-2024-010. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the Proposed Rule Change that are filed with the Commission, 
and all written communications relating to the Proposed Rule Change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal office of OCC and on OCC's website at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection.
    All submissions should refer to file number SR-OCC-2024-010 and 
should be submitted on or before November 29, 2024. Rebuttal comments 
should be submitted by December 13, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26413 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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