Federal Register / Vol. 87, No. 29 / Friday, February 11, 2022 / Notices 8063 

8Securities Exchange Act Release No. 93532 

(November 5, 2021), 86 FR 62851 (November 12, 

2021) (SR–NSCC–2021–010). 

9See supra note 4. 

10 15 U.S.C. 78s(b)(2). 

11 15 U.S.C. 78s(b)(2)(B)(ii)(II). 

12 Id. 

13 17 CFR 200.30–3(a)(57). 

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. 

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

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

Company-Information/Documents-and-Archives/ 

By-Laws-and-Rules. 

5See Exchange Act Release No. 91079 (Feb. 8, 

2021), 86 FR 9410 (Feb. 12, 2021) (File No. SR– 

OCC–2020–016). OCC makes its STANS 

Methodology description available to Clearing 

Members. An overview of the STANS methodology 

is on OCC’s public website: https://

www.theocc.com/Risk-Management/MarginMethodology. 

Proposed Rule Change.8 The 

Commission has received additional 

comment letters on the Proposed Rule 

Change.9

Section 19(b)(2) of the Act 10 provides 

that proceedings to determine whether 

to approve or disapprove a proposed 

rule change must be concluded within 

180 days of the date of publication of 

notice of filing of the proposed rule 

change. The time for conclusion of the 

proceedings may be extended for up to 

60 days if the Commission determines 

that a longer period is appropriate and 

publishes the reasons for such 

determination.11 The 180th day after 

publication of the Notice in the Federal 

Register is February 8, 2022. 

The Commission is extending the 

period for Commission action on the 

Proposed Rule Change. The Commission 

finds that it is appropriate to designate 

a longer period within which to take 

action on the Proposed Rule Change so 

that the Commission has sufficient time 

to consider the issues raised by the 

Proposed Rule Change and to take 

action on the Proposed Rule Change. 

Accordingly, pursuant to Section 

19(b)(2)(B)(ii)(II) of the Act,12 the 

Commission designates April 8, 2022, as 

the date by which the Commission 

should either approve or disapprove the 

Proposed Rule Change SR–NSCC–2021– 

010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–02912 Filed 2–10–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94166; File No. SR–OCC– 

2022–801] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Advance Notice 

Concerning the Options Clearing 

Corporation’s Margin Methodology for 

Incorporating Variations in Implied 

Volatility 

February 7, 2022. 

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 

(‘‘Clearing Supervision Act’’) 1 and Rule 

19b–4(n)(1)(i) 2 under the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’ 

or ‘‘Act’’),3 notice is hereby given that 

on January 24, 2022, the Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) an 

advance notice as described in Items I, 

II and III below, which Items have been 

prepared by OCC. The Commission is 

publishing this notice to solicit 

comments on the advance notice from 

interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Advance 

Notice 

This advance notice is submitted in 

connection with a proposal to simplify 

OCC’s margin methodology, the System 

for Theoretical Analysis and Numerical 

Simulations (‘‘STANS’’), control 

procyclicality in volatility modeling, 

provide natural offsets for volatility 

products with similar characteristics, 

and build the foundation for a single, 

consistent framework to model equity 

volatility products in margin and stress 

testing. Specifically, this proposed 

change would: 

(1) Implement a new model for 

incorporating variations in implied volatility 

within STANS for products based on the S&P 

500 Index (such index hereinafter referred to 

as ‘‘S&P 500’’ and such proposed model 

being the ‘‘S&P 500 Implied Volatility 

Simulation Model’’) to provide consistent 

and smooth simulated volatility scenarios; 

(2) implement a new model to calculate the 

theoretical values of futures on indexes 

designed to measure volatilities implied by 

prices of options on a particular underlying 

index (such indexes being ‘‘volatility 

indexes’’; futures contracts on such Volatility 

Indexes being ‘‘volatility index futures’’; and 

such proposed model being the ‘‘Volatility 

Index Futures Model’’) to provide consistent 

and stable coverage across all maturities; and 

(3) replace OCC’s model to calculate the 

theoretical values of exchange-traded futures 

contracts based on the expected realized 

variance of an underlying interest (such 

contracts being ‘‘variance futures,’’ and such 

model being the ‘‘Variance Futures Model’’) 

with one that provides adequate margin 

coverage while providing offsets for hedged 

positions in the listed options market. 

The proposed changes to OCC’s 

STANS Methodology document are 

contained in confidential Exhibit 5 of 

filing SR–OCC–2022–801. Amendments 

to the existing text are marked by 

underlining and material proposed to be 

deleted is marked by strikethrough text. 

The proposed changes are described in 

detail in Item 3 below. New sections 

2.1.4 (S&P 500 Implied Volatilities 

Scenarios) and 2.1.8 (Volatility Index 

Futures), and the replacement text for 

section 2.1.7 (Variance Futures), specific 

to the proposed models, are presented 

without marking. Existing Section 2.1.4 

through 2.1.7 have been renumbered to 

reflect the addition of the new sections 

but are otherwise unchanged. The 

proposed changes do not require any 

changes to the text of OCC’s By-Laws or 

Rules. All terms with initial 

capitalization that are not otherwise 

defined herein have the same meaning 

as set forth in the OCC By-Laws and 

Rules.4

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Advance Notice 

In its filing with the Commission, 

OCC included statements concerning 

the purpose of and basis for the advance 

notice and discussed any comments it 

received on the advance notice. The text 

of these statements may be examined at 

the places specified in Item IV below. 

OCC has prepared summaries, set forth 

in sections (A) and (B) below, of the 

most significant aspects of these 

statements. 

(A) Clearing Agency’s Statement on 

Comments on the Advance Notice 

Received From Members, Participants or 

Others 

Written comments were not and are 

not intended to be solicited with respect 

to the advance notice and none have 

been received. OCC will notify the 

Commission of any written comments 

received by OCC. 

(B) Advance Notices Filed Pursuant to 

Section 806(e) of the Payment, Clearing, 

and Settlement Supervision Act 

Description of the Proposed Change 

Background 

STANS Overview 

STANS is OCC’s proprietary risk 

management system for calculating 

Clearing Member margin requirements.5

The STANS methodology utilizes largescale Monte Carlo simulations to 


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8064 Federal Register / Vol. 87, No. 29 / Friday, February 11, 2022 / Notices 

6See OCC Rule 601. 

7The expected shortfall component is established 

as the estimated average of potential losses higher 

than the 99% value at risk threshold. The term 

‘‘value at risk’’ or ‘‘VaR’’ refers to a statistical 

technique that, generally speaking, is used in risk 

management to measure the potential risk of loss for 

a given set of assets over a particular time horizon. 

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

calculates initial margin requirements for 

segregated futures accounts on a gross basis using 

the Standard Portfolio Analysis of Risk Margin 

Calculation System (‘‘SPAN’’). Commodity Futures 

Trading Commission (‘‘CFTC’’) Rule 39.13(g)(8), 

requires, in relevant part, that a derivatives clearing 

organization (‘‘DCO’’) collect initial margin for 

customer segregated futures accounts on a gross 

basis. While OCC uses SPAN to calculate initial 

margin requirements for segregated futures accounts 

on a gross basis, OCC believes that margin 

requirements calculated on a net basis (i.e., 

permitting offsets between different customers’ 

positions held by a Clearing Member in a segregated 

futures account using STANS) affords OCC 

additional protections at the clearinghouse level 

against risks associated with liquidating a Clearing 

Member’s segregated futures account. As a result, 

OCC calculates margin requirements for segregated 

futures accounts using both SPAN on a gross basis 

and STANS on a net basis, and if at any time OCC 

staff observes a segregated futures account where 

initial margin calculated pursuant to STANS on a 

net basis exceeds the initial margin calculated 

pursuant to SPAN on a gross basis, OCC 

collateralizes this risk exposure by applying an 

additional margin charge in the amount of such 

difference to the account. See Exchange Act Release 

No. 72331 (June 5, 2014), 79 FR 33607 (June 11, 

2014) (File No. SR–OCC–2014–13). 

9 In December 2015, the Commission approved a 

proposed rule change and issued a Notice of No 

Objection to an advance notice filed by OCC to 

modify its margin methodology by more broadly 

incorporating variations in implied volatility within 

STANS. See Exchange Act Release No. 76781 (Dec. 

28, 2015), 81 FR 135 (Jan. 4, 2016) (File No. SR– 

OCC–2015–016); Exchange Act Release No. 76548 

(Dec. 3, 2015), 80 FR 76602 (Dec. 9, 2015) (File No. 

SR–OCC–2015–804). Initially named the ‘‘Implied 

Volatility Model,’’ OCC re-titled the model the 

‘‘Implied Volatilities Scenarios Model’’ in 2021 as 

part of the STANS Methodology’s broader 

reorganization of OCC’s Margin Methodology. See 

Exchange Act Release No. 90763 (Dec. 21, 2020), 85 

FR 85788, 85792 (Dec. 29, 2020) (File No. SR–OCC– 

2020–016). 

10OCC’s Implied Volatilities Scenarios Model 

excludes (i) binary options, (ii) options on 

commodity futures, (iii) options on U.S. Treasury 

securities, and (iv) Asians and Cliquets. 

11The ‘‘tenor’’ of an option is the amount of time 

remaining to its expiration. 

12OCC currently incorporates variations in 

implied volatility as risk factors for certain options 

with residual tenors of at least three years (‘‘Longer 

Tenor Options’’) by a separate process. See 

Exchange Act Release No. 68434 (Dec. 14, 2012), 77 

FR 57602 (Dec. 19, 2012) (File No. SR–OCC–2012– 

14); Exchange Act Release No. 70709 (Oct. 18, 

2013), 78 FR 63267 (Oct. 23, 2013) (File No. SR– 

OCC–2013–16). Because all Longer Tenor Options 

are S&P 500-based products, the proposed S&P 500 

Implied Volatility Simulation Model would 

eliminate the separate process for Longer Tenor 

Options with a single methodology for all S&P 500 

options. 

13The term ‘‘volatility surface’’ refers to a threedimensional graphed surface that represents the 

implied volatility for possible tenors of the option 

and the implied volatility of the option over those 

tenors for the possible levels of ‘‘moneyness’’ of the 

option. The term ‘‘moneyness’’ refers to the 

relationship between the current market price of the 

underlying interest and the exercise price. 

14The ‘‘delta’’ of an option represents the 

sensitivity of the option price with respect to the 

price of the underlying security. 

15The acronym ‘‘GARCH’’ refers to an 

econometric model that can be used to estimate 

volatility based on historical data. See generally 

Tim Bollerslev, ‘‘Generalized Autoregressive 

Conditional Heteroskedasticity,’’ Journal of 

Econometrics, 31(3), 307–327 (1986). 

16STANS relies on 10,000 price simulation 

scenarios that are based generally on a historical 

data period of 500 business days, which are 

updated daily to keep model results from becoming 

stale. 

forecast price and volatility movements 

in determining a Clearing Member’s 

margin requirement.6 STANS margin 

requirements are calculated at the 

portfolio level of Clearing Member 

accounts with positions in marginable 

securities and consists of an estimate of 

two primary components: A base 

component and a concentration/ 

dependence stress test add-on 

component. The base component is an 

estimate of a 99% expected shortfall 7

over a two-day time horizon. The 

concentration/dependence stress test 

add-on is obtained by considering 

increases in the expected margin 

shortfall for an account that would 

occur due to (i) market movements that 

are especially large and/or in which 

certain risk factors would exhibit perfect 

or zero correlations rather than 

correlations otherwise estimated using 

historical data or (ii) extreme and 

adverse idiosyncratic movements for 

individual risk factors to which the 

account is particularly exposed. OCC 

uses the STANS methodology to 

measure the exposure of portfolios of 

options and futures cleared by OCC and 

cash instruments in margin collateral, 

including volatility index futures and 

variance futures.8

The models in STANS currently 

incorporate a number of risk factors. A 

‘‘risk factor’’ within OCC’s margin 

system is defined as a product or 

attribute whose historical data is used to 

estimate and simulate the risk for an 

associated product. The majority of risk 

factors utilized in the STANS 

methodology are the returns on 

individual equity securities; however, a 

number of other risk factors may be 

considered, including, among other 

things, returns on implied volatility. 

Current Implied Volatilities Scenarios 

Model 

Generally speaking, the implied 

volatility of an option is a measure of 

the expected future volatility of the 

option’s underlying security at 

expiration, which is reflected in the 

current option premium in the market. 

Using the Black-Scholes options pricing 

model, the implied volatility is the 

standard deviation of the underlying 

asset price necessary to arrive at the 

market price of an option of a given 

strike, time to maturity, underlying asset 

price and the current discount interest 

rate. In effect, the implied volatility is 

responsible for that portion of the 

premium that cannot be explained by 

the current intrinsic value of the option 

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

the underlying and the exercise price of 

the option), discounted to reflect its 

time value. OCC considers variations in 

implied volatility within STANS to 

ensure that the anticipated cost of 

liquidating options positions in an 

account recognizes the possibility that 

the implied volatility could change 

during the two-business day liquidation 

time horizon and lead to corresponding 

changes in the market prices of the 

options. 

Using its current Implied Volatilities 

Scenarios Model,9 OCC models the 

variations in implied volatility used to 

re-price options within STANS for 

substantially all option contracts 10

available to be cleared by OCC that have 

a residual tenor 11 of less than three 

years (‘‘Shorter Tenor Options’’).12 To 

address variations in implied volatility, 

OCC models a volatility surface 13 for 

Shorter Tenor Options by incorporating 

certain risk factors (i.e., implied 

volatility pivot points) based on a range 

of tenors and option deltas 14 into the 

models in STANS. Currently, these 

implied volatility pivot points consist of 

three tenors of one month, three months 

and one year, and three deltas of 0.25, 

0.5, and 0.75, resulting in nine implied 

volatility risk factors. These pivot points 

are chosen such that their combination 

allows the model to capture changes in 

level, skew (i.e., strike price), convexity, 

and term structure of the implied 

volatility surface. OCC uses a GARCH 

model 15 to forecast the volatility for 

each implied volatility risk factor at the 

nine pivot points.16 For each Shorter 

Tenor Option in the account of a 

Clearing Member, changes in its implied 

volatility are simulated using forecasts 

obtained from daily implied volatility 

market data according to the 

corresponding pivot point and the price 

of the option is computed to determine 

the amount of profit or loss in the 

account under the particular STANS 

price simulation. Additionally, OCC 

uses simulated closing prices for the 

assets underlying the options in the 

account of a Clearing Member that are 

scheduled to expire within the 

liquidation time horizon of two business 

days to compute the options’ intrinsic 

value and uses those values to help 


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Federal Register / Vol. 87, No. 29 / Friday, February 11, 2022 / Notices 8065 

17For such Shorter Tenor Options that are 

scheduled to expire on the open of the market 

rather than the close, OCC uses the relevant 

opening price for the underlying assets. 

18 In December 2018, the Commission approved a 

proposed rule change and issued a Notice of No 

Objection to an advance notice filed by OCC to 

modify the Implied Volatilities Scenarios Model. 

See Exchange Act Release No. 84879 (Dec. 20, 

2018), 83 FR 67392 (Dec. 29, 2018) (File No. SR– 

OCC–2018–014); Exchange Act Release No. 84838 

(Dec. 19, 2018), 83 FR 66791 (Dec. 27, 2018) (File 

No. SR–OCC–2018–804). 

19A quality that is positively correlated with the 

overall state of the market is deemed to be 

‘‘procyclical.’’ While margin requirements from 

risk-based margin models normally fluctuate with 

market volatility, a margin model can be procyclical 

if it overreacts to market conditions, such as 

generating drastic spikes in margin requirements in 

response to jumps in market volatility. Antiprocyclical features in a model are measures 

intended to prevent risk-based models from 

fluctuating too drastically in response to changing 

market conditions. 

20An exponentially weighted moving average is 

a statistical method that averages data in a way that 

gives more weight to the most recent observations 

using an exponential scheme. 

21The lower the number the more weight is 

attributed to the more recent data (e.g., if the value 

is set to one, the exponentially weighted moving 

average becomes a simple average). 

22The MRWG is responsible for assisting OCC’s 

Management Committee in overseeing OCC’s 

model-related risk and includes representatives 

from OCC’s Financial Risk Management 

department, Quantitative Risk Management 

department, Model Validation Group, and 

Enterprise Risk Management department. 

23The inconsistency arises from the assumption 

that call deltas are equivalent to put deltas plus one, 

which is not well justified. 

24The arithmetic return of an implied volatility 

over a single period of any length of time is 

calculated by dividing the difference between final 

value and initial value by the initial value. 

25Currently, the S&P 500 underlying price 

scenario generated from the Variance Futures 

Model is used as input data for variance futures. For 

volatility index futures, synthetic VIX futures time 

series generated by the Synthetic Futures Model are 

used as input data to calibrate model parameters, 

as discussed below. 

26OCC also applies the Synthetic Futures Model 

to (i) futures on the American Interbank Offered 

Rate (‘‘AMERIBOR’’) disseminated by the American 

Financial Exchange, LLC, which is a transactionbased interest rate benchmark that represents 

market-based borrowing costs; (ii) futures products 

linked to indexes comprised of continuous yield 

based on the most recently issued (i.e., ‘‘on-therun’’) U.S. Treasury notes listed by Small Exchange 

Inc. (‘‘Small Treasury Yield Index Futures’’); and 

(iii) futures products linked to Light Sweet Crude 

Oil (WTI) listed by Small Exchange (‘‘Small Crude 

Oil Futures’’). See Exchange Act Release No. 89392 

(July 24, 2020), 85 FR 45938 (July 30, 2020) (File 

No. SR–OCC–2020–007) (AMERIBOR futures); 

Exchange Act Release No. 90139 (Oct. 8, 2020), 85 

FR 65886 (Oct. 16, 2020) (File No. SR–OCC–2020– 

012) (Small Treasury Yield Index Futures); 

Exchange Act Release No. 91833 (May 10, 2021), 86 

FR 26586 (May 14, 2021) (File No. SR–OCC–2021– 

005) (Small Crude Oil Futures). Notwithstanding 

the proposed charges herein, OCC would continue 

to use the current Synthetic Futures Model to 

model prices for interest rate futures on 

AMERIBOR, Small Treasury Yield Index Futures 

and Small Crude Oil Futures. 

27A ‘‘synthetic’’ futures time series relates to a 

uniform substitute for a time series of daily 

settlement prices for actual futures contracts, which 

persists over many expiration cycles and thus can 

be used as a basis for econometric analysis. One 

feature of futures contracts is that each contract may 

have a different expiration date, and at any one 

point in time there may be a variety of futures 

contracts on the same underlying interest, all with 

varying dates of expiration, so that there is no one 

continuous time series for those futures. Synthetic 

Continued 

calculate the profit or loss in the 

account.17

In January 2019,18 OCC modified the 

Implied Volatilities Scenarios Model 

after OCC’s analyses of the model 

demonstrated that the volatility changes 

forecasted by the GARCH model were 

extremely sensitive to sudden spikes in 

volatility, which at times resulted in 

overreactive margin requirements that 

OCC believed were unreasonable and 

procyclical.19 To reduce the 

oversensitivity of the Implied 

Volatilities Scenarios Model to large, 

sudden shocks in market volatility and 

therefore result in margin requirements 

that are more stable and that remain 

commensurate with the risks presented 

during periods of sudden, extreme 

volatility, OCC modified the Implied 

Volatilities Scenarios Model to use an 

exponentially weighted moving 

average 20 of forecasted volatilities over 

a specified look-back period rather than 

using raw daily forecasted volatilities. 

The exponentially weighted moving 

average involves the selection of a lookback period over which the data would 

be averaged and a decay factor (or 

weighting factor), which is a positive 

number between zero and one, that 

represents the weighting factor for the 

most recent data point.21 The look-back 

period and decay factor are model 

parameters subject to monthly review, 

along with other model parameters that 

are reviewed by OCC’s Model Risk 

Working Group (‘‘MRWG’’) 22 in 

accordance with OCC’s internal 

procedure for margin model parameter 

review and sensitivity analysis, and 

these parameters are subject to change 

upon approval of the MRWG. 

The current Implied Volatilities 

Scenarios Model is subject to certain 

limitations and issues, which would be 

addressed by the proposed changes 

described herein. While the overlay of 

an exponentially weighted moving 

average reduces and delays the impact 

of large implied volatility spikes, it does 

so in an artificial way that does not 

target the primary issues that OCC 

identified with the GARCH model. 

Consequently, the 2019 modifications 

were intended to be a temporary 

solution. 

The current model uses the ‘‘nearest 

neighbor’’ method to switch pivot 

points in the implied volatility surface, 

which introduces discontinuity in the 

implied volatility curve for a given 

tenor. In addition, the implied volatility 

scenarios for call and put options with 

the same tenor and strike price are not 

equal. These issues introduce 

inconsistencies in implied volatility 

scenarios.23 Due to the use of arithmetic 

implied volatility returns in the current 

model,24 it can produce near zero 

implied volatility, which is unrealistic, 

in a few simulated scenarios. 

In addition, the current model does 

not impose constraints on the nine pivot 

points to ensure that simulated surfaces 

are arbitrage-free because the pivots are 

not modeled consistently. As a result, 

the simulated implied volatility surfaces 

often allow arbitrages across options. 

Because of the potential for arbitrage, 

the implied volatilities are not adequate 

inputs to price variance futures and 

volatility index futures accurately, both 

of which assume an arbitrage-free 

condition.25 Furthermore, the current 

Implied Volatilities Scenarios Model 

may not provide natural offsetting of 

risks in accounts that contain 

combinations of S&P 500 options, 

variance futures, and/or volatility index 

futures because the copula utilized in 

the current model indirectly captures 

the correlation effect between S&P 500 

options and volatility index futures or 

variance futures. 

Current Synthetic Futures Model 

Volatility indexes are indexes 

designed to measure the volatility that 

is implied by the prices of options on a 

particular reference index or asset. For 

example, Cboe’s Volatility Index 

(‘‘VIX’’) is an index designed to measure 

the 30-day expected volatility of the 

S&P 500. Volatility index futures can 

consequently be viewed as an indication 

of the market’s future expectations of 

the volatility of a given volatility index’s 

underlying reference index (e.g., in the 

case of the VIX, providing a snapshot of 

the expected market volatility of the 

S&P 500 over the term of the options 

making up the index). OCC clears 

futures contracts on such volatility 

indexes. 

OCC currently uses the Synthetic 

Futures Model to calculate the 

theoretical value of volatility index 

futures, among other products,26 for 

purposes of calculating margin for 

Clearing Member portfolios. OCC’s 

current approach for projecting the 

potential final settlement prices of 

volatility index futures models the price 

distributions of ‘‘synthetic’’ futures on a 

daily basis based on the historical 

returns of futures contracts with 

approximately the same tenor.27 The 


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futures can be used to generate a continuous time 

series of futures contract prices across multiple 

expirations. These synthetic futures price return 

histories are inputted into the existing Copula 

simulation process in STANS alongside the 

underlying interests of OCC’s other cleared and 

cross-margin products and collateral. The purpose 

of this use of synthetic futures is to allow the 

margin system to better approximate correlations 

between futures contracts of different tenors by 

creating more price data points and their margin 

offsets. 

28See Exchange Act Release No. 85873 (May 16, 

2019), 84 FR 23620 (May 22, 2019) (File No. SR– 

OCC–2019–002); Exchange Act Release No. 85870 

(May 15, 2019), 84 FR 23096 (May 21, 2019) (File 

No. SR–OCC–2019–801). 

29 In order to incorporate a variance level implied 

by a longer time series of data, OCC calculates a 

floor for variance estimates based on the underlying 

index (e.g., VIX) which is expected to have a longer 

history that is more reflective of the long-run 

variance level that cannot be otherwise captured 

using the synthetic futures data. The floor therefore 

reduces the impact of a sudden increase in margin 

requirements from a low level and therefore 

mitigates procyclicality in the model. 

30A variance is a statistical measure of the 

variability of price returns relative to an average 

(mean) price return. Accordingly, OCC believes that 

an underlying variance is a ‘‘commodity’’ within 

the definition of Section 1a(4) of the Commodity 

Exchange Act (‘‘CEA’’), which defines 

‘‘commodity’’ to include ‘‘all . . . rights, and 

interests in which contracts for future delivery are 

presently or in the future dealt in.’’ 7 U.S.C. 1a(9). 

OCC believes a variance is neither a ‘‘security’’ nor 

a ‘‘narrow-based security index’’ as defined in 

Section 3(a)(10) and Section 3(a)(55)(A) of the 

Exchange Act, respectively, and therefore is within 

the exclusive jurisdiction of the CFTC. OCC clears 

this product in its capacity as a DCO registered 

under Section 5b of the CEA. See Exchange Act 

Release No. 49925 (June 28, 2004), 69 FR 40447 

(July 2, 2004) (File No. SR–OCC–2004–08). 

31See Uhlenbeck, G.E. and L.S. Ornstein, ‘‘On the 

Theory of Brownian Motion,’’ Physical Review, 36, 

823–841 (1930) (explaining the Gaussian OrnsteinUhlenbeck process). 

32The S&P 500 Implied Volatility Model has been 

designed to model implied volatility dynamics for 

options written on the S&P 500 and related indexes, 

such as S&P 500 index options (‘‘SPX’’) and S&P 

500 Exchange Traded Funds (‘‘SPY’’) options, 

options on S&P 500 futures, and related implied 

volatility derivatives such as VIX futures and 

Miax’s SPIKES Volatility Index (‘‘SPIKES’’). While 

OCC would continue to use the current Implied 

Volatilities Scenarios Model for the products other 

than S&P 500-based products to which the model 

currently applies, the S&P 500 Implied Volatility 

Simulation Model is intended to provide a 

foundation upon which OCC can build a single 

consistent framework to model single-name and 

index/futures equity volatility products for margin 

and stress testing. 

Synthetic Futures Model uses synthetic 

time series of 500 daily proportional 

returns created from historical futures. 

Once futures mature, the synthetic time 

series roll from the nearer-term futures 

to the next further out futures on the 

day subsequent to the front-month 

maturity date. Thus, the front-month 

synthetic always contains returns of the 

front contract; the second synthetic 

corresponds to the next month out, and 

so on. While synthetic time series 

contain returns from different contracts, 

a return on any given date is 

constructed from prices of the same 

contract (e.g., as the front-month futures 

contract ‘‘rolls’’ from the current month 

to the subsequent month, returns on the 

roll date are constructed by using the 

same contract and not by calculating 

returns across months). The 

econometric model currently used in 

STANS for purposes of modeling 

proportionate returns of the synthetic 

futures is an asymmetric GARCH(1,1) 

with an asymmetric Standardized 

Normal Reciprocal Inverse Gaussian (or 

‘‘NRIG’’)-distributed logarithmic 

returns.28 The correlation between S&P 

500 options and VIX futures are 

controlled by a copula. 

The current synthetic modeling 

approach suffers from limitations and 

issues similar to the current Implied 

Volatilities Scenarios Model. For one, 

the current synthetic model relies on the 

GARCH variance forecast, which, as 

described above, is prone to volatility 

shocks. To address this, the Synthetic 

Futures Model employs an antiprocyclical floor for variance 

estimates.29 Secondly, the current 

synthetic model makes the rolling 

volatility futures contracts take on 

different variances from calibration at 

futures roll dates, which could translate 

to jumps in margin. 

Current Model for Variance Futures 

Variance futures are commodity 

futures for which the underlying 

interest is a variance.30 Variance futures 

differ from volatility index futures in 

that the underlying variance is 

calculated using only historical daily 

closing values of the reference variable 

while an underlying volatility index 

represents the implied volatility 

component of bid and ask premium 

quotations for options on a reference 

variable. When a variance futures 

contract is listed, it defines the initial 

variance strike. This initial variance 

strike represents the estimated future 

variance at contract expiration. The 

final settlement value is determined 

based on a standardized formula for 

calculating the realized variance of the 

S&P 500 measured from the time of 

initial listing until expiration of the 

contract. At maturity, the buyer of the 

contract pays the amount of predefined 

strike to the seller and the seller pays 

the realized variances. Therefore, the 

buyer profits if the realized variance at 

maturity exceeds the predefined 

variance strike. S&P 500 variance 

futures are exchange-traded futures 

contracts based on the realized variance 

of the S&P 500. 

OCC uses the current Variance 

Futures Model to calculate the 

theoretical value of variance futures for 

purposes of calculating margin for 

Clearing Member portfolios. OCC’s 

current Variance Futures Model was 

introduced in 2007 and is an 

econometric model designed to capture 

long- and short-term conditional 

variance of the underlying S&P 500 to 

generate variance futures prices. OCC’s 

current approach to modeling variance 

futures has several disadvantages. OCC 

currently models variance futures by 

simulating a final settlement price 

rather than a near-term variance futures 

price. This approach is not consistent 

with OCC’s two-day liquidation 

horizon. In addition, the current 

Variance Futures Model is based on an 

econometric model that assumes the 

S&P 500 return variance can be 

described by the GARCH(1,1) model and 

that the long-term variation follows and 

Ornstein-Uhlenbeck process.31 As with 

the use of GARCH for the Implied 

Volatilities Scenarios Model, this 

approach has several limitations, 

including (1) the current approach does 

not provide appropriate risk offsets with 

other instruments closely related to the 

S&P 500 implied volatility, such as VIX 

futures; and (2) the margin rates it 

generates are too conservative for short 

positions and too aggressive for long 

positions, which causes model 

backtesting to fail. 

Proposed Change 

OCC is proposing to replace the 

Implied Volatilities Scenarios Model for 

S&P 500-based products, the Synthetic 

Futures Model for volatility index-based 

products, and the Variance Future 

Model for variance futures with new 

models that would simplify the STANS 

methodology, control procyclicality in 

volatility modeling, provide natural 

offsets for volatility products with 

similar characteristics, and build the 

foundation for a single, consistent 

framework to model equity volatility 

products in margin and stress testing. 

Proposed Changes to the Implied 

Volatilities Scenarios Model for S&P 

500-Based Products 

OCC proposes to replace the current 

Implied Volatilities Scenarios Model 

with the proposed S&P 500 Implied 

Volatility Simulation Model for the S&P 

500 product group.32 The purpose of the 

proposed S&P 500 Implied Volatility 

Simulation Model is to establish a 

consistent and robust framework for 

implied volatility simulation, provide 

appropriate control for procyclicality in 

S&P 500 implied volatility modeling, 

and provide natural offsets for volatility 


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33See Bergomi, Lorenzo, and Julien Guyon, 

‘‘Stochastic volatility’s orderly smiles,’’ Risk 25.5 

(2012): 60. 

34A stochastic differential equation is a 

differential equation in which one or more of the 

terms is a stochastic process, resulting in a solution 

which is also a stochastic process. 

35The smoothing algorithm is the process that 

OCC uses to estimate fair values for plain vanilla 

listed options based on closing bid and ask price 

quotes. See Exchange Act Release No. 86731 (Aug. 

22, 2019), 84 FR 45188, 45189 (Aug. 28, 2019) (File 

No. SR–OCC–2019–005). 

products with similar characteristics to 

S&P 500 implied volatility (e.g., VIX 

futures and options). The output of the 

S&P 500 Implied Volatility Simulation 

Model would be used by OCC’s options 

pricing model, as well as the proposed 

Volatility Index Futures Model and 

Variance Futures Model. 

Proposed S&P 500 Implied Volatility 

Simulation Model Description 

The proposed S&P 500 Implied 

Volatility Simulation Model is a Monte 

Carlo simulation model that captures 

the risk dynamics in S&P 500 implied 

volatility surface including its term 

structure and skew. This proposed 

model aims to provide enhanced 

treatment for simulating the dynamics 

of S&P 500 options and replace the 

nine-pivot approach in STANS, to 

provide appropriate control for 

procyclicality in S&P 500 implied 

volatility modeling, and to provide 

natural offsets for volatility products 

with similar characteristics of S&P 500 

implied volatility (e.g., VIX futures and 

options). 

The proposed approach would model 

the implied volatility surface in the 

space of standardized log-moneyness 

and tenor. Based on the approximation 

of the Bergomi-Guyon expansion,33 the 

dynamics of S&P 500 implied volatility 

surface would be characterized by an 

affine model. In the model, the 

dynamics of S&P 500 at-the-money 

(‘‘ATM’’) implied volatility would be 

specified precisely in the form of 

stochastic differential equations 34 for a 

fixed number of key tenors. The changes 

of S&P 500 ATM implied volatility 

across different tenors would be 

characterized by the volatility-ofvolatility of the anchor tenor with a 

power law decay term structure and a 

residual term-specific random process. 

The power law decay parameter would 

be modeled as a function of S&P 500 1- 

month ATM implied volatility. For any 

arbitrary tenors within the key tenor 

range, the term-specific correlation 

structure would be given by a linear 

interpolation across the nearest two key 

tenors. For any arbitrary tenors outside 

the key tenor range, the term-specific 

correlation structure would be 

determined by the shortest or longest 

key tenor, respectively. 

OCC assumes changes of skew (i.e., 

skew shock) evolve proportionally 

across different standardized logmoneyness and also follow a power law 

decay term structure. OCC would model 

the S&P 500 1-month implied volatility 

skew shock via a linear regression 

approach conditional on the changes of 

S&P 500 1-month ATM implied 

volatility and an idiosyncratic term. 

OCC would generate the simulated 

scenarios of S&P 500 implied volatility 

surface by first applying shocks across 

term structure and then skew shock 

across moneyness to the initial S&P 500 

implied volatility surface (obtained 

through OCC’s smoothing algorithm).35

Along with other risk factors in STANS, 

the standard uniform draws of the S&P 

500 1-month ATM implied volatility 

risk factor is generated from Copula. 

First, the log-return scenarios of S&P 

500 1-month ATM implied volatility 

would be simulated from a Hansen’s 

skewed t distribution with predetermined degrees-of-freedom and 

skewness parameters. The forecasted 

volatility-of-volatility for S&P 500 1- 

month ATM implied volatility would be 

estimated based on the 30-day VVIX, 

Cboe’s option-implied volatility-ofvolatility index. An equal-weighted 

look-back moving average would be 

applied to smooth the daily 30-day 

VVIX. To control for procyclicality, a 

dynamic scaling factor would be 

applied to the smoothed 30-day VVIX. 

The log-return scenarios of S&P 500 

ATM implied volatility for a given listed 

tenor would be generated based on the 

log-return scenarios of the 1-month 

ATM implied volatility with a power 

law decay and the term-specific 

residuals for tenors longer than 1 

month. The random variables for the 

term-specific residual diffusion process 

would be drawn from a multivariate 

Student’s t distribution with common 

degrees-of-freedom. 

Secondly, OCC would simulate the 

S&P 500 1-month implied volatility 

skew shock conditional on the logreturn scenarios of S&P 500 1-month 

ATM implied volatility and an 

idiosyncratic term. OCC would generate 

the skew shock scenarios for listed 

options with arbitrary tenors and 

standardized log-moneyness by 

applying the power law decay and 

scaling by the stylized standardized logmoneyness scenarios. Finally, OCC 

would add the skew shock scenario to 

the shocked S&P 500 ATM implied 

volatility scenario to obtain the final 

S&P 500 implied volatility scenario for 

an arbitrary tenor and standardized logmoneyness. OCC would use the 

simulated S&P 500 implied volatility 

scenarios to generate option prices used 

in margin estimation and stress testing. 

Proposed S&P 500 Implied Volatility 

Simulation Model Performance 

The proposed S&P 500 Implied 

Volatility Simulation Model simplifies 

the STANS methodology by minimizing 

the number of implied volatility risk 

factors. Under the current model, the 

nine implied volatility pivots used to 

simulate volatility scenarios have 

significantly increased the dimension of 

the Student’s t copula by adding nine 

risk factors to every index or security 

that has listed options. The proposed 

S&P 500 Implied Volatility Simulation 

Model would employ a simpler 

approach to model the S&P 500 implied 

volatility surface so that key risk factors 

driving the implied volatility surface are 

explicitly modeled within the model 

itself. By modeling the implied 

volatility surface directly, instead of 

using the nine-pivot approach, the 

simulated implied volatility surface 

would be smooth and continuous in 

both term structure and moneyness 

dimensions. In addition, put and call 

options with the same tenors and strike 

prices would have the same implied 

volatility scenarios under the proposed 

model. Thus, the S&P 500 Implied 

Volatility Simulation Model would 

address issues with the current model’s 

implied volatility surface and scenarios 

as discussed above. 

To compensate for the procyclicality 

in the GARCH process, the current 

model employs an exponentially 

weighted moving average overlay to 

reduce and delay the impact of large 

implied volatility spikes. In the 

proposed S&P 500 Implied Volatility 

Simulation Model, the forecasted 

variance of the S&P 500 1-Month ATM 

implied volatility would be simulated 

using the smoothed 30-day VVIX, which 

is a proxy of the option-implied 

volatility-of-volatility, scaled by a 

dynamic factor to control for 

procyclicality. OCC believes the 

proposed model would be a better and 

sounder method to produce consistent 

and smooth simulated implied volatility 

scenarios in both term structure and 

skew dimensions for S&P 500 and to 

control the procyclicality in margin 

requirements. As borne out by 

observations on the performance of the 

proposed model discussed below, OCC 

believes that these proposed changes 

also reduce the oversensitivity observed 

with the GARCH process under the 

current Implied Volatilities Scenarios 

Model to large, sudden shocks in market 

volatility and produce margin 


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36OCC believes that the proposed model’s 

improvements to the number of arbitrage violations 

is explained by two factors: (i) Replacing the 

current model’s approximate delta-based function 

for the volatility curve—which leads to arbitrage 

prices between call and put options of the same 

strike and expiration—with the proposed model’s 

standardized log-moneyness approach, and (ii) 

replacing the current model’s nine pivot points 

method with a methodology that produces an 

implied volatility surface that is continuous in 

strike and time space. 

37 In addition to the VIX index, Cboe calculates 

several other volatility indexes including the Cboe 

Short Term Volatility Index (VXST), which reflects 

the 9-day expected volatility of the S&P 500, as well 

as the Cboe Nasdaq-100 Volatility Index (VXN), 

Cboe DJIA Volatility Index (VXD), Cboe Russell 

2000 Volatility Index (RVX) and Cboe S&P 500 3- 

Month Volatility Index (VXV) and the Cboe S&P 

500 6-Month Volatility Index (VXMT). The 

Volatility Index Futures Model may apply to futures 

contracts written on these and other volatility 

indexes if and when such futures contracts are 

listed, depending on OCC’s assessment of whether 

those futures contracts meet the model assumptions 

and subject to OCC obtaining all necessary 

regulatory approval to apply the Volatility Index 

Futures Model to such futures contracts. 

38OCC calculates the implied forward price for 

options on indexes using the basis futures price. 

See Exchange Act Release No. 86296 (July 3, 2019), 

84 FR 32821 (July 9, 2019) (File No. SR–OCC–2019– 

005) (enhancing OCC’s smoothing algorithm). 

39See Cboe, VIX White Paper (2021), available at 

https://cdn.cboe.com/resources/vix/vixwhite.pdf. 

40 In some cases with limited listed strikes, 

additional strikes will be interpolated or 

extrapolated to provide more robust results. 

41See Confidential Exhibit 3 to File No. SR–OCC– 

2022–801. 

42The Samuelson effect refers to a decrease in 

volatility with increasing time to maturity. 

requirements that are more stable and 

that remain commensurate with the 

risks presented during stressed periods. 

Based on its analysis of the S&P 500 

Implied Volatility Simulation Model’s 

performance, OCC concludes that the 

proposed model accurately recovers the 

correlation structure of the S&P 500 

ATM implied volatilities as well as the 

VIX futures across different tenors, 

which benefits margin coverage of 

portfolios containing S&P 500 options, 

VIX futures, and S&P 500 options and 

VIX futures. Moreover, the proposed 

model provides adequate margin 

coverages for both upward and 

downward movements of implied 

volatility over the margin risk horizon. 

The margin coverage is stable across 

time and low, medium, and high 

volatility market conditions. The model 

parameters would periodically be 

recalibrated to incorporate more recent 

data and backtesting performance. 

In addition, the implied volatility 

scenarios generated by the proposed 

model observed fewer arbitrage 

violations and tighter consistency 

between VIX and S&P 500 option price 

scenarios.36 The proposed 

methodology’s mitigation of arbitrage is 

sufficient to allow OCC to use S&P 500 

Implied Volatility Simulation model in 

pricing volatility index futures and 

variance futures, which assume an 

arbitrage-free condition. In this way, the 

proposed changes support enhanced 

margin offsetting between S&P 500 

options, VIX futures, and S&P 500 

variance futures, which is naturally 

captured by the proposed models. 

OCC has performed backtesting of the 

current models and proposed models, 

including the proposed Volatility Index 

Futures Model, to compare and evaluate 

the performance of each model from a 

margin coverage perspective. Overall, 

the proposed models, when tested along 

with other models in STANS, provided 

adequate margin coverage under 

different market conditions over the 

backtesting period. Moreover, compared 

to the current models, the margin 

coverage from the proposed model is 

more stable and less procyclical, 

especially under stressed market 

conditions. 

Proposed Changes to the Synthetic 

Futures Model for Volatility IndexBased Products 

OCC proposes to use the Volatility 

Index Futures Model, rather than the 

current Synthetic Futures Model, to 

derive the theoretical fair values of 

volatility index futures.37 OCC would 

also use the Volatility Index Futures 

Model to calculate the implied forward 

price for options on volatility indexes, 

including options on VIX and SPIKES.38

The purpose of the proposed change is 

to replace the current method for 

pricing volatility index futures with an 

industry-standard method based on 

Cboe’s option replication formula 

augmented with a convexity correction. 

As discussed below, OCC believes that 

the proposed model will produce more 

accurate and stable results than the 

current Synthetic Futures Model, which 

suffers from the limitations discussed 

above, including that (i) the Synthetic 

Futures Model produces results that are 

not strongly correlated with S&P 500 

option prices and volatility and are 

more susceptible to volatility shocks 

due to the sensitivity of the GARCH 

process; and (ii) the Synthetic Futures 

Model depends on the historical 

calibration for various parameters, 

which can create artifacts due to the roll 

dates of VIX futures. 

Proposed Volatility Index Futures 

Model Description 

The proposed Volatility Index Futures 

Model would alleviate the issues 

observed with the current Synthetic 

Futures Model by adopting a parameterfree approach based on the replication 

of log-contract, which measures the 

expected realized volatility using S&P 

500 options, as discussed in Cboe’s VIX 

white paper.39 The proposed model 

would derive the theoretical fair value 

of volatility index futures via replication 

through a portfolio of vanilla S&P 500 

options 40 using the proposed S&P 500 

Implied Volatility Simulation Model 

and convexity adjustments, which 

reflect the concavity of the square root 

function used to convert variance into 

volatility. A basis adjustment would be 

computed to reflect the difference 

between the market price and the 

theoretical value at the base level and 

then applied to the simulated volatility 

index futures prices at the scenario level 

to align the simulation to the market. 

The output from the Volatility Index 

Futures Model would be an input to the 

options pricing model, which treats the 

volatility index Futures as the 

underlying of the options contract. By 

providing a direct link between the 

volatility index futures price and the 

underlying S&P 500 options price, OCC 

believes that the Volatility Index 

Futures Model would result in more 

sensible margin charges compared to the 

current model. 

Proposed Volatility Index Futures 

Model Performance 

Based on its analysis of the Volatility 

Index Futures Model’s performance,41

OCC has concluded the proposed model 

would provide more consistent and 

better-behaved margin coverage across 

the term structure when compared to 

the current Synthetic Futures Model. 

The Volatility Index Futures Model 

demonstrates desirable antiprocyclicality properties, providing 

adequate margin coverage during 

periods of high volatility without being 

too conservative in periods of low 

volatility. Furthermore, the propose 

model generates adequate margin 

coverage for short-term futures which is 

manifested in the pronounced 

Samuelson effect.42 OCC believes three 

reasons account for the improved 

performance of the Volatility Index 

Futures Model: (1) The proposed model 

provides a direct link between the 

futures price and the underlying option 

prices via replication; (2) the margin 

coverage of VIX futures is closely 

coupled with the S&P 500 Implied 

Volatility Simulation Model with 

procyclicality control, whereas the 

Synthetic Futures Model relies on the 

GARCH variance forecast process, 

which is prone to overreaction to 

shocks; and (3) unlike the Synthetic 

Futures Model, the Volatility Index 

Futures Model is not subject to the 


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43 VIX futures are commonly incorporated into a 

large S&P 500 portfolio as hedging instruments for 

volatility risk. For example, one could gain pure 

exposure to underlying spot movements of the S&P 

500 by buying/selling VIX futures to hedge the vega 

risk (i.e., risk of changes in implied volatility) of 

S&P 500 options. 

44See Confidential Exhibit 3 to File No. SR–OCC– 

2022–801. 

45This approach is based on Cboe’s published 

method for pricing S&P 500 variance futures. See 

Cboe, S&P 500 Variance Futures Contract 

Specification (Dec. 10, 2012), available at http://

www.cboe.com/products/futures/va-s-p-500- 

variance-futures/contract-specifications. 

46Additional strikes may be interpolated or 

extrapolated from listed strikes to provide more 

robust results. 

47See Confidential Exhibit 3 to File No. SR–OCC– 

2022–801. 

calibration artifact due to the 500-day 

lookback window, nor does it require 

the rolling VIX futures contracts to take 

on different variances from calibration 

at futures roll dates, which translate to 

discontinuities in margin under the 

current method. 

For VIX futures portfolios 43 hedged 

with S&P 500 options, the proposed 

models provide more efficient margin 

coverage.44 The improvement in margin 

coverage can be attributed to the direct 

coupling between VIX futures and S&P 

500 options, which gives rise to riskoffsetting effect from the volatility. This 

result demonstrates that the replication 

method in conjunction with the S&P 

500 Implied Volatility Simulation 

Model is better able to capture the 

correlations between VIX futures and 

S&P 500 options and produce crosshedging benefits for Clearing Members. 

Proposed Changes to the Variance 

Futures Model 

OCC proposes to replace the current 

Variance Futures Model in its entirety. 

As discussed above, OCC uses the 

current Variance Futures Model to 

derive the theoretical fair values of 

variance futures for calculating margin 

and clearing fund requirements based 

on Clearing Member portfolios. Like the 

proposed Volatility Index Futures 

Model, the proposed Variance Futures 

Model would employ an industrystandard fundamental replication 

technique using the log-contract to price 

variance futures.45 OCC expects that this 

approach would not only provide more 

accurate prices, but also offer natural 

risk offsets with the options of the same 

underlying security. In addition, the 

proposed Variance Futures Model 

would no longer be reliant on a GARCH 

variance forecast process, thereby 

addressing the sensitivity and 

procyclicality of that process to 

volatility shocks observed with the 

current model. Furthermore, the 

proposed method would simulate a 

near-term variance futures price rather 

than a final settlement price, consistent 

with OCC’s two-day liquidation 

assumption. 

Proposed Variance Futures Model 

Description 

The theoretical variances produced by 

the proposed Variance Futures Models 

would be comprised of two 

components. The first component, as 

under the current Variance Futures 

Model, would be the realized variance 

calculated by the realized daily returns 

of S&P 500 option prices.46 The second 

component captures the unrealized 

variance, which OCC would 

approximate using a portfolio of out of 

the money (‘‘OTM’’) call and put 

European options. The proposed model 

would calculate the implied component 

of variance futures via replication 

through a portfolio of OTM option 

prices generated using the proposed 

S&P 500 Implied Volatility Simulation 

Model. 

Proposed Variance Futures Model 

Performance 

Based on its analysis of the current 

and proposed Variance Futures 

Model,47 the proposed model shows 

significant improvement in margin 

coverage. The proposed model naturally 

captures the correlations between S&P 

500 options, variance futures, and VIX. 

Compared to the current model, the 

proposed model provides adequate long 

and short coverage for periods of high 

volatility and reasonable levels for 

periods of low volatility. In particular, 

the proposed model significantly 

reduces long-side coverage exceedances. 

The proposed model produces higher 

correlation for neighboring variance 

futures and adequate coverage without 

being overly conservative on the short 

side. OCC expects that any changes to 

the overall margins of Clearing Member 

accounts would be limited; over the 

twelve-month period between May 2019 

and April 2020, only four margin 

accounts held variance futures positions 

and the total risk from variance futures 

positions was less than one percent of 

the total risk of all the positions for each 

of those accounts. 

Implementation Timeframe 

OCC expects to operate the proposed 

model in parallel with the current 

model for a period of at least thirty (30) 

days before implementing the proposed 

model into production to give Clearing 

Members an opportunity to understand 

the practical effects of the proposed 

changes. OCC further expects to 

implement the proposed changes within 

sixty (60) days after the date that OCC 

receives all necessary regulatory 

approvals for the proposed changes. 

OCC will announce the implementation 

date of the proposed change by an 

Information Memorandum posted to its 

public website at least 2 weeks prior to 

implementation. 

Anticipated Effect on and Management 

of Risk 

OCC believes that the proposed 

changes would reduce the nature and 

level of risk presented by OCC because, 

as discussed above, by modeling 

implied volatility in a more direct, 

coherent manner, the resulting margin 

coverage will more accurately reflect the 

risk of positions dominated by S&P 500 

products, volatility index futures and 

variance futures. Overall, the impact 

analysis shows that at the account level, 

margin coverage generated by the 

proposed models is comparable to that 

generated using OCC’s existing models 

for accounts dominated by S&P 500 

options. While margin charges resulting 

from the proposed changes may be 

higher or lower than under the current 

models due to compositions of positions 

in each account, OCC believes that 

margin coverage under the proposed 

models will be more commensurate 

with the risks presented by its members’ 

activity because the proposed models 

employ a more consistent and sounder 

approach to modeling implied volatility, 

as discussed above. For accounts 

dominated by volatility index futures 

and variance futures, the proposed 

models are, in general, expected to 

produce more accurate margin 

requirement because by using S&P 500 

options to calculate the price for such 

products, the proposed models provide 

natural offsets for volatility products 

with similar characteristics. As such, 

OCC believes the proposed changes 

would result in margin requirements 

commensurate with the vega risk 

presented by Clearing Members’ 

portfolios. 

In addition, the proposed changes are 

expected to produce margin coverage 

that is more stable and less procyclical 

than the current models, especially 

under stressed market conditions. As 

such, the proposed changes help to 

address the procyclical features of the 

current GARCH approach. The proposed 

changes would therefore reduce the 

likelihood that OCC’s models would 

produce extreme, overreactive margin 

requirements that could strain the 

ability of certain Clearing Members to 

meet their daily margin requirements at 

OCC and ensuring more stable and 

appropriate changes in margin 

requirements across volatile market 


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48 12 U.S.C. 5461(b). 

49 12 U.S.C. 5464(a)(2). 

50 12 U.S.C. 5464(b). 

51 17 CFR 240.17A–22. See Exchange Act Release 

Nos. 68080 (October 22, 2012), 77 FR 66220 

(November 2, 2012) (S7–08–11) (‘‘Clearing Agency 

Standards’’); 78961 (September 28, 2016), 81 FR 

70786 (October 13, 2016) (S7–03–14) (‘‘Standards 

for Covered Clearing Agencies’’). 

52 17 CFR 240.17A–22. 

53See, e.g., Exchange Act Release No. 86182 (June 

24, 2019), 84 FR 31128, 31129 (June 28, 2019) (SR– 

OCC–2019–803). 

54 17 CFR 240.17A–22. 

55 12 U.S.C. 5464(b). 

56 17 CFR 240.17A–2(e)(6). 

57 12 U.S.C. 5464(b). 

58 12 U.S.C. 5464(b). 

59 Id. 

periods while continuing to capture 

changes in implied volatility and 

produce margin requirements that are 

commensurate with the risks presented. 

Overall, OCC believes that the 

proposed model is sound, robust and 

performs consistently when compared 

to the current model. OCC plans to 

design a model performance monitoring 

program as part of its model risk 

governance to monitor residual 

limitations and model paraments after 

the models are put into production, 

including a plan to perform 

compensating controls, if necessary. 

Consistency With Clearing Supervision 

Act 

The stated purpose of the Clearing 

Supervision Act is to mitigate systemic 

risk in the financial system and promote 

financial stability by, among other 

things, promoting uniform risk 

management standards for systemically 

important financial market utilities and 

strengthening the liquidity of 

systemically important financial market 

utilities.48 Section 805(a)(2) of the 

Clearing Supervision Act 49 also 

authorizes the Commission to prescribe 

risk management standards for the 

payment, clearing and settlement 

activities of designated clearing entities, 

like OCC, for which the Commission is 

the supervisory agency. Section 805(b) 

of the Clearing Supervision Act 50 states 

that the objectives and principles for 

risk management standards prescribed 

under Section 805(a) shall be to promote 

robust risk management, promote safety 

and soundness, reduce systemic risks, 

and support the stability of the broader 

financial system. The Commission has 

adopted risk management standards 

under Section 805(a)(2) of the Clearing 

Supervision Act and the Exchange Act 

in furtherance of these objectives and 

principles.51 Rule 17A–22 requires 

registered clearing agencies, like OCC, 

to establish, implement, maintain, and 

enforce written policies and procedures 

that are reasonably designed to meet 

certain minimum requirements for their 

operations and risk management 

practices on an ongoing basis.52

Therefore, the Commission has stated 53

that it believes it is appropriate to 

review changes proposed in advance 

notices against Rule 17A–22 54 and the 

objectives and principles of these risk 

management standards as described in 

Section 805(b) of the Clearing 

Supervision Act.55 For the following 

reasons, OCC believes the proposed 

changes are consistent with Section 

805(b) of the Clearing Supervision Act 

and Rule 17A–22(e)(6).56

Consistency with Section 805 of the 

Clearing Supervision Act 

OCC believes the proposed changes 

are consistent with the objectives and 

principles of Section 805(b) of the 

Clearing Supervision Act.57 in that they 

would promote robust risk management 

and safety and soundness while 

reducing systemic risks and supporting 

the stability of the broader financial 

system. The proposed models would be 

used by OCC to calculate margin 

requirements, which are part of risk 

management processes designed to limit 

OCC’s credit exposures to participants, 

thereby promoting safety and 

soundness. OCC uses the margin it 

collects from a defaulting Clearing 

Member to protect other Clearing 

Members and their customers from 

losses as a result of the default and 

ensure that OCC is able to continue the 

prompt and accurate clearance and 

settlement of its cleared products, 

thereby supporting the stability of the 

broader financial system and reducing 

systemic risks that such losses could 

present to its members of other market 

participants. For the following reasons, 

OCC believes that the proposed changes 

would improve OCC’s risk management 

by addressing issues with the existing 

models while promoting safety and 

soundness, thereby reducing systemic 

risks and supporting the stability of the 

broader financial system. 

As described above, the volatility 

changes forecasted by OCC’s current 

Implied Volatilities Scenarios Model are 

sensitive to large, sudden spikes in 

volatility, which can at times result in 

overreactive margin requirements that 

OCC believes are unreasonable and 

procyclical (for the reasons set forth 

above). Such sudden, unreasonable 

increases in margin requirements may 

stress certain Clearing Members’ ability 

to obtain liquidity to meet those 

requirements, particularly in periods of 

extreme volatility, and could result in a 

Clearing Member being delayed in 

meeting, or ultimately failing to meet, 

its daily settlement obligations to OCC. 

A Clearing Member’s failure to meet its 

daily settlement obligations could, in 

turn, cause the suspension of such 

Clearing Member and the liquidation of 

its portfolio, which could harm 

investors and other Clearing Members. 

While the current Implied Volatilities 

Scenarios Model addresses this issue 

with an exponentially weighted moving 

average that reduces and delays the 

impact of large implied volatility spikes, 

it does so in an artificial way that does 

not target the primary issues with the 

GARCH process that OCC has identified. 

By modeling implied volatility in a 

more direct, coherent manner, the 

proposed S&P 500 Implied Volatility 

Simulation Model would therefore 

reduce the likelihood that OCC’s models 

would produce extreme, overreactive 

margin requirements that could strain 

the ability of certain Clearing Members 

to meet their daily margin requirements 

at OCC by controlling procyclicality in 

OCC’s margin methodology and 

ensuring more stable and appropriate 

changes in margin requirements across 

volatile market periods while 

continuing to capture changes in 

implied volatility and produce margin 

requirements that are commensurate 

with the risks presented. Accordingly, 

by better controlling procyclicality, OCC 

believes the proposed Implied Volatility 

Scenarios Model are consistent with 

Section 805(b) of the Clearing 

Supervision Act.58

In addition, OCC believes its 

proposed changes to establish the 

Volatility Index Futures Model and 

replace the Variance Futures Model are 

consistent with Section 805(b) of the 

Clearing Supervision Act.59 Both the 

Volatility Index Futures Model and the 

Variance Futures Model exhibit 

procyclicality issues as a result of their 

reliance on the GARCH variance 

forecast process, which is prone to 

volatility shocks. The proposed 

Volatility Index Futures Model and 

Variance Futures Model would address 

these issues by adopting a fundamental 

replication technique to price Volatility 

Index Futures and Variance Futures. In 

addition to providing a consistent 

modeling approach to modeling equity 

volatility products that provides 

accurate prices, this approach also offers 

natural risk offsets with the options of 

the same underlying security. As 

discussed above, collecting margins that 

are commensurate with risk helps to 

avoid collection of excessive margin 

that may stress certain Clearing 

Members’ ability to obtain liquidity to 

meet those requirements, particularly in 

periods of extreme volatility, and could 


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Federal Register / Vol. 87, No. 29 / Friday, February 11, 2022 / Notices 8071 

60 Id. 

61 17 CFR 240.17Ad–2(e)(6). 

62 17 CFR 240.17Ad–2(e)(6)(i), (iii), (v). 

63 Id. 

64 12 U.S.C. 5464(b). 

65 17 CFR 240.17Ad–2(e)(6)(i), (iii), (v). 

result in Clearing Member defaults that 

could harm investors and other Clearing 

Members. These changes would also 

provide natural offsets between S&P 500 

options, Volatility Index Futures and 

Variance Futures. Accordingly, OCC 

believes the proposed Volatility Index 

Futures Model and Variance Futures 

Model are consistent with Section 

805(b) of the Clearing Supervision 

Act.60

Consistency Rule 17Ad–22(e)(6) 

OCC also believes that the proposed 

changes are consistent with Rule 17Ad– 

22(e)(6) under the Exchange Act.61 In 

particular, paragraphs (i), (iii), and (v) of 

Rule 17Ad–22(e)(6) 62 require a covered 

clearing agency that provides central 

counterparty services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that (1) considers, and produces margin 

levels commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market; (2) 

calculates margin sufficient to cover its 

potential future exposure to participants 

in the interval between the last margin 

collection and the close out of positions 

following a participant default; and (3) 

uses an appropriate method for 

measuring credit exposure that accounts 

for relevant product risk factors and 

portfolio effects across products. As 

noted above, OCC’s current models for 

implied volatility and pricing volatility 

index futures and variance futures 

demonstrate sensitivity to sudden 

spikes in volatility, which can at times 

result in overreactive margin 

requirements that OCC believes are 

unreasonable and procyclical. The 

proposed changes are designed to 

reduce the oversensitivity of the model 

and produce margin requirements that 

are commensurate with the risks 

presented during periods of sudden, 

extreme volatility. The proposed 

changes are designed to reduce 

procyclicality in OCC’s margin 

methodology and ensure more stable 

changes in margin requirements across 

volatile market periods while 

continuing to capture changes in 

implied volatility and produce margin 

requirements that are commensurate 

with the risks presented by OCC’s 

cleared options. As a result, OCC 

believes that the proposed changes are 

reasonably designed to consider, and 

produce margin levels commensurate 

with, the risk presented by the implied 

volatility of OCC’s cleared options, as 

well as the risk presented by volatility 

index futures and variance futures; 

calculate margin sufficient to cover its 

potential future exposure to participants 

in the interval between the last margin 

collection and the close out of positions 

following a participant default; and use 

an appropriate method for measuring 

credit exposure that accounts for this 

product risk factor (i.e., implied 

volatility) and for these products (i.e., 

volatility index futures and variance 

futures) in a manner consistent with 

Rules 17Ad–22(e)(6)(i), (iii) and (v).63

For the foregoing reasons, OCC 

believes that the proposed changes are 

consistent with Section 805(b) of the 

Clearing Supervision Act 64 and Rule 

17Ad–22(e)(6) 65 under the Exchange 

Act. 

III. Date of Effectiveness of the Advance 

Notice and Timing for Commission 

Action 

The proposed change may be 

implemented if the Commission does 

not object to the proposed change 

within 60 days of the later of (i) the date 

the proposed change was filed with the 

Commission or (ii) the date any 

additional information requested by the 

Commission is received. OCC shall not 

implement the proposed change if the 

Commission has any objection to the 

proposed change. 

The Commission may extend the 

period for review by an additional 60 

days if the proposed change raises novel 

or complex issues, subject to the 

Commission providing the clearing 

agency with prompt written notice of 

the extension. A proposed change may 

be implemented in less than 60 days 

from the date the advance notice is 

filed, or the date further information 

requested by the Commission is 

received, if the Commission notifies the 

clearing agency in writing that it does 

not object to the proposed change and 

authorizes the clearing agency to 

implement the proposed change on an 

earlier date, subject to any conditions 

imposed by the Commission. 

OCC shall post notice on its website 

of proposed changes that are 

implemented. The proposal shall not 

take effect until all regulatory actions 

required with respect to the proposal are 

completed. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the advance notice is 

consistent with the Clearing 

Supervision Act. Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

OCC–2022–801 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549. 

All submissions should refer to File 

Number SR–OCC–2022–801. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the advance notice that 

are filed with the Commission, and all 

written communications relating to the 

advance notice between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of OCC and on OCC’s website at 

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

By-Laws-and-Rules48T. 

All comments received will be posted 

without change. Persons submitting 

comments are cautioned that we do not 

redact or edit personal identifying 

information from comment submissions. 

You should submit only information 

that you wish to make available 

publicly. 

All submissions should refer to File 

Number SR–OCC–2022–801 and should 

be submitted on or before March 4, 

2022. 


lotter on DSK11XQN23PROD with NOTICES1
8072 Federal Register / Vol. 87, No. 29 / Friday, February 11, 2022 / Notices 

66 17 CFR 200.30–3(a)(91). 

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

2 17 CFR 240.19b–4. 

3OCC’s By-Laws and Rules can be found on 

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

Company-Information/Documents-and-Archives/ 

By-Laws-and-Rules. 

4See Exchange Act Release No. 91079 (Feb. 8, 

2021), 86 FR 9410 (Feb. 12, 2021) (File No. SR– 

OCC–2020–016). OCC makes its STANS 

Methodology description available to Clearing 

Members. An overview of the STANS methodology 

is on OCC’s public website: https://

www.theocc.com/Risk-Management/MarginMethodology. 

5See OCC Rule 601. 

6The expected shortfall component is established 

as the estimated average of potential losses higher 

than the 99% value at risk threshold. The term 

‘‘value at risk’’ or ‘‘VaR’’ refers to a statistical 

technique that, generally speaking, is used in risk 

management to measure the potential risk of loss for 

a given set of assets over a particular time horizon. 

7Pursuant to OCC Rule 601(e)(1), OCC also 

calculates initial margin requirements for 

segregated futures accounts on a gross basis using 

the Standard Portfolio Analysis of Risk Margin 

Calculation System (‘‘SPAN’’). Commodity Futures 

Trading Commission (‘‘CFTC’’) Rule 39.13(g)(8), 

requires, in relevant part, that a derivatives clearing 

organization (‘‘DCO’’) collect initial margin for 

customer segregated futures accounts on a gross 

basis. While OCC uses SPAN to calculate initial 

margin requirements for segregated futures accounts 

on a gross basis, OCC believes that margin 

requirements calculated on a net basis (i.e., 

permitting offsets between different customers’ 

positions held by a Clearing Member in a segregated 

futures account using STANS) affords OCC 

additional protections at the clearinghouse level 

against risks associated with liquidating a Clearing 

Member’s segregated futures account. As a result, 

OCC calculates margin requirements for segregated 

futures accounts using both SPAN on a gross basis 

and STANS on a net basis, and if at any time OCC 

staff observes a segregated futures account where 

initial margin calculated pursuant to STANS on a 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.66

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–02911 Filed 2–10–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94165; File No. SR–OCC– 

2022–001] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Proposed Rule Change 

Concerning the Options Clearing 

Corporation’s Margin Methodology for 

Incorporating Variations in Implied 

Volatility 

February 7, 2022. 

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

Securities Exchange Act of 1934 

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

19b–4 thereunder,2 notice is hereby 

given that on January 24, 2022, the 

Options Clearing Corporation (‘‘OCC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by OCC. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

This proposed rule change would 

modify OCC’s margin methodology, the 

System for Theoretical Analysis and 

Numerical Simulations (‘‘STANS’’), to 

simplify the methodology, control 

procyclicality in volatility modeling, 

provide natural offsets for volatility 

products with similar characteristics, 

and build the foundation for a single, 

consistent framework to model equity 

volatility products in margin and stress 

testing. Specifically, this proposed rule 

change would: 

(1) Implement a new model for 

incorporating variations in implied volatility 

within STANS for products based on the S&P 

500 Index (such index hereinafter referred to 

as ‘‘S&P 500’’ and such proposed model 

being the ‘‘S&P 500 Implied Volatility 

Simulation Model’’) to provide consistent 

and smooth simulated volatility scenarios; 

(2) implement a new model to calculate the 

theoretical values of futures on indexes 

designed to measure volatilities implied by 

prices of options on a particular underlying 

index (such indexes being ‘‘volatility 

indexes’’; futures contracts on such volatility 

indexes being ‘‘volatility index futures’’; and 

such proposed model being the ‘‘Volatility 

Index Futures Model’’) to provide consistent 

and stable coverage across all maturities; and 

(3) replace OCC’s model to calculate the 

theoretical values of exchange-traded futures 

contracts based on the expected realized 

variance of an underlying interest (such 

contracts being ‘‘variance futures,’’ and such 

model being the ‘‘Variance Futures Model’’) 

with one that provides adequate margin 

coverage while providing offsets for hedged 

positions in the listed options market. 

The proposed changes to OCC’s 

STANS Methodology document are 

contained in confidential Exhibit 5 of 

filing SR–OCC–2022–001. Amendments 

to the existing text are marked by 

underlining and material proposed to be 

deleted is marked by strikethrough text. 

The proposed changes are described in 

detail in Item 3 below. New sections 

2.1.4 (S&P 500 Implied Volatilities 

Scenarios) and 2.1.8 (Volatility Index 

Futures), and the replacement text for 

section 2.1.7 (Variance Futures), specific 

to the proposed models, are presented 

without marking. Existing Section 2.1.4 

through 2.1.7 have been renumbered to 

reflect the addition of the new sections 

but are otherwise unchanged. The 

proposed rule change does not require 

any changes to the text of OCC’s ByLaws or Rules. All terms with initial 

capitalization that are not otherwise 

defined herein have the same meaning 

as set forth in the OCC By-Laws and 

Rules.3

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, 

OCC included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. OCC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

(1) Purpose 

Background 

STANS Overview 

STANS is OCC’s proprietary risk 

management system for calculating 

Clearing Member margin requirements.4

The STANS methodology utilizes largescale Monte Carlo simulations to 

forecast price and volatility movements 

in determining a Clearing Member’s 

margin requirement.5 STANS margin 

requirements are calculated at the 

portfolio level of Clearing Member 

accounts with positions in marginable 

securities and consists of an estimate of 

two primary components: a base 

component and a concentration/ 

dependence stress test add-on 

component. The base component is an 

estimate of a 99% expected shortfall 6

over a two-day time horizon. The 

concentration/dependence stress test 

add-on is obtained by considering 

increases in the expected margin 

shortfall for an account that would 

occur due to (i) market movements that 

are especially large and/or in which 

certain risk factors would exhibit perfect 

or zero correlations rather than 

correlations otherwise estimated using 

historical data or (ii) extreme and 

adverse idiosyncratic movements for 

individual risk factors to which the 

account is particularly exposed. OCC 

uses the STANS methodology to 

measure the exposure of portfolios of 

options and futures cleared by OCC and 

cash instruments in margin collateral, 

including volatility index futures and 

variance futures.7


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