```

[Federal Register Volume 90, Number 3 (Monday, January 6, 2025)]
[Notices]
[Pages 710-714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31610]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102057; File No. SR-OCC-2024-014]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change, as Modified by Partial 
Amendment No. 1, by The Options Clearing Corporation Concerning Its 
Process for Adjusting Certain Parameters in Its Proprietary System for 
Calculating Margin Requirements During Periods When the Products It 
Clears and the Markets It Serves Experience High Volatility

December 30, 2024.

I. Introduction

    On October 1, 2024, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2024-014, pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder, to codify OCC's process for adjusting certain 
parameters in its proprietary system for calculating margin 
requirements during periods when the products OCC clears and the 
markets it serves experience high volatility.\3\ The proposed rule 
change, as modified by Partial Amendment No. 1 (hereinafter, the 
``Proposed Rule Change'') was published for public comment in the 
Federal Register on October 9, 2024.\4\ The Commission has received no 
comments regarding the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, at 89 FR 81958.
    \4\ See Securities Exchange Act Release No. 101246 (Oct. 3, 
2024), 89 FR 81958 (Oct. 9, 2024) (File No. SR-OCC-2024-014) 
(``Notice of Filing'').
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    On November 21, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
disapprove the Proposed Rule Change.\6\ For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 101684 (Nov. 21, 
2024), 89 FR 93693 (Nov. 27, 2024) (File No. SR-OCC-2024-014).
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II. Background \7\
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    \7\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    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 financial 
transactions. As the CCP for the listed options markets and for certain 
futures in the United States, OCC is exposed to the risk that one or 
more of its Clearing Members may fail to make a payment or to deliver 
securities. OCC addresses such risk exposure, in part, by requiring its 
Clearing Members to provide collateral, including margin collateral. 
Margin is the collateral that CCPs collect to cover potential changes 
in a member's positions over a set period of time. Typically, margin is 
designed to cover such exposures during normal market conditions, which 
means that margin collateral should be sufficient to cover exposures at 
least 99 out of 100 days.\8\ OCC's methodology for calculating margin 
collateral--including daily and intra-day margin requirements for 
Clearing Members--is a collection of margin models collectively called 
the System for Theoretical Analysis and Numerical Simulations 
(``STANS''). The STANS Methodology Description is a document that 
comprehensively describes the material aspects of OCC's risk-based 
margin system, including its approach for calculating daily and intra-
day margin requirements for its Clearing Members.\9\
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    \8\ See Securities Exchange Act Release No. 78961 (Sep. 28, 
2016), 81 FR 70786, 70819 (Oct. 13, 2016) (``Standards for Covered 
Clearing Agencies'') (stating that a covered clearing agency 
generally should consider, among other things, ``whether initial 
margin meets an established single-tailed confidence level of at 
least 99 percent with respect to the estimated distribution of 
future exposure[.]'').
    \9\ See Securities Exchange Act Release No. 91079 (Feb. 8, 
2021), 86 FR 9410 (Feb. 12, 2021) (File No. SR-OCC-2020-016) 
(``STANS Methodology Approval'').
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    As a collection of models, STANS is subject to assumptions and 
limitations that are incorporated into STANS as margin model 
parameters. For example, OCC has a price return model that employs 
bounds, or ``control sets'' that are implemented under either regular 
or high volatility settings, for certain parameters that are calculated 
daily based on current market data.\10\ OCC maintains authority under 
its rules to adjust member margin requirements to protect the 
respective interests of OCC, its Clearing Members, and the public. OCC 
has established an exception process for implementing, changing, and 
terminating certain of these margin model parameters in STANS to 
control margin requirements where such parameters cause STANS to 
produce inappropriate margin requirements

[[Page 711]]

during periods of heightened volatility (the ``high-volatility 
parameter controls''). While the STANS Methodology Description 
currently includes a brief discussion of the high-volatility parameter 
controls that OCC uses,\11\ it does not provide a detailed description 
of OCC's actual process and governance for implementing, changing, and 
terminating the high-volatility parameter controls. As such, OCC is 
filing the Proposed Rule Change to codify and describe more fully in 
the STANS Methodology Description its process and governance 
surrounding the high-volatility parameter controls.
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    \10\ See Notice of Filing, notes 25-28 (describing the 
parameters to which bounds are applied).
    \11\ In the initial rule filing to introduce the STANS 
Methodology Description, OCC included a brief description of the 
high-volatility parameter controls discussion. See Securities 
Exchange Act Release No. 90763 (Dec. 21, 2020), 85 FR 85788, 85793 
(Dec. 29, 2020) (File No. SR-OCC-2020-016) (``The STANS Methodology 
Description would also describe the controls that may be placed on 
the GJR-GARCH parameters after their initial calibration. GARCH 
volatility forecasting models can be very reactive in certain market 
environments. As a result, OCC may implement parameter controls for 
risk factors and classes of risk factors, which are subject to 
periodic review and approval by the [Model Risk Working Group].'').
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    More specifically, OCC proposes to amend its existing Margin Policy 
to include material details regarding its high-volatility parameter 
control setting process.\12\ Although the Proposed Rule Change would 
amend OCC's Margin Policy, OCC states that the proposal does not 
significantly change OCC's existing high-volatility parameter control 
setting practices,\13\ which OCC indicates have been in use since at 
least 2020.\14\
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    \12\ OCC also intends to update its internal Margin Setting and 
Maintenance procedure (Exhibit 3F to the Proposed Rule Change) to 
provide greater detail about its high-volatility parameter control 
process.
    \13\ See Notice of Filing, 89 FR 81959.
    \14\ See id. at 81961-62 (describing an instance when OCC 
applied the idiosyncratic control settings in 2021). Additionally, 
various exhibits to File No. SR-OCC-2024-014 indicate OCC's use of 
high-volatility parameter control settings since 2020. For example, 
confidential Exhibit B to that filing, which is an internal OCC 
memorandum addressing high-volatility parameter control settings, 
describes an instance on March 9, 2020 when OCC implemented the 
global control settings.
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    Proposed additions to the Margin Policy describing OCC's exception 
process for setting high-volatility parameter controls include the 
following: (1) setting and reviewing regular and high-volatility 
parameter control settings; (2) monitoring the volatility of products 
being cleared and markets served, and establishing thresholds to 
escalate the results of such monitoring to senior decisionmakers; and 
(3) internal governance for implementing and terminating high-
volatility parameter control settings. The three sets of changes to 
OCC's Margin Policy are described in further detail below.

A. Setting and Reviewing Regular and High-Volatility Parameter Control 
Settings

    STANS uses large-scale Monte Carlo simulations to calculate the 
margin requirements of OCC's Clearing Members. The methodology includes 
econometric models that incorporate a number of risk factors.\15\ One 
of these econometric models, GARCH, is used to estimate the volatility 
of equity securities based on historical data. Over time, OCC has 
observed that the margin requirements produced by its GARCH model are 
strongly reactive to market movements and are considered to be 
``procyclical''--meaning that changes in margin requirements produced 
by the GARCH model may be positively correlated with the overall state 
of the market. OCC states that such procyclicality could inflate the 
margin requirements of OCC's Clearing Members beyond the related risk 
posed by Clearing Members' positions if it is not addressed during 
high-volatility periods in the market, and would potentially threaten 
the operational stability of those Clearing Members.\16\
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    \15\ OCC defines a risk factor in STANS 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 STANS are the returns on individual equity securities.
    \16\ See Notice of Filing, 89 FR 81960. For example, OCC states 
that its GARCH model produced forecasts for particular S&P 500 Index 
(``SPX'') options that were four-fold larger than the comparable 
market index, leading to margin requirement increasing by 80% 
overnight, with some margin requirements increasing ten-fold. Id. 
OCC has attempted a number of approaches to mitigate the impact of 
procyclicality, including changes to its GARCH model. See Securities 
Exchange Act Release No. 84879 (Dec. 20, 2018), 83 FR 67392, 67393 
(Dec. 28, 2018) (File No. SR-OCC-2018-014). OCC has also developed a 
new model to replace GARCH for simulating implied volatility for 
SPX-based options and volatility index futures. See Securities 
Exchange Act Release No. 95319 (July 19, 2022), 87 FR 44167 (July 
25, 2022) (File No. SR-OCC-2022-001).
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    As part of its current practice, OCC applies high-volatility 
parameter control settings to constrain the GARCH parameters 
temporarily during periods of high market volatility. OCC's price 
return model uses upper and lower bounds for parameters calculated 
daily based on market data. OCC's high-volatility parameter control 
settings consist of parameters that are bounded differently than 
regular control settings. These high-volatility parameter control 
settings, when applied to GARCH parameters after their initial 
calibration, mitigate the reactivity of the model volatility forecast 
and, in turn, generally prevent significant overestimation of Clearing 
Members' margin requirements.\17\ Depending on the circumstances, OCC 
may apply control settings to individual risk factors (i.e., 
``idiosyncratic control settings''), or to all or a class of risk 
factors (i.e., ``global control settings'').\18\
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    \17\ See Notice of Filing, 89 FR 81959. OCC also provides 
detailed examples in which high-volatility parameter control 
settings were implemented. Id. at 81962, notes 41-42.
    \18\ When OCC implements global control settings for a class or 
sector of risk factors, it is OCC's practice to blend the high 
volatility and regular control settings based on a weighted 
percentage between them. See Notice of Filing, 89 FR 81961. Such a 
``blended'' or ``weighted'' approach allows OCC's risk managers, 
when appropriate, to select bounds that provide more conservative 
margin coverage when applying high volatility control settings 
globally across multiple risk factors. See id.
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    As part of the Proposed Rule Change, OCC proposes to amend its 
Margin Policy to describe the current exception process for setting and 
reviewing both regular and high-volatility parameter control settings. 
Specifically, the proposed addition to the Margin Policy would state 
that GARCH parameters may be temporarily constrained through the 
application of idiosyncratic or global control settings. The added 
language would state that OCC's Financial Risk Management team 
(``FRM'') maintains both regular and high-volatility parameter control 
sets, which it reviews on an at-least annual basis. FRM's review of the 
high-volatility parameter control sets assesses whether they 
effectively mitigate procyclicality while remaining appropriately risk-
based. The new Margin Policy language would further state that OCC's 
Model Risk Working Group (``MRWG'') must approve any changes to the 
regular or high-volatility sets. The Proposed Rule Change would also 
provide further detail on the review of both regular and high-
volatility parameter control sets.\19\ These proposed changes to the 
Margin Policy describe current OCC processes that will remain 
unchanged.
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    \19\ The proposed language states that in the case of the 
regular control set, the review assesses whether the GARCH parameter 
bounds are appropriately risk-based, including but not limited to 
assessing whether they align with the 95th percentile of the 
parameter calibrations over the prior review period; and, in the 
case of the high-volatility parameter control sets, the review 
assesses whether they effectively mitigate procyclicality while 
remaining appropriately risk-based, including but not limited to 
whether the bounds keep the day-over-day change in 2-day expected 
shortfall coverage within a factor of approximately 1.5, assuming 
price shocks based on observed returns for top risk factors.

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[[Page 712]]

B. Monitoring Volatility of Products and Markets Served

    As part of the Proposed Rule Change, OCC proposes to amend the 
Margin Calls and Adjustments section of the Margin Policy to include 
details about how OCC currently sets volatility controls. Specifically, 
the new Control Setting details would include information about OCC's 
current use of certain monitoring thresholds related to high market 
volatility, low market liquidity, and significant increases in position 
size or concentration (``CCA Monitoring Thresholds'').\20\ The new 
details would state that the Quantitative Risk Management (``QRM'') 
team,\21\ in collaboration with Stress Testing and Liquidity Risk 
Management, will perform a review of the CCA Monitoring Thresholds to 
ensure that they remain adequate to identify periods of high market 
volatility, low market liquidity, and significant increases in position 
size or concentration. Moreover, the new language would state that any 
changes to the CCA Monitoring Thresholds must be approved by the MRWG 
and the Stress Testing Working Group.
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    \20\ The establishment of these CCA Monitoring Thresholds is 
described in OCC's internal Clearing Fund Methodology Policy and its 
internal Stress Test Reporting Procedure.
    \21\ FRM is the parent department of QRM, which is responsible 
for, among other things, monitoring the use and performance of risk 
models according to relevant procedures, maintaining risk tolerances 
and associated key risk indicators to measure and monitor risk 
models. See Securities Exchange Act Release No. 97484 (May 11, 
2023), 88 FR 31549, 31550 (May 17, 2023) (File No. SR-OCC-2023-004).
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    OCC also proposes to amend the Margin Calls and Adjustments section 
to state that QRM shall perform a monthly sensitivity analysis of the 
margin model, but may review more frequently when CCA Monitoring 
Thresholds are breached.
    These proposed changes to the Margin Policy describe current OCC 
processes that will remain unchanged.

C. Internal Governance for Implementing and Terminating High-Volatility 
Parameter Controls

    As part of the Proposed Rule Change, OCC proposes to amend its 
Margin Policy to include details about its current internal governance 
process for implementing and terminating high-volatility parameter 
control settings. The new Margin Policy details would include 
descriptions of both idiosyncratic and global control settings, and the 
circumstances under which these settings may be used.
    For example, for global control settings, FRM monitors market 
volatility on a daily basis, and escalates to the MRWG if a market 
volatility threshold is exceeded. As part of the escalation to the 
MRWG, FRM recommends whether global control settings should be applied 
to all risk factors or to a class of risk factors. MRWG approval is 
required for OCC to implement global control settings, and for OCC to 
revert back to regular control settings.\22\
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    \22\ When OCC implements global control settings, MRWG evaluates 
and selects a control setting with different weightings between the 
regular control set and high-volatility parameter control set based 
on an assessment of which blended approach generates a coverage 
level that converges with the implied volatility of the SPX. Factors 
that the MRWG considers when determining whether to revert to 
regular control settings include, but are not limited to, whether 
SPX coverage rates produced under regular control settings have 
converged with the initial coverage rates when the global control 
settings were first implemented. See Notice of Filing, 89 FR 81961.
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    Meanwhile, for idiosyncratic control settings, FRM monitors 
securities against thresholds for idiosyncratic price moves.\23\ These 
thresholds may be a tiered structure that takes into account the type 
and magnitude of OCC's risk exposure to the security, the value of the 
security, the magnitude of the price move, and the coverage rates. When 
an idiosyncratic threshold is breached, FRM Officer approval is 
required for any implementation of idiosyncratic control settings for 
an individual risk factor. An FRM Officer may also approve 
idiosyncratic control settings based on additional considerations, 
including market moves, expected shortfall risk contribution, and 
changes in Clearing Member positions. Generally, the FRM Officer will 
approve the reversion back to regular control settings once market 
volatility lessens, but in exceptional circumstances, the FRM Officer 
has the discretion to apply the idiosyncratic control settings for a 
longer or shorter period of time.
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    \23\ These ``idiosyncratic thresholds'' are defined in OCC's 
internal Margin Setting and Maintenance Procedure. OCC included a 
copy of this procedure as Exhibit 3F for the Proposed Rule Change.
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    The new language in the Margin Policy would also state that changes 
to the idiosyncratic thresholds require MRWG approval.
    These proposed changes to the Margin Policy describe current OCC 
processes that will remain unchanged.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\24\ Under the Commission's 
Rules of Practice, the ``burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \25\
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    \24\ 15 U.S.C. 78s(b)(2)(C).
    \25\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\26\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\27\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\28\
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    \26\ Id.
    \27\ Id.
    \28\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    After carefully considering the Proposed Rule Change, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission finds 
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) 
of the Exchange Act \29\ and Rules 17Ad-22(e)(2) \30\ and 17Ad-22(e)(6) 
\31\ thereunder, as described in detail below.
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(e)(2).
    \31\ 17 CFR 240.17Ad-22(e)(6).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be 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.\32\ 
Based on the review of the record, and for the reasons described below, 
OCC's proposed update to its Margin Policy in the manner described 
above is consistent with the safeguarding of securities and funds which 
are in OCC's custody or control or for which it is responsible.
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    \32\ 15 U.S.C. 78q-1(b)(3)(F).

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[[Page 713]]

    OCC's high-volatility parameter control settings provide an 
exception handling process for OCC to correct for procyclicality 
effects on the GARCH model calculation that may unreasonably inflate 
Clearing Members' margin requirements during periods of high market 
volatility.\33\ The idiosyncratic control settings allow OCC to adjust 
Clearing Member margin requirements to be commensurate with the risk of 
the products, portfolios, or markets when an individual risk factor 
becomes volatile (e.g., reflecting genuine changes in the risk of the 
Clearing Member's products or portfolio, or the markets), rather than 
allowing the Clearing Member's margin requirement to diverge from 
observed market dynamics based on the reactivity of OCC's GARCH model. 
The global control settings offer the same benefit for periods during 
which all or a class of risk factors becomes volatile. Therefore, by 
setting and reviewing high-volatility parameter control settings, OCC 
is able to reduce the likelihood that Clearing Members would become 
operationally unstable or, potentially, default as the result of 
unreasonably high margin calls. This in turn further assures the 
safeguarding of Clearing Members' collateral by reducing the likelihood 
that OCC would be forced to charge losses from a defaulting Clearing 
Member to the Clearing Fund.
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    \33\ Examples of unreasonably inflated margin requirements were 
included in backtesting data and analysis provided as part of OCC's 
confidential Exhibit 3C to File No. SR-OCC-2024-014. See Notice of 
Filing, 89 FR 81962, note 43.
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    OCC's use of CCA Monitoring Thresholds to monitor for market 
volatility is also consistent with the safeguarding of securities and 
funds which are in OCC's custody or control or for which it is 
responsible. The CCA Monitoring Thresholds are set and used for FRM to 
detect both high market volatility generally and high volatility of 
individual risk factors. When FRM observes that any of these thresholds 
are exceeded, FRM determines whether or not to recommend that OCC's 
high-volatility parameter control settings be implemented--either to 
MRWG that global controls should be implemented for market-wide 
volatility, or to the FRM Officer that idiosyncratic controls should be 
implemented for idiosyncratic volatility. OCC's monitoring and proper 
setting of these thresholds helps to lower the chances of a Clearing 
Member default resulting from margin calls that are significantly 
higher than necessary to account for the risk presented by the Clearing 
Member's products, portfolio, or the market, and thus assures the 
safeguarding of Clearing Members' collateral from any loss charges to 
OCC's Clearing Fund.
    The high-volatility parameter control setting practices described 
in the Proposed Rule Change are designed to ensure that Clearing Member 
margin requirements remain commensurate with market risk in 
circumstances when the margin model reacts unreasonably to high market 
volatility. Indeed, the confidential backtesting data that OCC provided 
to the Commission \34\ shows that no account level exceedance has been 
attributed to OCC's implementation of high-volatility parameter control 
settings. Thus, the application of the high-volatility parameter 
control settings does not appear to have reduced OCC's ability to cover 
the risk posed by Clearing Members' positions. Additionally, the 
confidential information regarding model backtesting provided by OCC 
and reviewed by the Commission demonstrates that, overall, the use of 
high-volatility parameter control settings has not prevented OCC from 
maintaining a 2-day expected shortfall coverage level of 99%.\35\ This 
demonstrates that, even with the use of the high-volatility parameter 
control settings, OCC's margin collateral remains sufficient to cover 
exposures at least 99 out of 100 days, as discussed above.\36\
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    \34\ As stated in the Margin Policy, OCC monitors margin 
sufficiency by using its ``business backtesting'' process for 
monitoring account exceedances. OCC has provided responses to 
Commission requests for backtesting data and analysis as part of its 
confidential Exhibit 3C to File No. SR-OCC-2024-014. See Notice of 
Filing, 89 FR 81962, note 43.
    \35\ Notice of Filing, 89 FR 81962.
    \36\ See supra note 8.
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    For the foregoing reasons, the Proposed Rule Change is consistent 
with the requirements of Section 17A(b)(3)(F) of the Exchange Act.\37\
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    \37\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency with Rule 17Ad-22(e)(2) under the Exchange Act

    Rule 17Ad-22(e)(2) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, provide 
for governance arrangements that, among other things, specify clear and 
direct lines of responsibility.\38\ Based on the review of the record, 
and for the reasons described below, OCC's proposed update to its 
Margin Policy in the manner described above is consistent with Rule 
17Ad-22(e)(2)(v).
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    \38\ 17 CFR 240.17Ad-22(e)(2)(v).
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    OCC's amendments to its Margin Policy describe the the arrangements 
governing the implemention, modification, and termination of high-
volatility parameter controls. Defining the MRWG, QRM, FRM, and FRM 
Officer's roles and responsibilities in these processes specifies clear 
and direct lines of responsibility. Specifically, the added language to 
the Margin Policy describes the role of FRM in monitoring for both 
market and idiosyncratic volatility. It also describes the FRM's direct 
line of responsibility to either the MRWG for global control settings 
or the FRM Officer for idiosyncratic control settings, as well as the 
roles of MRWG and the FRM Officer in approving the eventual reversion 
back to regular control settings.
    For the foregoing reasons, the Proposed Rule Change is consistent 
with Rule 17Ad-22(e)(2) under the Exchange Act.\39\
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    \39\ 17 CFR 240.17Ad-22(e)(2).
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C. Consistency With Rule 17Ad-22(e)(6) Under the Exchange Act

    Rule 17Ad-22(e)(6) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, among other things, (1) considers, and produces margin 
levels commensurate with, the risks and particular attributes of each 
relevant product, portfolio, and market \40\ and (2) calculates 
sufficient margin 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.\41\ Based on 
the review of the record, and for the reasons described below, OCC's 
proposed update to its Margin Policy in the manner described above is 
consistent with Rule 17Ad-22(e)(6).
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    \40\ 17 CFR 240.17Ad-22(e)(6)(i).
    \41\ 17 CFR 240.17Ad-22(e)(6)(iii).
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    As described above, the high-volatility parameter control settings 
provide a necessary exception process allowing OCC to mitigate a 
limitation of its GARCH models that have demonstrated extreme 
sensitivity to sudden spikes in volatility. Such reactivity can produce 
instability, and in certain instances, over- or underestimation of 
margin

[[Page 714]]

requirements.\42\ The confidential backtesting data that OCC provided 
to the Commission has shown that during instances of market volatility 
where OCC has employed either the idiosyncratic control settings or the 
global control settings, the control settings have limited Clearing 
Member margin requirements to be commensurate with market risk by 
countering procyclicality effects, while still ensuring that OCC is 
collecting appropriate margin to cover its exposure to relevant 
products, portfolios, and markets.\43\ Ensuring that OCC maintains 
processes to counter procyclicality, in turn, allows for reduced margin 
requirements that, as described above, do not degrade backtesting 
coverage. Therefore, OCC is still able to calculate sufficient margin, 
while limiting the need for ``destabilizing, procyclical changes.'' 
\44\ Further, including such high-volatility parameter control settings 
reduces the likelihood that Clearing Members would be required to 
provide additional financial resources unnecessarily, which, in turn, 
could reduce the strain on such Clearing Members during stressed market 
conditions.
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    \42\ For example, OCC's 2018 model would have increased 
aggregate margin requirements by 80 percent overnight in response to 
increased volatility observed on February 5, 2018. OCC stated that 
it believed that these margin requirements were unreasonable and 
procyclical. See Notice of Filing, 89 FR 81960; Securities Exchange 
Act Release No. 84879, at 83 FR 67392, 67393.
    \43\ OCC has provided responses to Commission requests for 
backtesting data and analysis as part of its confidential Exhibit 3C 
to File No. SR-OCC-2024-014. See Notice of Filing, 89 FR 81962, note 
43.
    \44\ See Standards for Covered Clearing Agencies, 81 FR 70819.
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    Accordingly, the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(6) under the Exchange Act.\45\
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    \45\ 17 CFR 240.17Ad-22(e)(6).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \46\ and the rules and regulations thereunder.
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    \46\ In approving the Proposed Rule Change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\47\ that the proposed rule change, as modified by Partial 
Amendment No. 1 (SR-OCC-2024-014), be, and hereby is, approved.
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    \47\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-31610 Filed 1-3-25; 8:45 am]
BILLING CODE 8011-01-P
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