[Federal Register Volume 87, Number 96 (Wednesday, May 18, 2022)]
[Notices]
[Pages 30284-30286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10616]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94900; File No. SR-OCC-2022-001]


Self-Regulatory Organizations; Options Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change Concerning the Options Clearing 
Corporation's Margin Methodology for Incorporating Variations in 
Implied Volatility

May 12, 2022.

I. Introduction

    On January 24, 2022, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2022-001 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to change 
quantitative models related to certain volatility products.\3\ The 
Proposed Rule Change was published for public comment in the Federal 
Register on February 11, 2022.\4\ The Commission has received comments 
regarding the Proposed Rule Change.\5\
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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 87 FR 8072.
    \4\ Securities Exchange Act Release No. 94165 (Feb. 7, 2022), 87 
FR 8072 (Feb. 11, 2022) (File No. SR-OCC-2022-001) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2022-801) 
(``Advance Notice'') with the Commission pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the 
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 
240.19b-4, respectively. The Advance Notice was published in the 
Federal Register on February 11, 2022. Securities Exchange Act 
Release No. 94166 (Feb. 7, 2022), 87 FR 8063 (Feb. 11, 2022) (File 
No. SR-OCC-2022-801).
    \5\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-occ-2022-001/srocc2022001.htm. Since 
the proposal contained in the Proposed Rule Change was also filed as 
an advance notice, all public comments received on the proposal are 
considered regardless of whether the comments are submitted on the 
Proposed Rule Change or the Advance Notice.
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    On March 24, 2022, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\7\ This order 
institutes proceedings, pursuant to Section 19(b)(2)(B) of the

[[Page 30285]]

Exchange Act,\8\ to determine whether to approve or disapprove the 
Proposed Rule Change.
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 94165 (Feb. 7, 2022), 87 
FR 8072 (Feb. 11, 2022) (File No. SR-OCC-2022-001).
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    OCC is a central counterparty (``CCP''), which means it interposes 
itself as the buyer to every seller and seller to every buyer for 
financial transactions. As the CCP for the listed options markets in 
the U.S., as well as for certain futures, OCC is exposed to the risk 
that one or more of its members may fail to make a payment or to 
deliver securities. OCC addresses such exposures, in part, by requiring 
its members to provide collateral, including margin collateral. Margin 
is the collateral that CCPs, like OCC, 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 
exposures at least 99 out of 100 days.
    Margin requirements may fluctuate from day to day; however, CCPs 
seek to reduce fluctuations that could otherwise impose systemic risk. 
For example, if a CCP collects too little margin during relatively 
stable market conditions, then it would need to collect significantly 
more margin during stressed market conditions. Margin requirements that 
are strongly reactive to market movements are considered to be 
``procyclical.'' By contrast, a CCP may collect slightly more margin 
during quiet times to reduce the additional strain it places on members 
during times of market stress.
    OCC's process for setting margin requirements considers several 
distinct risk factors, including volatility. OCC's current models for 
estimating the impact of volatility on member positions have a number 
of limitations that may result in procyclical margin requirements. OCC 
is proposing to change its models to reduce the level of procyclicality 
in its margin requirements caused by changes in volatility. The changes 
OCC is proposing would also provide for offsets between products based 
on the same underlying asset. Based on data provided by OCC, the 
proposed model changes would likely increase margin requirements 
slightly overall, which, in turn, would reduce the additional amount of 
margin OCC would need to collect during periods of market stress.
    The proposed changes to OCC's models are a continuation of 
volatility model changes that OCC has implemented over the past several 
years. In 2015, the Commission approved OCC's proposal to more broadly 
incorporate variations in implied volatility in OCC's margin 
methodology.\9\ In 2018, OCC modified its implied volatility model to 
address issues highlighted by large spikes in volatility.
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    \9\ See Securities Exchange Act Release No. 76781 (Dec. 28, 
2015), 81 FR 135 (Jan. 4, 2016) (File No. SR-OCC-2015-016).
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    As described in the Notice of Filing,\10\ OCC proposes to change 
three quantitative models related to certain volatility products. 
Specifically, OCC proposes the following changes:
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    \10\ See Notice of Filing, supra note 4.
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    (1) Implement a new model for incorporating variations in implied 
volatility within OCC's margin methodology for products based on the 
S&P 500 Index;
    (2) implement a new model to margin futures on volatility indexes; 
\11\ and
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    \11\ A volatility index is an index designed to measure the 
volatiles implied by the prices of options on an underlying index.
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    (3) replace OCC's model to for margining variance futures.\12\
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    \12\ A variance future is an exchange-traded futures contract 
based on the expected realized variance of an underlying interest.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \13\ to determine whether the Proposed 
Rule Change should be approved or disapproved. Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the Proposed Rule Change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
providing the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\14\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
Proposed Rule Change's consistency with Section 17A of the Exchange 
Act,\15\ and the rules thereunder, including the following provisions:
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    \14\ Id.
    \15\ 15 U.S.C. 78q-1.
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    <bullet> Section 17A(b)(3)(F) of the Exchange Act,\16\ which 
requires, among other things, that the rules of a clearing agency must 
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; and
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    <bullet> Rule 17Ad-22(e)(2) under the Exchange Act,\17\ which 
requires a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to provide 
for governance arrangements that, among other things, (1) are clear and 
transparent,\18\ (2) clearly prioritize the safety and efficiency of 
the covered clearing agency,\19\ and (3) support the public interest 
requirements in Section 17A of the Exchange Act (15 U.S.C. 78q-1) 
applicable to clearing agencies, and the objectives of owners and 
participants.\20\
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    \17\ 17 CFR 240.17Ad-22(e)(2).
    \18\ 17 CFR 240.17Ad-22(e)(2)(i).
    \19\ 17 CFR 240.17Ad-22(e)(2)(ii).
    \20\ 17 CFR 240.17Ad-22(e)(2)(iii).
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    <bullet> Rule 17Ad-22(e)(3) under the Exchange Act,\21\ which 
requires a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to maintain 
a sound risk management framework for comprehensively managing legal, 
credit, liquidity, operational, general business, investment, custody, 
and other risks that arise in or are borne by the covered clearing 
agency, which, among other things, includes risk management policies, 
procedures, and systems designed to identify, measure, monitor, and 
manage the range of risks that arise in or are borne by the covered 
clearing agency, that are subject to review on a specified periodic 
basis and approved by the board of directors annually.\22\
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    \21\ 17 CFR 240.17Ad-22(e)(3).
    \22\ 17 CFR 240.17Ad-22(e)(3)(i).
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    <bullet> Rule 17Ad-22(e)(4) under the Exchange Act,\23\ which 
requires a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes.
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    \23\ 17 CFR 240.17Ad-22(e)(4).
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    <bullet> Rule 17Ad-22(e)(6) under the Exchange Act,\24\ which 
requires a covered clearing agency establish, implement, maintain, and 
enforce

[[Page 30286]]

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 \25\ (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; \26\ and uses 
an appropriate method for measuring credit exposure that accounts for 
relevant product risk factors and portfolio effects across 
products.\27\
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    \24\ 17 CFR 240.17Ad-22(e)(6).
    \25\ 17 CFR 240.17Ad-22(e)(6)(i).
    \26\ 17 CFR 240.17Ad-22(e)(6)(iii).
    \27\ 17 CFR 240.17Ad-22(e)(6)(v).
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    <bullet> Rule 17Ad-22(e)(23) under the Exchange Act,\28\ which 
requires a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to provide 
for, among other things, sufficient information to enable participants 
to identify and evaluate the risks, fees, and other material costs they 
incur by participating in the covered clearing agency.\29\
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    \28\ 17 CFR 240.17Ad-22(e)(23).
    \29\ 17 CFR 240.17Ad-22(e)(23)(ii).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Exchange 
Act,\30\ Rule 17Ad-22(e)(6) under the Exchange Act,\31\ or any other 
provision of the Exchange Act, or the rules and regulations thereunder. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4(g) under the Exchange Act,\32\ any request for an opportunity to 
make an oral presentation.\33\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(e)(6).
    \32\ 17 CFR 240.19b-4(g).
    \33\ Section 19(b)(2) of the Exchange Act grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by June 8, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
June 22, 2022.
    The Commission asks that commenters address the sufficiency of 
OCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice of Filing,\34\ in addition to any other comments 
they may wish to submit about the Proposed Rule Change.
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    \34\ See Notice of Filing, supra note 4.
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    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f082859c95dd939f9d9d959e8483b0839593de979f86"><span class="__cf_email__" data-cfemail="2e5c5b424b034d4143434b405a5d6e5d4b4d00494158">[email protected]</span></a>. Please include 
File Number SR-OCC-2022-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2022-001. 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 Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    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-2022-001 and 
should be submitted on or before June 8, 2022. Rebuttal comments should 
be submitted by June 22, 2022.
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    \35\ 17 CFR 200.30-3(a)(31).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10616 Filed 5-17-22; 8:45 am]
BILLING CODE 8011-01-P


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