66018 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices 

15 15 U.S.C. 78f(b)(5). 

16 Id. 

17 15 U.S.C. 78s(b)(3)(A). 

18 17 CFR 240.19b–4(f)(6). 19 17 CFR 200.30–3(a)(12). 

6(b)(5) 15 requirements that the rules of 

an exchange be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, to foster cooperation 

and coordination with persons engaged 

in regulating, clearing, settling, 

processing information with respect to, 

and facilitating transactions in 

securities, to remove impediments to 

and perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. 

Additionally, the Exchange believes the 

proposed rule change is consistent with 

the Section 6(b)(5) 16 requirement that 

the rules of an exchange not be designed 

to permit unfair discrimination between 

customers, issuers, brokers, or dealers. 

In particular, the Exchange believes 

that the automated handling of market 

orders to sell in no-bid series if the 

Exchange best offer is $0.50 or less 

assists with the maintenance of fair and 

orderly markets and protects investors 

and the public interest because it 

provides for automated handling of 

these orders, ultimately resulting in 

more efficient executions of these 

orders. The Exchange believes that the 

$0.50 threshold also protects investors 

and assists with the maintenance of fair 

and orderly markets by preventing 

executions of market orders to sell in 

no-bid series with higher offers at 

potentially extreme prices in series that 

are not truly no-bid. The Exchange 

believes this threshold appropriately 

reflects the interests of investors, as 

options in no-bid series with offers 

higher than $0.50 are less likely to be 

worthless, and manual handling of these 

orders will lead to better executions for 

investors than would occur through 

automatic handling. The Exchange also 

believes that the $0.50 threshold 

promotes fair and orderly markets 

because market orders to sell in no-bid 

series with offers of $0.50 or less are 

likely to be individuals seeking to close 

out a worthless position for which 

automatic handling is appropriate. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

CBOE does not believe that the 

proposed rule change will impose any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. More 

specifically, the Exchange does not 

believe that the proposed rule changes 

will impose any burden on intramarket 

competition because it will be 

applicable to all TPHs trading on the 

Exchange trading floor. In addition, the 

Exchange does not believe the proposed 

changes will impose any intermarket 

burden because the Exchange will 

operate in a similar manner only with 

a more applicable no-bid series 

threshold. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The Exchange neither solicited nor 

received comments on the proposed 

rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Because the foregoing proposed rule 

change does not: 

(i) significantly affect the protection of 

investors or the public interest; 

(ii) impose any significant burden on 

competition; and 

(iii) become operative for 30 days 

from the date on which it was filed, or 

such shorter time as the Commission 

may designate, it has become effective 

pursuant to Section 19(b)(3)(A) of the 

Act 17 and Rule 19b–4(f)(6) 18

thereunder. At any time within 60 days 

of the filing of the proposed rule change, 

the Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission will institute proceedings 

to determine whether the proposed rule 

change should be approved or 

disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the 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– 

CBOE–2014–067 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2014–067. 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 Web site (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 Web site 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 the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–CBOE– 

2014–067 and should be submitted on 

or before November 28, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.19

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–26346 Filed 11–5–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73482; File No. SR–OCC– 

2014–803] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of No Objection to Advance Notice 

Filing to Better Manage Risks 

Concentration and Other Risks 

Associated With Accepting Deposits of 

Common Stocks for Margin Purposes 

October 31, 2014. 

On July 16, 2014, the Options 

Clearing Corporation (‘‘OCC’’) filed with 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices 66019 

1 12 U.S.C. 5465(e)(1). The Financial Stability 

Oversight Council designated OCC a systemically 

important financial market utility on July 18, 2012. 

See Financial Stability Oversight Council 2012 

Annual Report, Appendix A, http://

www.treasury.gov/initiatives/fsoc/Documents/

2012%20Annual%20Report.pdf. Therefore, OCC is 

required to comply with the Payment, Clearing and 

Settlement Supervision Act and file advance 

notices with the Commission. See 12 U.S.C. 

5465(e). 

2 17 CFR 240.19b–4(n)(1). 

3Securities Exchange Act Release No. 72803 

(August 11, 2014), 79 FR 48285 (August 15, 2014) 

(SR–OCC–2014–803). OCC also filed the proposal 

contained in this advance notice as a proposed rule 

change under Section 19(b)(1) of the Act and Rule 

19b–4 thereunder, which was published for 

comment in the Federal Register on August 5, 2014. 

15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. See 

Securities Exchange Act Release No. 72717 (July 30, 

2014), 79 FR 45523 (August 5, 2014) (SR–OCC– 

2014–14). The Commission did not receive any 

comments on the proposed rule change. 

4 12 U.S.C. 5465(e)(1)(D). The Commission 

received a response with further information for 

consideration of the advance notice on September 

19, 2014, at which time a 60 day review period 

began pursuant to Sections 806(e)(1)(E) and (G) of 

the Payment, Clearing and Settlement Supervision 

Act. See 12 U.S.C. 5465(e)(1)(E) and 12 U.S.C. 

5465(e)(1)(G). 

5See Securities Exchange Act Release No. 58158 

(July 15, 2008), 73 FR 42646 (July 22, 2008) (SR– 

OCC–2007–20). 6According to OCC, consistent with the language 

contained in existing Interpretation & Policy .14, 

the Interpretation provides OCC with discretion in 

determining the amount of margin credit given to 

deposits of common stock by an individual clearing 

member as such determination would be based on 

positions held and common stock deposits made by 

such clearing member on a given business day. 

However, as discussed in the following two 

sections, OCC states that it also has developed 

certain automated processes as well as additional 

internal policies that describe how OCC presently 

intends to exercise such discretion. According to 

OCC, these additional internal policies are included 

in OCC’s collateral risk management policy, which 

will not be implemented until approval of this rule 

change with changes thereto being subject to 

additional rule filings. 

the Securities and Exchange 

Commission (‘‘Commission’’) advance 

notice SR–OCC–2014–803 pursuant to 

Section 806(e)(1) of the Payment, 

Clearing, and Settlement Supervision 

Act of 2010 (‘‘Payment, Clearing and 

Settlement Supervision Act’’) 1 and Rule 

19b–4(n)(1) under the Securities 

Exchange Act of 1934 (‘‘Act’’).2 The 

advance notice was published for 

comment in the Federal Register on 

August 15, 2014.3 On September 8, 

2014, pursuant to Section 806(e)(1)(D) of 

the Payment, Clearing and Settlement 

Supervision Act, the Commission 

required OCC to provide additional 

information concerning this advance 

notice.4 The Commission did not 

receive any comments on the advance 

notice publication. This publication 

serves as a notice of no objection to the 

changes proposed in the advance notice. 

I. Description of the Advance Notice 

According to OCC, the purpose of this 

change is to permit OCC to better 

manage concentration risk and wrongway risk associated with accepting 

deposits of common stock for margin 

purposes. In order to manage such risks, 

OCC is adding an Interpretation and 

Policy to Rule 604, which specifies the 

forms of margin assets accepted by OCC, 

that will provide OCC with discretion 

with respect to giving value to assets 

deposited by a single clearing member 

to satisfy its margin requirement(s). In 

addition, OCC is making clarifying 

amendments to an existing 

Interpretation and Policy under Rule 

604 that gives OCC discretion to not 

give value to a particular type of margin 

collateral across all clearing members. 

a. Background 

OCC Rule 604 lists the types of assets 

that clearing members may deposit with 

OCC to satisfy their margin 

requirement(s) as well as sets forth 

eligibility criteria for such assets. 

According to OCC, common stocks, 

including Exchange Traded Funds 

(‘‘ETFs’’) and Exchange Traded Notes 

(‘‘ETNs’’), are the most common form of 

margin assets deposited by clearing 

members and currently comprise 68% 

of the $60.6 billion in clearing member 

margin deposits held by OCC (not 

including deposits in lieu of margin). 

According to OCC, since 2009, OCC has 

used its System for Theoretical Analysis 

and Numerical Simulations (‘‘STANS’’), 

which is OCC’s daily automated Monte 

Carlo simulation-based margining 

methodology, to value common stocks 

deposited by clearing members as 

margin.5 The value given to margin 

deposits depends on factors that include 

the price volatility and the price 

correlation relationship of common 

stock collateral to the balance of the 

cleared portfolio. The approach used by 

STANS incentivizes clearing members 

who chose to meet their margin 

obligations with deposits of common 

stocks to choose common stocks that 

hedge their related open positions. 

According to OCC, notwithstanding 

the value STANS gives to deposits of 

common stocks, certain factors warrant 

OCC adjusting the value STANS gives to 

all clearing member margin deposits of 

a particular type of margin collateral. 

Such factors are set forth in Rule 604, 

Interpretation and Policy .14, and 

include the number of outstanding 

shares, number of outstanding 

shareholders and overall trading 

volume. OCC is proposing to add a new 

Interpretation and Policy to Rule 604 

(the ‘‘Interpretation’’) so that OCC has 

discretion to not give margin credit to a 

particular clearing member when such 

clearing member deposits a 

concentrated amount of any common 

stock and when a common stock, 

deposited as margin, presents ‘‘wrongway risk’’ to OCC. In addition, the 

Interpretation will provide OCC 

discretion to grant margin credit to a 

clearing member when it deposits 

shares of common stock that serve as a 

hedge to the clearing member’s related 

open positions and would otherwise be 

not be given margin credit.6

b. Concentrated Deposits of Common 

Stock 

OCC has determined that in the event 

it is necessary to liquidate a clearing 

member’s positions (including the 

clearing member’s margin collateral), 

OCC may be exposed to risk arising 

from a large quantity of a particular 

common stock deposited as margin by a 

clearing member. Specifically, 

depending on the relationship between 

the average daily trading volume of a 

particular security and the number of 

outstanding shares of such security 

deposited by a clearing member as 

margin, it is possible that the listed 

equities markets may not be able to 

quickly absorb all of the common stock 

OCC seeks to sell, or OCC may not be 

able to auction such securities, without 

an appreciable negative price impact. 

This occurrence, referred to by OCC as 

‘‘concentration risk,’’ is greatest when 

the number of shares being sold is large 

and the average daily trading volume is 

low. 

OCC’s existing authority to not give 

value to otherwise eligible forms of 

margin only provides OCC with the 

discretion to not give value across all 

clearing member deposits of a particular 

common stock. However, concentration 

risk may be a clearing member and 

account-specific risk. In order to 

mitigate the concentration risk of a 

single clearing member, OCC plans to 

implement automated processes to 

monitor the composition of a clearing 

member’s margin deposits. Such 

processes will identify concentration 

risk at both an account level and across 

all accounts of a clearing member. OCC 

is adding the Interpretation so that OCC 

has discretion to limit the margin credit 

granted to an individual clearing 

member that maintains a concentrated 

margin deposit of otherwise eligible 

common stock. 

According to OCC, for reasons stated 

above, OCC considers a common stock’s 

average daily trading volume and the 

number of shares a clearing member 

deposited as margin to be the two most 

significant factors when making a 

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66020 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices 

7According to OCC, since a 2-day limit is first 

checked at each account, it is possible that a 

clearing member with multiple accounts may have 

more than 2-days of a given common stock on 

deposit in aggregate. To control this condition, a 

final check is done on the aggregate amount of 

shares held by a clearing member across all of its 

accounts. For example, if a particular clearing 

member has three accounts each holding 2-days 

volume of a specific common stock, the clearing 

member check would identify that the member was 

holding six days of volume in aggregate. To mitigate 

this risk, an add-on charge equal to the market 

value of four days of volume would be applied to 

all accounts holding that security on a pro-rata 

basis. 

8This standard is based on the provisions of OCC 

Rule 215(a)(5). 

9OCC believes that by providing such 

information clearing members will be better able to 

adjust their margin deposits at OCC to conform to 

the proposed change if it is approved. 

10According to OCC, the ‘‘delta equivalent 

position’’ is the equivalent number of underlying 

shares represented by the aggregation of cleared 

products on that same underlying instrument. This 

value is calculated using the ‘‘delta’’ of the option 

or futures contract, which is the ratio between the 

theoretical change in the price of the options or 

futures contract to the corresponding change in the 

price of an underlying asset. Thus, delta measures 

the sensitivity of an options or futures contract 

price to changes in the price of the underlying asset. 

For example, a delta of +0.7 means that for every 

$1 increase in the price of the underlying stock, the 

price of a call option will increase by $0.70. Delta 

for an option or future can be expressed in shares 

decision to limit margin credit due to 

concentration risk. Accordingly, OCC 

will not give margin credit to clearing 

member margin deposits of a particular 

common stock in respect of a particular 

account when the deposited amount of 

such common stock is in excess of two 

times the average daily trade volume of 

such common stock over the most 

recent three month period. OCC’s 

systems will continually assess the 

composition of clearing member margin 

deposits for each account maintained by 

the clearing member, including intraday collateral substitutions in such 

accounts, to determine if a clearing 

member has a margin deposit with a 

concentrated amount of common stock. 

With respect to a given account, OCC’s 

systems will automatically set 

appropriate limits on the amount of a 

particular common stock for which a 

clearing member may be given margin 

credit for any one of a its tier accounts. 

In addition, and with respect to all of a 

clearing member’s accounts, OCC will 

impose an add-on margin charge if, in 

aggregate, a clearing member deposits a 

concentrated amount of a particular 

common stock as margin across all of its 

accounts. The add-on margin charge 

will operate to negate the margin credit 

given to the concentrated margin 

deposit, and will be collected, when 

applicable, as part of OCC’s standard 

morning margin process. OCC will 

assess the add-on margin charge across 

all of a clearing member’s accounts on 

a pro-rata basis (based on the amount of 

the particular common stock in each of 

a clearing member’s accounts).7

According to OCC, OCC staff has been 

monitoring concentrated common stock 

positions, assessing the impact of the 

proposed change described in this filing 

and contacting clearing members 

affected by the proposed change. OCC 

believes that clearing members will be 

able to comply with the proposed 

change without making significant 

changes to their day-to-day business 

operations. In December 2013, an 

information memo was posted to inform 

all members of the upcoming change. 

According to OCC, since January 2014, 

OCC staff has been in contact with any 

clearing member that would be affected 

by the proposed change. On a weekly 

basis, any clearing member that would 

see a reduction of 10% or more of its 

collateral value is contacted and 

provided an explanation of the policy 

and a list of concentrated positions 

observed in this analysis. On a monthly 

basis, all clearing members exhibiting 

any concentration risk are contacted to 

provide an explanation of the proposed 

policy and a list of concentrated 

positions. In both cases, clearing 

members are encouraged to proactively 

reduce concentrated positions to 

conform to the proposed policy. As of 

June 2014, twenty-five members would 

be affected. Implementation of the 

Interpretation would result in 

disallowing $1.2 billion in collateral 

value and result in margin calls for six 

members totaling $710 million. 

Moreover, in July 2014, OCC made an 

automated report concerning 

concentrated margin deposits of 

common stock available to all clearing 

members. 

c. Wrong-Way Risk 

OCC also will use the Interpretation to 

address the risk that the common stock 

a clearing member has deposited as 

margin and which is issued by the 

clearing member itself or an affiliate of 

the clearing member will lose value in 

the event the clearing member providing 

such margin defaults, which is known 

as ‘‘wrong-way risk.’’ According to OCC, 

wrong-way risk occurs when a clearing 

member makes a deposit of common 

stock issued by it or an affiliate and, in 

the event the clearing member defaults, 

the clearing member’s common stock 

margin deposit will also be losing value 

at the same time because there is likely 

to be a strong correlation between the 

clearing member’s creditworthiness and 

the value of such common stock. In 

order to address wrong-way risk, the 

Interpretation will implement 

automated systems that will not give 

margin credit to a clearing member that 

deposits common stock issued by such 

clearing member or an affiliate as 

margin collateral. OCC will define 

‘‘affiliate’’ broadly in the Interpretation 

to include any entity with direct or 

indirect equity ownership of 10% of the 

clearing member, or any entity for 

which the clearing member holds 10% 

of the direct or indirect equity 

ownership.8

OCC has addressed the impact of the 

change designed to address wrong-way 

risk. As of June 2014, there were 73 

clearing members whose parent or an 

affiliate has issued securities trading on 

U.S. exchanges. As of June 2014, there 

are six clearing members that would be 

affected by virtue of having made 

margin deposits of their own or an 

affiliate’s common stock. In total, these 

shares equaled $132 million and 

accounted for less than one half of one 

percent of the total market value of 

valued securities pledged as margin at 

OCC. In July 2014, OCC made 

information available to each clearing 

member that indicates which of its 

deposits of common stock would not 

receive margin credit under the 

proposed change due to wrong-way risk 

considerations, as described above.9

d. Deposits That Hedge Open Positions 

In addition to the above, OCC also 

will include language in the 

Interpretation so that it has discretion to 

give margin credit to common stock 

deposited as margin that would 

otherwise not be given margin credit in 

circumstances when such common 

stock acts as a hedge (i.e., the member 

holds an equivalent short position in 

cleared contracts on the same 

underlying security). This condition 

will be checked in both the account and 

clearing member level. For example, if 

a clearing member deposits the common 

stock of an affiliate as margin collateral, 

which, pursuant to the above, would 

ordinarily not be given value for the 

purposes of granting margin credit, OCC 

may nevertheless give value to such 

common stock for the purposes of 

granting margin credit to the extent such 

common stock acts as a hedge against 

open positions of the clearing member. 

In this case, a decline in the value of the 

margin deposit would be wholly or 

partially offset by an increase in the 

value in the open position. Moreover, in 

such a situation, OCC will 

systematically limit the margin credit 

granted to the lesser of a multiple of the 

daily trading volume or the ‘‘delta 

equivalent position’’ 10 for the particular 

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Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices 66021 

of the underlying asset. For example, a standard put 

option with a delta of ¥.45 would have a delta of 

¥45 shares, because the unit of trading is 100 

shares. 

11Assume, for example, an average daily trade 

volume of 250 shares, a threshold of 2 times the 

average daily trade volume, and a delta of ¥300 

shares for the options on a particular security in a 

particular account. A position of 700 shares that did 

not hedge any short options or futures would 

receive credit for only 500 shares (i.e., 2 times the 

average daily trade volume). If the net long position 

in the account, when combined with the delta of 

short option and futures position, were only 400, 

credit would be given for the entire 700 shares since 

the delta equivalent position is below the 500 share 

threshold. However, if the option delta were +300, 

the net long position would be 1000, and credit 

would only be given for 500 shares because the 

delta equivalent position would exceed the 500 

share threshold. 

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

13 Id. 

14 12 U.S.C. 5464(a)(2). 

15 12 U.S.C. 5464(b). 

16 12 U.S.C. 5464(a)(2). 

17See Rule 17Ad–22 of the Act. 17 CFR 

240.17Ad–22. Securities Exchange Act Release No. 

68080 (October 22, 2012), 77 FR 66220 (November 

2, 2012) (S7–08–11). 

18See Securities Exchange Act Release No. 68080 

(October 22, 2012), 77 FR 66220 (November 2, 2012) 

(S7–08–11). 

19 12 U.S.C. 5464(b). 

20 17 CFR 240.17Ad–22(b)(2). 

21 Id. 

22See Rule 604, Interpretation and Policy .15 

(providing OCC discretion to disapprove as margin 

collateral securities that meet certain factors, 

including trading volume, number of outstanding 

shareholder, number of outstanding shares, 

volatility and liquidity). 

23 17 CFR 240.17Ad–22(b)(2). 

24 12 U.S.C 5464(b); See also 12 U.S.C. 5464(a). 

common stock, taking into account the 

hedging position.11 OCC believes that 

this policy will further encourage 

clearing members to deposit margin 

collateral that hedges their related open 

positions and is in line with the 

valuation methods within STANS. This 

policy will also facilitate OCC’s 

management of its and its participants’ 

credit exposure as well as the 

liquidation of a clearing member’s 

portfolio should the need arise. 

e. Other Proposed Changes 

OCC also will make certain clarifying 

changes in order to accommodate the 

adoption of the Interpretation into its 

Rules. Primarily, OCC is adding 

language to OCC Rule 604, 

Interpretation and Policy .14, to clarify 

that such Interpretation and Policy 

concerns OCC’s authority to not give 

value to certain margin deposits for all 

clearing members (whereas the 

Interpretation applies to particular 

clearing member(s)). In addition, OCC is 

removing language from OCC Rule 604, 

Interpretation and Policy .14, to 

improve readability as well as to remove 

‘‘factors’’ concerning number of shares 

and affiliates since OCC’s authority with 

respect to such factors will be more 

clearly described in the Interpretation. 

Finally, OCC is renumbering the 

Interpretations and Policies of Rule 604 

in order to accommodate the adoption 

of the Interpretation. 

II. Discussion and Commission 

Findings 

Although the Payment, Clearing and 

Settlement Supervision Act does not 

specify a standard of review for an 

advance notice, the Commission 

believes its stated purpose is 

instructive.12 The stated purpose 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 (‘‘FMU’’) and strengthening the 

liquidity of systemically important 

FMUs.13

Section 805(a)(2) of the Payment, 

Clearing and Settlement Supervision 

Act 14 authorizes the Commission to 

prescribe risk management standards for 

the payment, clearing, and settlement 

activities of designated clearing entities 

and financial institutions engaged in 

designated activities for which it is the 

supervisory agency or the appropriate 

financial regulator. Section 805(b) of the 

Payment, Clearing and Settlement 

Supervision Act 15 states that the 

objectives and principles for the 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 Payment, Clearing and 

Settlement Supervision Act 16 and the 

Act (‘‘Clearing Agency Standards’’).17

The Clearing Agency Standards became 

effective on January 2, 2013 and 

establish, among other things, minimum 

requirements regarding how registered 

clearing agencies must maintain 

effective risk management procedures 

and controls.18 Therefore, it is 

appropriate for the Commission to 

review advance notices against these 

Clearing Agency Standards and the 

objectives and principles of these risk 

management standards as described in 

Section 805(b) of the Payment, Clearing 

and Settlement Supervision Act.19

The proposal in this advance notice is 

consistent with Clearing Agency 

Standards, Rule17Ad–22(b)(2) of the 

Act.20 Rule 17Ad–22(b)(2) of the Act 21

requires a registered clearing agency 

that performs central counterparty 

services to, among other things, 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to use margin 

requirements to limit its credit 

exposures to participants under normal 

market conditions. This proposal is 

consistent with this rule because it is 

reasonably designed to permit OCC to 

use margin requirements to limit its 

credit exposures to clearing members 

under normal market conditions in two 

ways. First, it is reasonably designed to 

limit OCC’s credit exposures to clearing 

members whose collateral portfolios 

could present concentration risk. 

Specifically, it addresses concentration 

risk by particular clearing member and 

by particular account by giving OCC 

discretion to disapprove as margin 

collateral certain securities, based on 

the number of shares deposited, by 

particular clearing member and by 

particular account, while also 

considering deposits that hedge open 

positions. It also clarifies that OCC’s 

existing authority to not give value to 

certain margin deposits applies to all 

clearing members, as opposed to 

particular clearing members.22 Second, 

it is reasonably designed to limit OCC’s 

credit exposures to clearing members 

whose collateral portfolios could 

present wrong-way risk. Specifically, it 

addresses wrong-way risk presented by 

clearing members who deposit as 

margin securities that are issued by the 

clearing member itself or by an affiliate 

of the clearing member. It addresses this 

type of wrong-way risk by giving OCC 

discretion to disapprove as margin 

collateral, with respect to a particular 

clearing member, any security issued by 

such clearing member or by an affiliate 

of such clearing member, while also 

considering deposits that hedge open 

positions. 

Rule 17Ad–22(b)(2) of the Act 23 also 

requires a registered clearing agency 

that performs central counterparty 

services to, among other things, 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to use risk-based 

models and parameters to set margin 

requirements. This proposal is 

consistent with this rule because it 

permits OCC to use risk-based models 

and parameters to set margin 

requirements in a way that takes into 

account concentration risk and wrongway risk, as described above. 

The proposal in this advance notice 

meets the objectives and principles 

described in Section 805(b) of the 

Payment, Clearing and Settlement 

Supervision Act.24 The changes to 

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66022 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices 

25 12 U.S.C. 5465(e)(1)(I). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 73178 

(Sep. 22, 2014), 79 FR 58012 (‘‘Notice’’). 

4 In Amendment No. 1, Nasdaq corrected a 

typographical error, deleting the second use of the 

word ‘‘not’’ in the following statement throughout 

the filing: ‘‘ADRs not listed on an exchange that is 

not a member of ISG or a party to a comprehensive 

surveillance sharing agreement with the Exchange.’’ 

See infra note 10 (setting forth the full 

representation, as amended). Because Amendment 

No. 1 is a technical amendment that does not raise 

unique or novel regulatory issues, Amendment No. 

1 is not subject to notice and comment. 

5According to the Exchange, the Trust is 

registered with the Commission as an investment 

company under the Investment Company Act of 

1940 (‘‘1940 Act’’) and has filed a registration 

statement on Form N–1A (‘‘Registration Statement’’) 

with the Commission. The Exchange states that the 

Trust has obtained, or will obtain prior to listing 

Shares of the Fund on the Exchange, an order from 

the Commission granting certain exemptive relief to 

the Trust under the 1940 Act. See Post-Effective 

Amendment No. 14 to the Registration Statement on 

Form N–1A for the Trust, dated July 16, 2014 (File 

Nos. 333–179562 and 811–22668). See Application 

for an Order (Jun. 16, 2014) (File No. 812–14322). 

6The Exchange states that the Adviser is not a 

broker-dealer and is not affiliated with the any 

broker-dealer. The Exchange represents that in the 

event (a) the Adviser becomes newly affiliated with 

a broker-dealer or registers as a broker-dealer, or (b) 

any new adviser or sub-adviser is a registered 

broker-dealer or becomes affiliated with a brokerdealer, the Adviser, new adviser, or new subadviser, as the case may be, will implement a fire 

wall with respect to its relevant personnel and/or 

such broker-dealer affiliate, as applicable, regarding 

access to information concerning the composition 

or changes to the portfolio, and the Adviser, new 

adviser, or new sub-adviser, as the case may be, will 

be subject to procedures designed to prevent the use 

and dissemination of material, non-public 

information regarding the portfolio. The Exchange 

also states that the Adviser does not currently 

intend to become newly affiliated with any brokerdealer, and the Fund does not currently intend to 

use a sub-adviser. 

7The Commission notes that additional 

information regarding the Trust, the Fund, and the 

Shares, including investment strategies, risks, 

creation and redemption procedures, calculation of 

net asset value (‘‘NAV’’), fees, portfolio holdings 

disclosure policies, distributions, and taxes, among 

other things, can be found in the Notice and 

Registration Statement, as applicable. See supra 

notes 3 and 5, respectively. 

8The term ‘‘under normal market conditions’’ as 

used herein includes, but is not limited to, the 

absence of adverse market, economic, political or 

other conditions, including extreme volatility or 

trading halts in the securities markets or the 

financial markets generally; operational issues 

causing dissemination of inaccurate market 

information; or force majeure type events such as 

systems failure, natural or man-made disaster, act 

of God, armed conflict, act of terrorism, riot or labor 

disruption, or any similar intervening circumstance. 

In periods of extreme market disturbance, the Fund 

may take temporary defensive positions by 

overweighting its portfolio in cash/cash-like 

instruments; however, to the extent possible, the 

Adviser would continue to seek to achieve the 

Fund’s investment objectives. 

9ADRs are receipts, typically issued by a bank or 

trust issuer, which evidence ownership of 

underlying securities issued by a non-U.S. issuer. 

For ADRs, the depository is typically a U.S. 

financial institution and the underlying securities 

are issued by a non-U.S. issuer. ADRs are not 

necessarily denominated in the same currency as 

their underlying securities. 

OCC’s margin policy, as described 

above, are designed to reduce the risk 

that clearing member margin assets 

would be insufficient should OCC need 

to use such assets to close-out positions 

of a defaulted clearing member. The 

changes are also designed to facilitate 

OCC to timely meet its settlement 

obligations because the change will 

diminish the likelihood that a large 

percentage of the value of a defaulting 

clearing member’s margin assets would 

not be available to OCC to cover losses 

in the event of a clearing member 

default. Therefore, the proposal (i) 

promotes robust risk management 

(including risk management of 

concentration risk and wrong-way risk), 

(ii) promotes safety and soundness, (iii) 

reduces systemic risks (including those 

caused by concentration risk and wrongway risk), and (iv) supports the stability 

of the broader financial system. 

III. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Payment, 

Clearing and Settlement Supervision 

Act,25 that the Commission DOES NOT 

OBJECT to the proposal in OCC’s 

advance notice (SR–OCC–2014–803) 

and OCC is AUTHORIZED to implement 

the proposal as of the date of this notice 

or the date of an order by the 

Commission approving a proposed rule 

change that reflects rule changes that are 

consistent with the proposal in this 

advance notice (SR–OCC–2014–14), 

whichever is later. 

By the Commission. 

Kevin O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–26344 Filed 11–5–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73480; File No. SR– 

NASDAQ–2014–090] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Order 

Granting Approval of Proposed Rule 

Change, as Modified by Amendment 

No. 1 Thereto, Relating to the Listing 

and Trading of Shares of the Validea 

Market Legends ETF of the ETF Series 

Solutions ETF Trust 

October 31, 2014. 

I. Introduction 

On September 11, 2014, The 

NASDAQ Stock Market LLC (‘‘Nasdaq’’ 

or ‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

list and trade the shares (‘‘Shares’’) of 

the Validea Market Legends ETF 

(‘‘Fund’’) under Nasdaq Rule 5735. The 

proposed rule change was published for 

comment in the Federal Register on 

September 26, 2014.3 The Commission 

received no comments on the proposed 

rule change. On October 28, 2014, the 

Exchange filed Amendment No. 1 to the 

proposed rule change.4 The Commission 

is approving the proposed rule change, 

as modified by Amendment No. l 

thereto. 

II. Description of Proposed Rule Change 

The Exchange proposes to list and 

trade the Shares pursuant to Nasdaq 

Rule 5735, which governs the listing 

and trading of Managed Fund Shares on 

the Exchange. The Shares will be 

offered by the ETF Series Solutions 

Trust (‘‘Trust’’), which was established 

as a Delaware business trust on 

February 9, 2012.5 The Fund is a series 

of the Trust. Validea Capital 

Management, LLC will be the 

investment adviser (‘‘Adviser’’) to the 

Fund.6 Quasar Distributors, LLC will be 

the principal underwriter and 

distributor of the Fund’s Shares. U.S. 

Bancorp Fund Services, LLC (‘‘USBFS’’) 

will act as the administrator, accounting 

agent, and transfer agent to the Fund. 

U.S. Bank National Association will act 

as the custodian to the Fund. 

The Exchange has made the following 

representations and statements in 

describing the Fund and its principal 

investments, other investments, and 

investment restrictions.7

Principal Investments of the Fund 

According to the Exchange, the 

Fund’s primary investment objective is 

to achieve capital appreciation, with a 

secondary focus on income. The Fund is 

a non-diversified, actively-managed 

exchange-traded fund (‘‘ETF’’) that will 

pursue its objectives by investing 

primarily at least 80% of its assets 

under normal market conditions,8 in 

U.S. exchange-listed equity securities of 

U.S. companies and foreign equity 

securities traded on a U.S. exchange as 

American Depositary Receipts 

(‘‘ADRs’’).9 The Fund’s investment in 

ADRs may include ADRs representing 

companies in emerging markets. With 

respect to its investments in exchangelisted common stocks and ADRs, the 

Fund will invest in such securities that 

trade in markets that are members of the 

Intermarket Surveillance Group (‘‘ISG’’). 

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