Document ID: SEC-2020-1973-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2020-12-14T05:00Z

[Federal Register Volume 85, Number 240 (Monday, December 14, 2020)]
[Notices]
[Pages 80829-80831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27394]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90603; File No. SR-OCC-2020-015]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning the Implementation 
of New Sufficiency Scenarios in The Options Clearing Corporation's 
Stress Testing Inventory

December 8, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on December 2, 2020, The Options Clearing 
Corporation (``OCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by OCC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by OCC would implement additional stress 
test scenarios designed to test the sufficiency of OCC's prefunded 
financial resources. The proposed changes to OCC's Comprehensive Stress 
Testing & Clearing Fund Methodology, and Liquidity Risk Management 
Description (``Methodology Description'') are included in Exhibit 5 of 
filing SR-OCC-2020-015. Material proposed to be added is underlined and 
material proposed to be deleted is marked in strikethrough text. All 
terms with initial capitalization that are not defined herein have the 
same meaning as set forth in the OCC By-Laws and Rules.\3\
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    \3\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    (1) Purpose
Background
    OCC performs daily stress testing using a wide range of scenarios, 
both hypothetical and historical,\4\ designed to serve multiple 
purposes.\5\ OCC's stress testing inventory contains scenarios designed 
to: (1) Determine whether the financial resources collected from all 
Clearing Members collectively are adequate to cover OCC's risk 
tolerance (``Adequacy Scenarios''); (2) establish the monthly size of 
the Clearing Fund at an amount necessary to cover losses arising from 
the default of the two Clearing Member Groups that would potentially 
cause the largest aggregate credit exposure as a result of a 1-in-80 
year hypothetical market event (``Sizing Scenarios''); (3) measure the 
exposure of the Clearing Fund to the portfolios of individual Clearing 
Member Groups and determine whether any such exposure is sufficiently 
large as to necessitate OCC calling for additional resources to guard 
against potential losses under a wide range of stress scenarios, 
including extreme but plausible market conditions (``Sufficiency 
Scenarios''); and (4) monitor and assess the size of OCC's prefunded 
financial resources against a wide range of stress scenarios that may 
include newly developed stress scenarios for evaluation as well as 
extreme but implausible scenarios (``Informational Scenarios''). 
Adequacy and Informational Scenarios are not used directly to size the 
Clearing Fund or drive calls for additional financial resources from 
OCC's Clearing Members.
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    \4\ OCC's historical scenarios are intended to replicate 
historical events in current market conditions, which includes the 
set of currently existing securities, their prices, and volatility 
levels. These scenarios provide OCC with information regarding pre-
defined reference points determined to be relevant benchmarks for 
assessing OCC's exposure to Clearing Members and the adequacy of its 
financial resources. OCC's hypothetical scenarios represent events 
in which market conditions change in ways that have not yet been 
observed. These hypothetical scenarios are derived using statistical 
methods (e.g., draws from estimated multivariate distributions) or 
created based on a mix of statistical techniques and expert judgment 
(e.g., a 15% decline in market prices and 50% increase in 
volatility).
    \5\ On July 26, 2018, the Commission issued a Notice of No 
Objection to an advance notice by OCC concerning the adoption of a 
new stress testing and Clearing Fund methodology. See Securities 
Exchange Act Release No. 83714 (July 26, 2018), 83 FR 37570 (August 
1, 2018) (SR-OCC-2018-803) (Notice of No Objection to Advance 
Notice, as Modified by Amendments No. 1 and 2, Concerning Proposed 
Changes to The Options Clearing Corporation's Stress Testing and 
Clearing Fund Methodology). On July 27, 2018, the Commission 
approved a proposed rule change by OCC concerning the same proposal. 
See Securities Exchange Act Release No. 83735 (July 27, 2018), 83 FR 
37855 (August 2, 2018) (SR-OCC-2018-008) (Order Approving Proposed 
Rule Change, as Modified by Amendments No. 1 and 2, Related to The 
Options Clearing Corporation's Stress Testing and Clearing Fund 
Methodology).
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    Pursuant to OCC Rule 609 and OCC's Clearing Fund Methodology 
Policy, if any of OCC's Sufficiency Scenarios identifies exposures that 
exceed 75% of the current Clearing Fund requirement less deficits, OCC 
may require additional margin deposits from the Clearing Member 
Group(s) driving the breach. Additionally, pursuant to Rule 1001(c) and 
the Clearing Fund Methodology Policy, if a Sufficiency

[[Page 80830]]

Scenario identifies a Clearing Fund draw for any one or two Clearing 
Member Groups that exceeds 90% of the current Clearing Fund size (after 
subtracting any monies deposited as a result of a margin call in 
accordance with a breach of the 75% threshold), OCC has the authority 
to reset the size of the Clearing Fund on an intra-month basis to 
ensure that it continues to maintain sufficient prefunded financial 
resources.
Proposed Change
    OCC proposes to elevate four of its current Informational Scenarios 
to Sufficiency Scenarios. The proposed Sufficiency Scenarios are 
historical scenarios designed to represent recent market events from 
March 2020. Specifically, the proposed scenarios would include price 
shocks representing the most extreme market decline and rally moves in 
March 2020 and would include variations on these scenarios designed to 
account for specific-wrong way risk exposures arising from cleared 
positions on issued exchange traded notes (``ETNs'').\6\ In their 
current status as Informational Scenarios, the March 2020 scenarios do 
not drive the size of the Clearing Fund or calls for additional 
resources. However, as Sufficiency Scenarios, they would be used to 
measure the exposure of OCC's Clearing Fund to the portfolios of 
individual Clearing Member Groups and determine whether any such 
exposure is sufficiently large as to necessitate OCC calling for 
additional resources in the form of margin or an intra-month re-sizing 
of the Clearing Fund. The proposed rule change would enable OCC to test 
the sufficiency of its financial resources under a wider range of 
relevant stress scenarios and respond quickly when OCC believes 
additional financial resources are necessary. The proposed rule change 
would thereby improve OCC's ability to measure, monitor and manage its 
credit exposures to its participants and enhance OCC's ability to 
manage risks in its role as a systemically important financial market 
utility.
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    \6\ See Securities Exchange Act Release No. 87673 (December 6, 
2019), 84 FR 67981 (December 12, 2019) (SR-OCC-2019-807) (Notice of 
No Objection To Advance Notice Related to Proposed Changes to The 
Options Clearing Corporation's Rules, Margin Policy, Margin 
Methodology, Clearing Fund Methodology Policy, and Clearing Fund and 
Stress Testing Methodology To Address Specific Wrong-Way Risk) and 
Securities Exchange Act Release No. 87718 (December 11, 2019), 84 FR 
68992 (December 17, 2019) (SR-OCC-2019-010) (Order Approving 
Proposed Rule Change Related to Proposed Changes to the Options 
Clearing Corporation's Rules, Margin Policy, Margin Methodology, 
Clearing Fund Methodology Policy, and Clearing Fund and Stress 
Testing Methodology To Address Specific Wrong-Way Risk).
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    (2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Exchange Act \7\ and the rules thereunder applicable to OCC. 
Section 17A(b)(3)(F) of the Exchange Act \8\ requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities and 
derivatives transactions and, in general, protect investors and the 
public interest. The proposed rule change would enhance OCC's framework 
for measuring, monitoring, and managing its credit risks. Specifically, 
the proposed rule change would enable OCC to test the sufficiency of 
its prefunded financial resources under a wider range of stress 
scenarios and respond quickly when OCC believes the collection of 
additional financial resources is necessary. The ability to 
appropriately size and test the sufficiency of prefunded financial 
resources is critical to ensuring that OCC can continue to provide 
prompt and accurate clearance and settlement of securities and 
derivatives transactions in the event of a Clearing Member default and 
manage the risks associated with its role as a systemically important 
financial market utility. Accordingly, OCC believes the proposed rule 
change is consistent with the requirements of Section 17A(b)(3)(F) of 
the Act.\9\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ Id.
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    Rule 17Ad-22(e)(4)(iii) \10\ requires, in part, that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those arising from its payment, clearing, and settlement processes, 
including by maintaining additional financial resources (beyond those 
collected as margin) at the minimum to enable it to cover a wide range 
of foreseeable stress scenarios that include, but are not limited to, 
the default of the participant family that would potentially cause the 
largest aggregate credit exposure for the covered clearing agency in 
extreme but plausible market conditions. Rule 17Ad-22(e)(4)(vi)(A) \11\ 
further requires, in part, that such policies and procedures are 
reasonably designed to test the sufficiency of the covered clearing 
agency's total financial resources available to meet the minimum 
financial resource requirements under Rule 17Ad-22(e)(4)(iii) \12\ by 
conducting stress testing of its total financial resources once each 
day using standard predetermined parameters and assumptions. As 
described above, the proposed rule change would enable OCC to test the 
sufficiency of its prefunded financial resources under a wider range of 
stress scenarios and respond quickly to collect additional financial 
resources from its Clearing Members if the Sufficiency Scenario 
exposures breach the predetermined thresholds established in OCC's 
Rules and Clearing Fund Methodology Policy. Moreover, the proposed 
Sufficiency Scenarios were constructed in accordance with OCC's 
existing Methodology Description using standard predetermined 
parameters and assumptions. As a result, OCC believes the proposed rule 
change is designed to further OCC's compliance with the requirements of 
Rules 17Ad-22(e)(4)(iii) and (vi)(A).\13\
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    \10\ 17 CFR 240.17Ad-22(e)(4)(iii).
    \11\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \12\ 17 CFR 240. 17Ad-22(e)(4)(iii).
    \13\ 17 CFR 240.17Ad-22(e)(4)(iii) and (vi)(A).
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Exchange Act \14\ requires that the 
rules of a clearing agency not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. While the proposed rule change could have an impact on certain 
Clearing Members, OCC does not believe that the proposed rule change 
would impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. OCC's analysis to date 
indicates that the proposed Sufficiency Scenarios generate stress test 
exposures that are generally in line with its current, most impactful 
Sufficiency Scenarios.\15\ OCC notes, however, that the results of 
these proposed scenarios may vary depending on the composition of each 
individual Clearing Member's portfolio at a given point in time. As a 
result, the proposed scenarios could from time to time result in more 
frequent or larger sufficiency stress test margin calls.
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    \14\ 15 U.S.C. 78q-1(b)(3)(I).
    \15\ OCC has provided data and analysis concerning the proposed 
rule change in Confidential Exhibit 3 to SR-OCC-2020-015.
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    The implementation of the new Sufficiency Scenarios would enable 
OCC to test the sufficiency of its

[[Page 80831]]

financial resources under a wider range of relevant stress scenarios 
and respond quickly when OCC believes additional financial resources 
are required. The proposed changes are designed to improve OCC's 
ability to measure, monitor and manage its credit exposures to its 
participants consistent with its regulatory requirements under Rule 
17Ad-22(e)(4) \16\ and to enhance OCC's ability to manage risks in its 
role as a systemically important financial market utility. Moreover, 
the proposed Sufficiency Scenarios were constructed in accordance with 
OCC's approved stress testing methodology using standard predetermined 
parameters and assumptions.\17\ The proposed Sufficiency Scenarios are 
historical scenarios designed to represent recent market events from 
March 2020, which constitute a significant and relevant period of 
market stress and volatility. As noted above, OCC's analysis to date 
indicates that the proposed Sufficiency Scenarios generate stress test 
exposures that are generally in line with expectations and with OCC's 
current, most impactful Sufficiency Scenarios based on a reflection of 
current Clearing Member portfolio exposures.\18\ However, these 
scenarios provide diversification in terms of the shocks applied to 
individual names, which may result in meaningful differences if 
Clearing Member exposures change, and would help capture risks that 
OCC's current inventory of Sufficiency Scenarios might not capture in 
different market conditions. Accordingly, OCC believes that any impact 
on competition or OCC's Clearing Members would be necessary and 
appropriate in furtherance of the protection of investors and the 
public interest under the Act.
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    \16\ 17 CFR 240.17Ad-22(e)(4).
    \17\ See supra note 5.
    \18\ See supra note 15.
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Exchange Act applicable to clearing agencies, and 
would not impact or impose a burden on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2020-015 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2020-015. 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#rule-filings.
    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-2020-015 and 
should be submitted on or before December 29, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27394 Filed 12-11-20; 8:45 am]
BILLING CODE 8011-01-P