Document ID: SEC-2010-1396-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2010-09-13T04:00Z

[Federal Register: September 13, 2010 (Volume 75, Number 176)]
[Notices]               
[Page 55619-55621]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se10-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62854; File No. SR-OCC-2010-14]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise Its Rules To Expand 
the Forms of Collateral Eligible for Incorporation in the System for 
Theoretical Analysis and Numerical Simulations Risk Management 
Methodology

September 7, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 25, 2010, 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 primarily 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. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The purpose of this proposed rule change is to revise OCC's Rules 
to expand the forms of collateral eligible for incorporation in the 
System for Theoretical Analysis and Numerical Simulations (``STANS'') 
risk management methodology.

II. Self-Regulatory Organization'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. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change would make a change to Interpretation and 
Policy .06 under Rule 601 in connection with expanding the forms of 
collateral eligible for incorporation in the STANS

[[Page 55620]]

risk management methodology. Currently, OCC incorporates common stock 
and ETFs \3\ in the STANS margin calculation process.\4\ When OCC began 
including common stock and ETFs in the STANS margin calculation 
process, it noted its belief that the procedure would more accurately 
measure risk in Clearing Members' accounts and thereby permit OCC to 
more precisely set margin requirements to reflect that risk. For those 
same reasons, OCC now proposes incorporating certain fixed-income, 
``government securities'' into the STANS margin calculation process.
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    \3\ ETFs fall within the definition of ``fund shares'' as that 
term is denied in Article I, Section 1 of OCC's By-Laws.
    \4\ Securities Exchange Act Release No. 34-58158 (July 15, 
2008), 73 FR 42626 (July 22, 2008)(SR-OCC-2007-20).
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    The specific amendments proposed to OCC's Rules to facilitate 
incorporation of government securities in the STANS margin calculation 
process can be found at http://www.optionsclearing.com/components/docs/
legal/rules_and_bylaws/sr_occ_10_14.pdf.
    OCC would incorporate certain ``government securities'' into the 
STANS margin calculation in phases beginning with U.S. Government 
securities.\5\ Treasury Inflation Protected Securities and callable U.S 
Treasury Securities would be excluded from the initial phase as would 
Canadian government securities and GSE debt securities.\6\
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    \5\ This would include but not be limited to Government 
securities and GSE debt securities.
    \6\ The government securities initially excluded would be 
evaluated for possible inclusion in STANS as appropriate models are 
developed.
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    Currently, government securities deposited as collateral to satisfy 
margin requirements are priced on a nightly basis and are assigned a 
value equal to their current market value less an applicable haircut 
based on the term to maturity. While this method of valuing collateral 
has generally served OCC well in the past, OCC believes analyzing 
cleared positions and margin assets as a single portfolio using STANS 
provides a more accurate valuation of the Clearing Members' securities 
deposited as collateral in relation to other account positions. As when 
OCC began including common stocks and ETFs in the STANS calculation, 
OCC believes phasing in government securities would align risk-
management techniques utilized to manage market risk of cleared 
positions, for example for Treasury futures contracts, with those 
techniques used to value margin deposits.
    The proposed inclusion of government securities into STANS would be 
implemented using an approach similar to that used for adding common 
stocks and ETFs. The value of the securities deposited in a Clearing 
Member's account would be determined along with the risk on the margin 
assets on a portfolio basis with reference to the volatility and 
correlation of each deposited security to the other positions in the 
account. Given the conservative nature of the current haircuts applied 
to deposits of government securities, OCC anticipates a modest increase 
in their collateral valuation should this change be implemented.
    As a part of this proposal, OCC would apply a portfolio specific 
adjustment factor when determining whether sufficient margin excess 
resides in an account. This would enable OCC to release margin 
collateral to a Clearing Member on an intraday basis. The adjustment 
factor is account and security specific and is determined by 
approximating the change in margin requirement caused by depositing or 
withdrawing a particular security from the Clearing Member's account 
based on the risk characteristics of that security and its consequent 
assessed value. OCC believes this process would provide a more accurate 
projection of the margin impact of collateral withdrawals and 
substitutions on a Clearing Member's account. It is currently used to 
analyze the impact of substitutions and withdrawals of equity 
collateral within the STANS Monte Carlo simulations.\7\
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    \7\ OCC believes the approach currently used to assess the 
impact of collateral substitutions and withdrawals represents an 
improvement over that outlined in File No. SR-OCC-2007-20. 
Interpretation and Policy .01 under Rule 608 generally provides that 
OCC may specify procedures from time-to-time to assess the impact of 
collateral withdrawals and substitutions.
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    OCC's Rule 601, ``Margin Requirements'' already provides that 
margin assets in the form of securities may be incorporated into the 
Monte Carlo calculations as an alternative to valuing such assets under 
Rule 604, ``Form of Margin Assets''. In connection with incorporating 
common stocks and ETFs into the STANS calculation, OCC adopted 
Interpretation and Policy .06 under Rule 601 to clarify that margin 
assets in the form of common stocks and ETFs would be included in the 
Monte Carlo simulations described in Rule 601 for purposes of 
determining the minimum expected liquidating value of an account with 
other margin assets being valued as provided for under Rule 604.\8\ OCC 
now proposes broadening the interpretation to provide that OCC may 
designate those margin assets which, if deposited into a Clearing 
Member's account, will be valued as provided in Rule 601 rather than 
Rule 604. This change is intended to facilitate OCC's proposal 
incorporate certain government securities into the STANS margin 
calculation process.
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    \8\ Rule 604(f) provides that, in lieu of the valuations 
provided for in Rule 604, OCC may elect to value any or all margin 
assets in the form of securities pursuant to Rule 601.
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    OCC believes the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \9\ and the rules and 
regulations thereunder because the proposed rule changes would promote 
accuracy in the clearance and settlement of cleared contracts and in 
the risk assessments relative thereto, and would promote efficiency and 
eliminate unnecessary costs to investors by determining margin 
requirements with better precision, and, in general, to protect 
investors and the public interest. The change accomplishes these 
purposes by more accurately valuing collateral deposits.
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    \9\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. OCC will notify the Commission of any written 
comments received by OCC.

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

    Within forty-five days of the date of publication of this notice in 
the Federal Register or within such longer period (i) as the Commission 
may designate up to ninety days of such date 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 Act. Comments may be submitted by any of 
the following methods:

[[Page 55621]]

Electronic Comments

     Use the Commissions Internet comment form (http://
www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-OCC-2010-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Elizabeth 
M. Murphy, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-OCC-2010-14. This 
file number should be included on the subject line if e-mail 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 Section, 100 
F Street, NE., Washington, DC 20549-1090, on official business days 
between the hours of 10 a.m. and 3 p.m. Copies of such filings will 
also be available for inspection and copying at the principal office of 
the OCC and on OCC's Web site at http://www.optionsclearing.com/about/
publications/bylaws.jsp.
    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-OCC-2010-14 
and should be submitted on or before October 4, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-22701 Filed 9-10-10; 8:45 am]
BILLING CODE 8010-01-P