Document ID: SEC-2019-1889-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2019-12-17T05:00Z

[Federal Register Volume 84, Number 242 (Tuesday, December 17, 2019)]
[Notices]
[Pages 68985-68989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27081]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87717; File No. SR-OCC-2019-009]

Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Approving Proposed Rule Change Related to Proposed Changes to the 
Options Clearing Corporation's Rules, Clearing Fund Methodology Policy, 
and Clearing Fund and Stress Testing Methodology

December 11, 2019.

I. Introduction

    On October 10, 2019, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2019-009 (``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 make changes to 
OCC's Clearing Fund and stress testing rules and methodology.\3\ The 
Proposed Rule Change was published for public comment in the Federal 
Register on October 29, 2019.\4\ The Commission has received no 
comments regarding the Proposed Rule Change.\5\ This order approves the 
Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, at 84 FR 57911.
    \4\ Securities Exchange Act Release No. 87386 (Oct. 23, 2019), 
84 FR 57911 (Oct. 29, 2019) (SR-OCC-2019-009) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2019-806) 
(``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 November 12, 2019. Securities Exchange Act 
Release No. 87475 (Nov. 6, 2019), 84 FR 61120 (Nov. 12, 2019) (SR-
OCC-2019-806).
    \5\ 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 Advance Notice.
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II. Background 6
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    \6\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    As noted above, OCC proposes to revise its Clearing Fund and stress 
testing rules and methodology. Specifically, OCC proposes to: (1) 
Incorporate a new set of stress test scenarios to be used in the 
monthly sizing of OCC's Clearing Fund that are designed to capture the 
risks of extreme moves in individual or small subsets of securities; 
(2) revise OCC's stress testing methodology for modeling certain 
volatility index futures; (3) modify OCC's methodology for allocating 
Clearing Fund contribution requirements to standardize the margin risk 
component of the allocation formula for all Clearing Members; and (4) 
adopt an additional threshold for notifying senior management of intra-
day margin calls based on certain stress test results. OCC also 
proposes to correct certain rules concerning OCC's cooling-off period 
and replenishment/assessment powers.\7\
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    \7\ Additionally, OCC proposes clarifying and conforming changes 
to its Rules, Clearing Fund Methodology Policy (``Policy''), and 
Stress Testing and Clearing Fund Methodology Description 
(``Methodology Description'').
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A. Sizing Stress Test Scenarios

    On a monthly basis, OCC establishes the size of its Clearing Fund 
at the level it believes is necessary to maintain sufficient financial 
resources to cover losses arising from the default of the two Clearing 
Member Groups that would

[[Page 68986]]

potentially cause the largest aggregate credit exposure to OCC under 
certain stress scenarios.\8\ OCC determines the size of its Clearing 
Fund each month through an approach based on broad-based market and 
systemic shocks (``Systemic Scenarios'').\9\ OCC proposes to 
incorporate an additional set of stress test scenarios to be used in 
the monthly sizing of OCC's Clearing Fund that are designed to capture 
the risks of extreme moves in individual or small subsets of securities 
(``Idiosyncratic Scenarios''). The Idiosyncratic Scenarios would be in 
addition to the existing Systemic Scenarios. Because OCC's monthly 
Clearing Fund sizing process is designed to cover OCC's largest 
aggregate stress test exposures, the expansion of the set of Clearing 
Fund sizing stress tests could not result in a smaller Clearing Fund 
than would be the case without such an expansion.
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    \8\ See Notice of Filing, 84 FR at 57912.
    \9\ See Notice of Filing, 84 FR at 57913. See also, Securities 
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37857 
(Aug. 2, 2019) (SR-OCC-2018-008) (describing OCC's Clearing Fund 
sizing stress test scenarios as an approach based on hypothetical 
stress scenarios that assume shocks to the Cboe S&P 500 Index 
(``SPX'') associated with a 1-in-80-year market event).
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    In constructing the Idiosyncratic Scenarios, OCC would shock each 
single-name equity (i.e., excluding exchange-traded funds, exchange-
traded notes, indices, and non-equity products). OCC would evaluate the 
effects of such shocks on every Clearing Member Group's portfolios. 
Within each Clearing Member Group's portfolio, OCC would identify the 
four single-name equities for which such shocks would result in the 
largest losses. OCC would then identify the two Clearing Member Groups 
with the largest aggregate losses. The combined losses of the two 
identified Clearing Member Groups would represent the loss that OCC 
would seek to cover in its monthly Clearing Fund sizing process. OCC 
believes that implementing the proposed Idiosyncratic Scenarios would 
enhance OCC's stress testing methodology and overall resiliency by 
providing a more comprehensive suite of sizing stress tests to ensure 
that OCC maintains an appropriate level of financial resources to cover 
its credit exposures under scenarios addressing both systemic market 
risks and idiosyncratic risks.\10\
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    \10\ See Notice of Filing, 84 FR at 57913.
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B. Volatility Index Futures

    Under OCC's current stress testing methodology, prices shocks for 
futures based on the Cboe Volatility Index (``VIX'') \11\ are 
equivalent to a price shock for the underlying. Because the VIX has no 
term structure, this process produces a uniform shock across 
expirations of the VIX futures contracts. Futures contracts for 
different expirations, however, generally trade at different prices 
reflecting the differing future price expectations of the underlying 
asset.\12\ OCC believes that applying a uniform shock across 
expirations is unrealistic, and that it would lead to an overestimation 
of VIX futures price shocks, particularly in market decline 
scenarios.\13\ As noted above, OCC proposes to revise its stress 
testing methodology for modeling certain volatility index futures. 
Specifically, the proposed change would produce differing price shocks 
for VIX futures across the term structure. The proposed methodology 
would be based on SPX volatility shocks across different expirations, 
as opposed to the current methodology's reliance on a single shock to 
the VIX. OCC believes that implementation of the proposed methodology 
would improve pricing for VIX futures as well as VIX options.\14\
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    \11\ The VIX is an index designed to measure the 30-day expected 
volatility of the SPX.
    \12\ When there is a large shock to the VIX it has consistently 
been observed that the change in price of near-term VIX future 
contracts is much larger than for further out expirations. See 
Notice of Filing, 84 FR at 57913, n. 11.
    \13\ See Notice of Filing, 84 FR at 57913.
    \14\ See Notice of Filing, 84 FR at 57914. OCC uses VIX futures 
to calculate theoretical values for VIX options.
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C. Clearing Fund Allocation

    OCC allocates Clearing Fund contribution requirements to individual 
Clearing Members, in part, based on each Clearing Member's 
proportionate share of risk margin, which OCC refers to as ``total 
risk.'' \15\ The majority of Clearing Member margin requirements are 
based on OCC's System for Theoretical Analysis and Numerical 
Simulations (``STANS''), which is OCC's proprietary risk management 
system. The margin requirement for certain Clearing Members' accounts, 
however, is calculated using the Standard Portfolio Analysis of Risk 
Margin Calculation System (``SPAN''), which reflects customer gross 
margining.\16\ OCC proposes to define ``total risk'' as based on the 
same margin model for all Clearing Members.\17\ OCC believes it is more 
appropriate to use the same margin risk measurement for all Clearing 
Members when allocating Clearing Fund contribution requirements to 
allow for a more equitable comparison across all accounts.\18\
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    \15\ Currently, OCC uses the following weighting in its 
allocation of clearing fund requirements: 70 percent total risk, 15 
percent open interest, and 15 percent volume. See Securities 
Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 37863 
(Aug. 2, 2019) (SR-OCC-2018-008).
    \16\ See Notice of Filing, 84 FR at 57914, n. 16 (stating that 
``OCC calculates margin requirements for segregated futures accounts 
using both SPAN on a gross basis and STANS on a net basis, and if at 
any time OCC staff observes a segregated futures account where 
initial margin calculated pursuant to STANS on a net basis exceeds 
the initial margin calculated pursuant to SPAN on a gross basis, OCC 
collateralizes this risk exposure by applying an additional margin 
charge in the amount of such difference to the account'' (citation 
omitted)).
    \17\ Specifically, OCC proposes to use STANS plus certain add-on 
charges as the basis for determining each Clearing Member's 
proportionate share of total risk.
    \18\ See Notice of Filing, 84 FR at 57914.
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D. Margin Call Notification

    On a daily basis, OCC evaluates the sufficiency of its financial 
resources based on OCC's potential exposure to Clearing Member Groups 
under certain stress test scenarios (``Sufficiency Stress Tests''). 
Based on the results of the Sufficiency Stress Tests, OCC may call for 
additional collateral to ensure that it maintains sufficient financial 
resources to guard against potential losses. For example, OCC is 
authorized to make an intra-day margin call against a Clearing Member 
Group whose Sufficiency Stress Test exposures breach a pre-determined 
threshold. Currently, OCC's rules require that written notification of 
such intra-day margin calls in excess of $500 million be provided to 
OCC's Executive Chairman, Chief Executive Officer, and Chief Operating 
Officer (``Office of the CEO''). OCC proposes to revise its rules to 
require that written notification of stress test-related intra-day 
margin calls also be sent to the Office of the CEO when a stress test-
related intra-day margin call would exceed 75 percent of the Clearing 
Member's excess net capital. OCC believes that this additional 
notification requirement is appropriate because it would allow OCC's 
senior management to be informed as soon as practicable of, and to 
subsequently monitor, circumstances where a margin call may strain a 
particular Clearing Member's ability to meet such requirements based on 
its financial condition or the amount of collateral it has available to 
pledge when certain pre-identified thresholds have been exceeded.\19\
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    \19\ See Notice of Filing, 84 FR at 57914.
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E. Cooling-Off Period

    In 2018, OCC implemented a set of recovery tools, including 
revisions to OCC's authority to assess its Clearing Members for funds 
to replenish OCC's

[[Page 68987]]

Clearing Fund.\20\ For example, OCC implemented a ``cooling-off 
period'' during which its authority to levy such assessments is capped, 
which provides certainty to Clearing Members regarding their potential 
obligations to OCC. In proposing such revisions, OCC intended that the 
cooling-off period would be triggered by any proportionate Clearing 
Fund charges to Clearing Members related to the default of a Clearing 
Member.\21\ OCC's current rules, however, do not provide for a cooling-
off period based on proportionate Clearing Fund charges arising out of 
two specific sets of circumstances: (1) In connection with protective 
transactions effected for the account of OCC pursuant to Chapter XI of 
OCC's Rules and (2) as a result of a failure of any Clearing Member to 
make any other required payment or render any other required 
performance (as provided in clauses (v) and (vi) of OCC Rule 1006(a)). 
OCC proposes to revise its rules such that any proportionate Clearing 
Fund charges to Clearing Members related to the default of a Clearing 
Member, including the two listed above, would trigger a cooling-off 
period.
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    \20\ See Securities Exchange Act Release No. 83916 (Aug. 23, 
2018), 83 FR 44076 (Aug. 29, 2018) (SR-OCC-2017-020).
    \21\ See Notice of Filing, 84 FR at 57915. Such triggers include 
the assessments arising out of a Clearing Member's failure to meet 
its obligations regarding confirmed trades, exercised or assigned 
contracts, stock loan transactions, or the liquidation of a Clearing 
Member's open positions. See id. at n. 22.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\22\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to OCC. More 
specifically, the Commission finds that the proposal is consistent with 
Section 17A(b)(3)(F) of the Exchange Act \23\ and Rules 17Ad-22(e)(2) 
and (4) thereunder.\24\
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to (i) promote 
the prompt and accurate clearance and settlement of securities 
transactions, and to the extent applicable, derivatives agreements, 
contracts, and transactions; (ii) 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 (iii), in general, protect investors 
and promote the public interest.\25\ Based on its review of the record, 
the Commission believes that the proposed changes are designed to 
promote prompt and accurate clearance and settlement, assure the 
safeguarding of securities and funds which are in OCC's custody or 
control or for which OCC is responsible, and, in general, protect 
investors and promote the public interest for the reasons set forth 
below.
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the proposed changes to OCC's stress 
testing methodology are designed to promote the prompt and accurate 
clearance and settlement of securities transactions. As an initial 
matter, OCC is the only clearing agency for standardized U.S. 
securities options listed on Commission-registered national securities 
exchanges (``listed options'').\26\ OCC provides central counterparty 
services for the listed-options markets.\27\ OCC's role as the sole CCP 
for all listed options contracts in the U.S. makes it an integral part 
of the national system for clearance and settlement.\28\ As described 
above, OCC proposes to expand the suite of stress tests it uses to size 
the Clearing Fund each month, and to revise OCC's estimation of VIX 
futures prices for stress testing. The introduction of the 
Idiosyncratic Scenarios to the monthly sizing of OCC's Clearing Fund 
would be in addition to the Systemic Scenarios OCC already uses to size 
its Clearing Fund and would help OCC address risks not currently 
contemplated by OCC's Systemic Scenarios, which in turn should enhance 
OCC's ability to accurately and appropriately size its Clearing Fund. 
Additionally, OCC proposes to revise its process for shocking VIX 
futures prices to reflect the actual term structure dynamics of such 
futures. OCC's current use of a uniform shock for VIX futures 
contracts, regardless of tenure, is not consistent with OCC's 
observation that futures contracts with different expirations generally 
trade at different prices reflecting the differing future price 
expectations of the underlying asset. By enhancing its methodology for 
modeling price shocks for VIX futures, OCC should be able to produce 
more appropriate VIX futures price shocks in its stress scenarios, 
which in turn also should enhance OCC's ability to accurately and 
appropriately size its Clearing Fund. OCC relies on the resources in 
its Clearing Fund to manage the potential losses arising out of the 
default of a Clearing Member under extreme but plausible market 
conditions. Strengthening the methodology that OCC uses to manage its 
financial resources by enhancing its ability to accurately and 
appropriately size the Clearing Fund, therefore, would enhance OCC's 
ability to manage Clearing Member defaults, which, in turn, facilitates 
the continued clearance and settlement of listed options. The 
Commission believes, therefore, that the proposed changes to OCC's 
stress testing methodology, taken together, are consistent with the 
promotion of prompt and accurate clearance and settlement of 
derivatives contracts.
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    \26\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \27\ See id., 84 FR at 5158.
    \28\ See id.
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    The Commission believes that the proposed changes regarding notice 
of intra-day margin requirements and allocation of Clearing Fund 
requirements are consistent with assuring the safeguarding of 
securities and funds. Currently, OCC notifies its Office of the CEO 
when intra-day margin calls generated in response to OCC's daily stress 
tests are large in absolute terms (i.e., in excess of $500 million). 
OCC proposes to also notify its Office of the CEO when such margin 
calls are large relative to the Clearing Member against which they are 
made (i.e., in excess of 75 percent of the Clearing Member's excess net 
capital). The Commission believes that such notification would provide 
OCC's senior management with additional risk management information, 
which in turn could be used to inform critical decisions related to 
margin or other protective measures that could help OCC avoid drawing 
on resources from surviving Clearing Members to manage a Clearing 
Member default. In the Commission's view, such measures would be 
consistent with assuring the safeguarding of securities and funds which 
are in OCC's custody or control or for which OCC is responsible.
    Additionally, OCC proposes to revise its method of allocating 
Clearing Fund contribution requirements across

[[Page 68988]]

Clearing Members. OCC proposes to redefine the ``total risk'' component 
of its Clearing Fund allocation formula such that it would rely on the 
same underlying model for all Clearing Members when calculating total 
risk (as opposed to using different models for different Clearing 
Members depending on their cleared positions). The proposed change 
would not alter the allocation weighting, but, in the Commission's 
view, it would provide a more consistent metric by which to assess 
risks across Clearing Members and determine how much risk each Clearing 
Member should bear in terms of Clearing Fund requirements.\29\ The 
Commission believes that these changes as well are consistent with 
assuring the safeguarding of securities and funds which are in OCC's 
custody or control or for which OCC is responsible.
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    \29\ While the proposed change would not affect the total size 
of the Clearing Fund, it would result in changes to Clearing 
Members' proportionate share of the Clearing Fund.
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    Finally, the Commission believes that the proposed expansion of 
triggers for the cooling-off period is designed, in general, to protect 
investors and promote the public interest. The Commission continues to 
believe that the cooling-off period provides certainty and 
predictability regarding Clearing Members' maximum liability for 
Clearing Fund contributions.\30\ Currently, however, the cooling-off 
period would be triggered by some, but not all proportionate Clearing 
Fund charges to Clearing Members arising out of a Clearing Member's 
failure to meet certain obligations under OCC's rules. OCC proposes to 
expand the set of events that would trigger the cooling-off period to 
include certain protective transactions and the failure of a Clearing 
Member to meets its obligations under certain of OCC's rules. The two 
events to be added as cooling-off period triggers are similar to the 
current triggers in that they pertain to proportionate Clearing Fund 
charges designed to manage the failure of a Clearing Member to meet its 
obligations to OCC. The Commission believes that including these two 
additional events as cooling-off period triggers would provide Clearing 
Members with additional certainty and predictability regarding their 
potential maximum liability for Clearing Fund contributions, which in 
turn is consistent with the protection investors and promotion of the 
public interest.
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    \30\ See Securities Exchange Act Release No. 83916 (Aug. 23, 
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
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    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Section 17A(b)(3)(F) of the 
Exchange Act.\31\
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    \31\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

    Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that, among other things, specify clear and 
direct lines of responsibility.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(2)(v).
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    As described above, OCC proposes to add a new internal reporting 
requirement regarding certain intra-day margin calls. OCC may call for 
additional margin from Clearing Members based on the results of its 
Sufficiency Stress Tests. In addition to notifying its Office of the 
CEO when such margin calls are large in absolute terms (i.e., in excess 
of $500 million), OCC now proposes to also notify to its Office of the 
CEO when such margin calls are large relative to the Clearing Member 
against which they are made (i.e., in excess of 75 percent of the 
Clearing Member's excess net capital). The Commission believes that 
such notification would inform OCC's senior management, who could then 
monitor circumstances as appropriate, when an intra-day margin call 
could strain the resources of a particular Clearing Member based on its 
financial condition. Accordingly, the Commission believes that the 
adoption of such a notification requirement is consistent with Rule 
17Ad-22(e)(2)(v) under the Exchange Act.\33\
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    \33\ 17 CFR 240.17Ad-22(e)(2)(v).
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C. Consistency With Rule 17Ad-22(e)(4) Under the Exchange Act

    Rule 17Ad-22(e)(4) under the Exchange Act 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.\34\ Based on its review of the record, the 
Commission believes that the proposed rule change is consistent with 
Rule 17Ad-22(e)(4) under the Exchange Act.
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    \34\ 17 CFR 240.17Ad-22(e)(4).
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1. Stress Testing
    Rules 17Ad-22(e)(4)(i) and (iii) under the Exchange Act require 
that a covered clearing agency's policies and procedures meet the 
requirements of Rule 17Ad-22(e)(4) by maintaining financial resources 
at the minimum to enable OCC 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 OCC in extreme but plausible market 
conditions.\35\ Further, Rule 17Ad-22(e)(4)(vi) under the Exchange Act 
requires that a covered clearing agency's policies and procedures meet 
the requirements of Rule 17Ad-22(e)(4) by testing the sufficiency of a 
covered clearing agency's total financial resources available to meet 
the minimum financial resource requirements under Rules 17Ad-
22(e)(4)(i) through (iii).\36\
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    \35\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
    \36\ 17 CFR 240.17Ad-22(e)(4)(vi).
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    As described above, OCC proposes to expand the set of stress tests 
that it uses to size the Clearing Fund by adding the Idiosyncratic 
Scenarios to its current suite of stress tests. The Idiosyncratic 
Scenarios are designed to capture the risk of extreme moves in 
individual securities or small subsets of securities, while the current 
Systemic Scenarios are based on broad-based market and systemic shocks. 
Consistent with the general view that expanding the types of scenarios 
that a clearing agency uses in its monthly sizing process makes the 
clearing agency's risk management robust to a broader range of shocks, 
the Commission believes that OCC's proposal to add the Idiosyncratic 
Scenarios to its suite of stress tests would be a strengthening 
change--meaning it would enhance OCC's ability to accurately and 
appropriately size its Clearing Fund--that is consistent with the 
requirements of Rules 17Ad-22(e)(4)(i) and (iii) under the Exchange 
Act.\37\
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    \37\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(4)(iii).
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    Additionally, OCC proposes to revise its stress testing methodology 
to produce differing price shocks for VIX futures across the term 
structure. The proposed methodology would be based on SPX volatility 
shocks across different expirations, as opposed to the current 
methodology's reliance on a single shock to the VIX. As discussed 
above, these changes would help OCC produce VIX futures price shocks in 
its stress scenarios that are consistent with OCC's observation that 
futures contracts with different expirations generally trade at 
different prices reflecting the differing future price expectations of 
the underlying asset, which in turn should

[[Page 68989]]

enhance OCC's ability to accurately and appropriately size its Clearing 
Fund, consistent with the requirements of Rule 17Ad-22(e)(4)(vi).
    Accordingly, the Commission believes that, taken together, OCC's 
proposed changes to its stress testing methodology would be consistent 
with the requirements of Rules 17Ad-22(e)(4)(i), (iii), and (vi).\38\
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    \38\ 17 CFR 240.17Ad-22(e)(4)(i); 17 CFR 240.17Ad-22(e)(4)(iii); 
and 17 CFR 240.17Ad-22(e)(4)(vi).
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2. Clearing Fund Allocation
    As noted above, Rule 17Ad-22(e)(4) under the Exchange Act generally 
requires 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.\39\
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    \39\ 17 CFR 240.17Ad-22(e)(4).
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    OCC relies on the Clearing Fund as a source of mutualized resources 
available to manage losses arising out of a Clearing Member's default. 
OCC's method for allocating contributions to the Clearing Fund among 
Clearing Members is aligned primarily with the credit risk posed by 
each Clearing Member.\40\ OCC proposes to redefine the margin risk 
component of its Clearing Fund allocation formula such that it would 
rely on the same underlying model--STANS--for all Clearing Members (as 
opposed to relying on STANS for most Clearing Members and SPAN for 
certain Clearing Members with segregated futures accounts). The 
proposed change would not change the overall allocation weighting 
(i.e., margin risk would still account for 70 percent of the Clearing 
Fund allocation among Clearing Members), but the Commission believes it 
would provide a more consistent metric by which to assess margin risk 
across Clearing Members. Accordingly, the Commission believes that the 
proposed change is reasonably designed to support the management of 
OCC's credit exposures to its participants. The Commission believes, 
therefore, that OCC's proposed change to its Clearing Fund allocation 
methodology is consistent with the requirements of Rule 17Ad-
22(e)(4).\41\
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    \40\ Clearing Fund allocations are based on a weighting of 70 
percent margin risk, what OCC refers to as the ``total risk'' 
component of its Clearing Fund allocation formula, with open 
interest and cleared volume weighted at 15 percent each.
    \41\ 17 CFR 240.17Ad-22(e)(4).
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3. Cooling-Off Period
    Rule 17Ad-22(e)(4)(ix) under the Exchange Act requires, in part, 
that a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to describe 
its process to replenish any financial resources it may use following a 
default or other event in which use of resources is contemplated.\42\
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    \42\ 17 CFR 240.17Ad-22(e)(4)(ix).
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    As noted above, OCC's current recovery tools include a cooling-off 
period, during which OCC's authority to assess Clearing Members for 
funds to replenish OCC's Clearing Fund is limited. Recognizing the 
limit that such a cooling-off period places on the financial resources 
available to OCC, the Commission continues to believe that the cooling-
off period provides certainty and predictability regarding Clearing 
Members' maximum liability for Clearing Fund contributions.\43\ OCC 
proposes to expand the set of events that would start the cooling-off 
period to include proportionate Clearing Fund charges to Clearing 
Members triggered by certain protective transactions or the failure of 
a Clearing Member to meet certain obligations under OCC's rules, 
consistent with OCC's original intention with its prior filing. The two 
events to be added as triggers for the cooling-off period are similar 
to the current triggers in that they pertain to amounts paid out of the 
Clearing Fund to manage the failure of a Clearing Member to meet its 
obligations to OCC. Consistent with the Commission's statements 
regarding the current formulation of the cooling-off period, the 
Commission believes that the proposed expansion is consistent with 
OCC's obligations to describe its process to replenish any financial 
resources it may use following a default or other event in which use of 
resources is contemplated as required under Rule 17Ad-22(e)(4)(ix).\44\
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    \43\ See Securities Exchange Act Release No. 83916 (Aug. 23, 
2018), 83 FR 44076, 44082 (Aug. 29, 2018) (SR-OCC-2017-020).
    \44\ 17 CFR 240.17Ad-22(e)(4)(ix).
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    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Proposed Rule Change are 
consistent with Rule 17Ad-22(e)(4) under the Exchange Act.\45\
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    \45\ 17 CFR 240.17Ad-22(e)(4).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \46\ and the rules and regulations thereunder.
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    \46\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\47\ that the Proposed Rule Change (SR-OCC-2019-009) be, 
and hereby is, approved.
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    \47\ 15 U.S.C. 78s(b)(2).
    \48\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
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pursuant to delegated authority.\48\

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27081 Filed 12-16-19; 8:45 am]
 BILLING CODE 8011-01-P