Document ID: SEC-2010-0963-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2010-06-30T04:00Z

[Federal Register: June 30, 2010 (Volume 75, Number 125)]
[Notices]               
[Page 37864-37866]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jn10-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62371; File No. SR-OCC-2010-04]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise Its By-Laws and 
Rules To Establish a Clearing Fund Amount Intended To Support Losses 
Under a Defined Set of Default Scenarios

June 24, 2009.
    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 March 16, 2010, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change and on June 6, 2010, filed an amendment to the proposed 
rule change. The proposed rule change, as amended, is described in

[[Page 37865]]

Items I, II, and III below, which Items have been substantially 
prepared by OCC. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, 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 By-Laws 
and Rules to establish a clearing fund amount intended to support 
losses under a defined set of default scenarios.

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

1. Purpose
    This proposed rule change would revise OCC's By-Laws and Rules to 
establish a clearing fund amount required to support losses under a 
defined set of default scenarios. Currently, the amount of clearing 
fund is calculated monthly and is based on a fixed percentage of the 
average total daily margin requirements during the previous month.\3\
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    \3\ Under the current formula, if 6% does not result in a 
clearing fund amount of at least one billion dollars, then OCC 
collects a higher percentage of the previous month's average daily 
margin requirement that will result in a fund level of at least one 
billion dollars. However, in no event is the percentage permitted to 
exceed 7%.
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    Under the proposed formula for determining the size of the clearing 
fund, the level of the fund would be equal to the larger of the amount 
of the charge to the fund that would result from (i) a default by the 
single ``clearing member group'' the default of which would be likely 
to result in the largest draw against the clearing fund or (ii) an 
event involving the near-simultaneous default of two randomly-selected 
``clearing member groups''.\4\ Initially, the confidence levels 
employed by OCC in calculating the charge likely to result from a 
default by OCC's largest ``clearing member group'' and the default of 
two randomly-selected ``clearing member groups'' would be 99% and 99.9% 
respectively. OCC would have discretion to employ different confidence 
levels in these calculations but could not employ confidence levels of 
less than 99%.\5\ The size of the clearing fund would continue to be 
recalculated monthly based on average daily calculations for the 
previous month. In no event would the size of the total clearing fund 
be permitted to be less than one billion dollars.\6\
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    \4\ The term ``clearing member group'' would be defined to mean 
a clearing member and any member affiliates of such clearing member 
(proposed new definition in Article I of OCC's By-Laws.).
    \5\ Proposed Interpretations & Policies .02 to Rule 1001.
    \6\ Proposed Interpretations & Policies .01 to Rule 1001.
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    In considering whether to revise the clearing fund sizing formula, 
OCC compared the size of the clearing fund that would have resulted 
from application of the revised formula to the actual size of the 
clearing fund for each month from February 2008 through September 
2009.\7\ This analysis revealed that the size of the clearing fund 
under the revised formula would have been on average 10% larger than 
under the current formula. In September and October 2008, two months of 
extreme volatility in the U.S. securities markets, the revised formula 
would have resulted in a clearing fund size approximately 31% and 27% 
greater than under the current formula. The average monthly change in 
the size of the clearing fund and the standard deviation of clearing 
fund size from month-to-month under the two formulas were broadly 
similar.\8\
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    \7\ The data used for this analysis was obtained prior to 
implementation of the changes approved in SR-OCC-2007-20. 
Accordingly, the data does not account for the effects those changes 
had on OCC's clearing fund size calculation. SR-OCC-2007-20 allowed 
certain securities to be analyzed as a single portfolio under OCC's 
risk management methodology, the System for Theoretical Analysis and 
Numerical Simulations (``STANS''), and consequently allowed OCC to 
more accurately measure risk in Clearing Members accounts and more 
precisely set margin requirements to reflect such risk.
    \8\ The comparative data described in this paragraph was 
obtained using confidence levels of 99% and above. OCC estimates 
that using only a 99% confidence level would have lowered the total 
size of the clearing fund calculated using the proposed methodology 
by an average of approximately one half of a percent.
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    OCC believes the proposed new formula for calculating clearing fund 
is a better predictor of losses that would be likely to result from the 
default scenarios described above and would establish an adequate 
clearing fund to cover losses without OCC having to require clearing 
members to replenish the clearing fund. The existing formula for 
determining the amount of clearing fund is intended to establish an 
amount reasonably designed to cover losses resulting from one or more 
clearing member defaults. OCC believes the formula adequately serves 
that purpose. Nevertheless, OCC believes the proposed formula is a 
better predictor of the actual losses likely to result from such 
defaults. This is because the existing formula only indirectly accounts 
for potential losses by setting the amount of the clearing fund as a 
percentage of the previous month's average daily margin requirements. 
In contrast, the proposed formula would directly account for various 
types of default scenarios. Therefore, in OCC's view, the proposed 
formula would be more likely to result in adequate clearing fund levels 
if such scenarios occur and would more closely align the size of the 
clearing fund with its intended purpose of absorbing losses from 
clearing member defaults and avoid disruption of the clearance process 
even during extreme market conditions. Article VIII, Section 6 of OCC's 
By-Laws, which obligates clearing members to satisfy deficiencies in 
their clearing fund deposits resulting from pro-rata charges or 
otherwise,\9\ would remain unchanged.
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    \9\ This is subject to a cap equal to 100% of a clearing 
member's then-required deposit if it promptly withdraws from 
membership and closes out or transfers its open positions.
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    The specific amendments proposed to OCC's By-Laws and Rules to 
facilitate the proposed changes to its clearing fund calculation, can 
be found at http://www.optionsclearing.com/about/publications/
bylaws.jsp. If approved by the Commission, OCC would implement the 
revised formula for determining the size of its clearing fund after 
sixty days notice to clearing members.
2. Statutory Basis
    OCC believes the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \10\ and the rules and 
regulations thereunder because the proposed rule changes would 
facilitate prompt and accurate clearance and settlement of securities 
transactions by creating a more direct correlation between the clearing 
fund size and estimated losses from a defined set of default scenarios.
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    \10\ 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.

[[Page 37866]]

(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 thirty-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 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:

Electronic Comments

     Use the Commission's 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-2010-04 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-2010-04. 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 am and 3 pm. 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-
2010-04 and should be submitted on or  before July 21, 2010.
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    \11\ 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.\11\

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15892 Filed 6-29-10; 8:45 am]
BILLING CODE 8010-01-P