Document ID: SEC-2017-2104-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2017-12-19T05:00Z

[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60252-60253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27230]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82311; File No. SR-OCC-2017-008]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Related to The Options Clearing 
Corporation's Collateral Risk Management Policy

December 13, 2017.

I. Introduction

    On October 27, 2017, the Options Clearing Corporation (``OCC'') 
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 (SR-
OCC-2017-008) to formalize and update OCC's Collateral Risk Management 
Policy. The proposed rule change was published for comment in the 
Federal Register on November 9, 2017.\3\ The Commission received one 
comment letter regarding the proposed change.\4\ For the reasons 
discussed below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 82009 (Nov. 3, 2017), 82 
FR 52079 (Nov. 9, 2017) (SR-OCC-2017-008) (``Notice'').
    \4\ Letter from Michael Kitlas, dated November 3, 2017. See 
comments on the proposed rule change (SR-OCC-2017-008), https://www.sec.gov/comments/sr-occ-2017-008/occ2017008.htm.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    This proposed rule change would formalize and update OCC's 
Collateral Risk Management Policy (``CRM Policy''). The CRM Policy 
describes the categories of risk that are considered by OCC in 
determining which asset classes should be acceptable forms of 
collateral as margin assets and Clearing Fund contributions. OCC's 
assessment of an asset class generally includes an evaluation of credit 
risk, liquidity risk, and market risk.\5\ With respect to credit risk, 
the CRM Policy requires OCC staff to evaluate the creditworthiness of 
counterparties, including custodial agents and settlement banks and to 
monitor the health of such counterparties on an ongoing basis.\6\ 
Regarding liquidity risk, OCC gives no value to a participant for its 
own (or its affiliate's) debt or equity securities, and limits the 
amount of a particular asset type that a participant may pledge under 
the CRM Policy.\7\ With respect to market risks, the CRM Policy 
provides that eligible asset classes are accepted after consideration 
of their liquidity, price transparency, price volatility, offset 
potential with contracts cleared by OCC, modeling implications and 
projected inventories.\8\
---------------------------------------------------------------------------

    \5\ Notice, 82 FR at 52080.
    \6\ Id.
    \7\ Id.
    \8\ Id.
---------------------------------------------------------------------------

    The CRM Policy describes OCC's approach to valuing collateral and 
setting and applying haircuts. OCC's pricing information, as described 
in the CRM Policy, feeds into OCC's processes for establishing 
haircuts, daily mark-to-market valuation of collateral, and intraday 
valuation of collateral. Given the importance of pricing data to inform 
these processes, OCC maintains redundant information feeds from 
multiple sources to help ensure accuracy and quality.\9\
---------------------------------------------------------------------------

    \9\ Notice, 82 FR at 52080-81.
---------------------------------------------------------------------------

    The CRM Policy also summarizes OCC's two approaches for valuing 
collateral: Collateral in Margins (``CiM'') and haircuts.\10\ Under the 
CiM approach, the current market value of margin assets is included as 
a positive asset value in the calculation of a portfolio's net asset 
value within OCC's System for Theoretical Analysis and Numerical 
Simulations (``STANS''). OCC then offsets this positive asset value 
based on, among other things, the expected shortfall and stress test 
charges associated with an account, resulting in a net excess or net 
deficit.\11\ For collateral that is not managed using the CiM process, 
the CRM Policy provides that OCC subjects such collateral to percentage 
haircuts established at the

[[Page 60253]]

time the collateral is accepted by OCC and that are monitored regularly 
to help ensure the haircuts remain adequate.\12\
---------------------------------------------------------------------------

    \10\ Notice, 82 FR at 52081.
    \11\ Notice, 82 FR at 52081, note 23.
    \12\ Notice, 82 FR at 52081.
---------------------------------------------------------------------------

    Additionally, the CRM Policy provides that OCC's Credit and 
Liquidity Working Group must review the policy's performance and 
adequacy on at least an annual basis, including with respect to 
collateral eligibility, concentration limits, collateral haircuts and 
monitoring processes.\13\
---------------------------------------------------------------------------

    \13\ Id.
---------------------------------------------------------------------------

III. Summary of Comment Received

    The Commission received one comment letter in response to the 
proposed rule change.\14\ The commenter stated that the proposed rule 
change is consistent with the Act.\15\
---------------------------------------------------------------------------

    \14\ See supra note 4.
    \15\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the 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 
Act and the rules and regulations thereunder applicable to such 
organization.\16\ After carefully considering the proposed rule change 
and the comment letter, the Commission finds that the proposed rule 
change is consistent with the requirements of the 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 Act and Rule 17Ad-22(e)(5) under the Act.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
registered clearing agency be designed to do, among other things, the 
following: (1) Promote the prompt and accurate clearance and settlement 
of securities transactions; (2) 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 (3) in general protect investors and 
the public interest.\17\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The CRM Policy describes OCC's process for limiting the collateral 
that it accepts to assets with low credit, liquidity, and market risk. 
The acceptance of only low-risk collateral increases the likelihood 
that such collateral can be liquidated in a timely manner, thereby 
enhancing OCC's ability to continue to perform its critical services 
for the financial markets while also managing a default. The CRM Policy 
also describes how OCC haircuts such collateral, and requires review of 
such haircuts at least annually. Ensuring that collateral haircuts are 
appropriately set and reviewed on a regular basis increases the 
likelihood that OCC will collect and hold collateral that can be 
liquidated at a value at or above the value attributed to it. This 
approach thereby increases the likelihood that OCC will be able to 
continue to meet its settlement obligations and manage the default of a 
clearing member by liquidating the defaulting clearing member's 
collateral in a timely and effective manner.
    The timely liquidation of collateral at or above the expected value 
would, therefore, support OCC's ability to continue to meet settlement 
obligations on time, promoting the prompt and accurate clearance and 
settlement of securities transactions. In addition, being able to 
successfully liquidate collateral in a timely and effective manner 
would reduce the likelihood of OCC having to draw on mutualized 
resources, including Clearing Fund contributions. As such, the 
Commission believes that the proposal would help assure the 
safeguarding of securities and funds which are in the custody or 
control of OCC, or for which OCC is responsible. As a result, the 
Commission also finds that the proposed rule change, in general, 
protects investors and the public interest. Accordingly, the Commission 
finds that the proposed rule change is consistent with Section 17A of 
the Act.\18\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(3) of the Act

    Rule 17Ad-22(e)(5) requires that a covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to limit the assets it accepts as 
collateral to those with low credit, liquidity, and market risks; set 
and enforce appropriately conservative haircuts and concentration 
limits if the covered clearing agency requires collateral to manage its 
or its participants' credit exposure; and, require a review of the 
sufficiency of its collateral haircuts and concentration limits to be 
performed not less than annually.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------

    As discussed above, the proposed CRM Policy would address each 
component of Rule 17Ad-22(e)(5).\20\ First, the proposed CRM Policy 
requires that, in determining forms of collateral as margin assets and 
Clearing Fund contributions, OCC evaluates the market, credit, and 
liquidity risk of an asset class. Second, the CRM Policy provides for 
the maintenance of redundant pricing information feeds from multiple 
sources to ensure the availability of information that is critical to 
OCC's daily and intraday processes for collateral valuation. The CRM 
Policy further describes OCC's processes for setting haircuts either 
via the use of STANS or percentage-based haircuts. Third, the proposed 
CRM requires at least annual review of concentration limits and 
collateral haircuts. The Commission finds, therefore, that the proposed 
rule change is consistent with Rule 17Ad-22(e)(5).\21\
---------------------------------------------------------------------------

    \20\ Id.
    \21\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed change is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A of the Act \22\ and 
the rules and regulations thereunder.
---------------------------------------------------------------------------

    \22\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-OCC-2017-008) be, and hereby is, 
approved.
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27230 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P