[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51087-51089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20955]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65119; File No. SR-OCC-2011-10]
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
August 12, 2011.
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 3, 2011, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would change the method by which the size
of OCC's clearing fund is determined.
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.\3\
---------------------------------------------------------------------------
\3\ The Commission has modified the text of the summaries
prepared by OCC.
---------------------------------------------------------------------------
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 the size of OCC's clearing fund as the amount that is
required within a confidence level selected by OCC to sustain possible
loss under a defined set of scenarios as determined by OCC. The
proposed rule change replaces a previously proposed rule change which
was withdrawn by OCC.\4\ Currently the size of the clearing fund is
calculated each month and is equal to a fixed percentage of the average
total daily margin requirement for the preceding month provided that
this calculation results in a clearing fund of $1 billion or more.\5\
---------------------------------------------------------------------------
\4\ Securities Exchange Act Release 34-62371 (June 24, 2010), 75
FR 37864 (June 30, 2010) (SR-OCC-2010-04). OCC withdrew its proposed
rule change regarding clearing fund sizing in order to submit this
proposed rule change which: Incorporates the amendments that were
proposed to the previous proposed rule change; discusses the
adaptation of the methodology underlying the formula change made to
incorporate the effects of implementing the rule changes described
in Securities Exchange Act Release No. 34-58158 (July 15, 2008), 73
FR 42646 (July 22, 2008) (SR-OCC-2007-20) (``Collateral in Margins
Filing''); provides updated comparative data about the impact of the
proposed clearing fund sizing formula; and makes additional changes
to improve the overall readability of certain proposed rule text.
\5\ If the calculation does not result in a clearing fund of $1
billion or more, the percentage that results in a fund level of at
least $1 billion is applied provided that in no event will the
percentage exceed 7%.
---------------------------------------------------------------------------
Under the proposed formula for determining the size of the clearing
fund, the amount 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'' whose default 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,'' in each case as calculated by OCC with a
specified confidence level. 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.\6\ However, OCC would have the discretion to employ
different confidence levels in these calculations in the future
provided that OCC would not employ confidence levels of less than 99%
without filing a rule change with the Commission.\7\ The size of the
clearing fund would continue to be recalculated monthly based on a
monthly averaging of daily calculations for the previous month and
subject to a
[[Page 51088]]
requirement that the total clearing fund be not less than $1
billion.\8\
---------------------------------------------------------------------------
\6\ ``Clearing member group'' will be defined in Article I
(``Definitions'') of OCC's By-Laws to mean ``a Clearing Member and
any Member Affiliates of such Clearing Member.''
\7\ Proposed Interpretation and Policy .02 to OCC Rule 1001.
\8\ Proposed Interpretation and Policy .01 to OCC Rule 1001.
---------------------------------------------------------------------------
The new formula is designed to more directly take into account
anticipated losses resulting from the clearing member default scenarios
described above and thereby establish the clearing fund at a size that
is sufficient to cover such losses without relying on any rights of OCC
to require clearing members to replenish the clearing fund. The formula
is generally consistent with the current ``Recommendations for Central
Counterparties'' published by the Bank for International Settlements
and the International Organization of Securities Commissioners. Among
the recommendations in the publication are that a clearing organization
``maintain sufficient financial resources to withstand, at a minimum, a
default by the clearing member to which it has the largest exposure in
extreme but plausible market conditions.'' The publication further
advises clearing organizations to plan for the possibility of a default
by two or more clearing members in a short time frame.\9\
---------------------------------------------------------------------------
\9\ See Bank for International Settlements and International
Organization of Securities Commissions, Recommendations for Central
Counterparties (November 2004), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD176.pdf (the``2004 Recommendations'').
OCC notes that in December 2009 the Committee on Payment and
Settlement Systems of the Bank for International Settlements
(``CPSS'') and the Technical Committee of the International
Organization of Securities Commissions (``IOSCO'') began a
comprehensive review of the 2004 Recommendations in order to
strengthen and clarify such recommendations based on experience and
lessons learned from the recent financial crisis. In March 2011, the
CPSS and IOSCO published for comment the results of such review with
comments requested by July 29, 2011. See Bank for International
Settlements and International Organization of Securities
Commissions, Principles for financial market infrastructures (March
2011), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD350.pdf.
---------------------------------------------------------------------------
In considering whether to revise the formula for determining the
size of the clearing fund, 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. This analysis revealed that for this time
period 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, which were two months of extreme volatility
in the U.S. securities markets, the revised formula would have resulted
in a clearing fund size of 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 for this time period under the two formulas were broadly
similar.\10\
---------------------------------------------------------------------------
\10\ Note the comparative data described in this paragraph was
obtained using confidence levels set at 99% and above. OCC estimates
that using only a 99% confidence level for the months referenced
would have lowered by an average of approximately \1/2\% the total
size of the clearing fund as determined by the proposed methodology.
---------------------------------------------------------------------------
Since deciding in September 2009 that it wished to adopt the
revised formula, OCC has continued to compare the size of the clearing
fund under the revised formula with the size under the current formula.
During 2010 the methodology underlying the revised formula was adapted
to incorporate the effects of the implementation of the rule changes
described in the Collateral in Margins Filing.\11\ Under those changes,
certain types of securities accepted as collateral are analyzed for
margin purposes together with positions in cleared products as a single
portfolio, affording a more accurate measurement of risk. During the
period February 2008 through January 2010 (i.e., prior to the
implementation of the Collateral in Margins Filing) for which
comparative data is available, the size of the clearing fund under the
revised formula would have been on average 3% larger than under the
current formula. Including also the further months of July, 2010
through June, 2011 (i.e., since the implementation of the Collateral in
Margins Filing) for which comparative data is available, the
corresponding percentage increase is 2%.
---------------------------------------------------------------------------
\11\ Securities Exchange Act Release No. 34-58158 (July 15,
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20). See supra note
4.
---------------------------------------------------------------------------
The existing formula for determining the size of the clearing fund
was intended to establish the fund at a level reasonably designed to
cover losses resulting from one or more clearing member defaults, and
OCC believes that it has served that purpose adequately. Nevertheless,
OCC believes that the proposed amended formula is a better predictor of
the actual losses that would be likely to result from such defaults.
The existing formula takes potential losses into account only
indirectly by setting the size of the clearing fund as a percentage of
average margin requirements. The revised formula would directly take
into account various types of default scenarios and therefore in OCC's
view would be more likely to result in a level for the clearing fund
that is adequate in the event such scenarios occur. The new formula
would therefore more closely align the size of the clearing fund with
its intended purpose of absorbing losses resulting from clearing member
defaults and would thereby avoid a disruption of the clearance process
even during extreme market conditions.
Article VIII, Section 6 of OCC's By-Laws, which obligates clearing
members to make good deficiencies in their clearing fund deposits
resulting from pro rata charges or otherwise (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) would remain unchanged.
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.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_11_10.pdf.
If approved by the Commission, OCC would implement the revised
formula for determining the size of its clearing fund sixty days after
notice to its clearing members.
2. Statutory Basis
OCC believes the proposed rule changes are consistent with the
requirements of Section 17A of the Act \12\ 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.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
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 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
[[Page 51089]]
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:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or send an e-mail to [email protected]. Please include File Number SR-OCC-2011-10 on the
subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2011-10. 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, 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 OCC and on OCC's Web
site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_11_03.pdf. 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-2011-10 and should be submitted on or before
September 7, 2011.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Elizabeth M. Murphy,
Secretary .
[FR Doc. 2011-20955 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P