[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67042-67044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27292]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68147; File No. SR-OCC-2012-17]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Filing, as Modified by
Amendment No. 1 Thereto, Relating to the Margining of Segregated
Futures Customer Accounts on a Gross Basis
November 2, 2012.
I. Introduction
On September 14, 2012, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') an
advance notice concerning a proposed rule change SR-OCC-2012-17
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed rule
change was published in the Federal Register on September 26, 2012.\3\
The advance notice was published in the Federal Register on October 1,
2012.\4\ On October 11, 2012, OCC filed Amendment No. 1 to the proposed
rule change and the advance notice.\5\ The Commission received no
comment letters on either publication. This publication serves as a
notice of no objection to the advance notice.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ ``Notice of Filing of Proposed Rule Change Relating to the
Margining of Segregated Futures Customer Accounts on a Gross
Basis,'' Release No. 34-67896 (September 20, 2012), 77 FR 59231
(September 26, 2012).
\4\ ``Advance Notice Relating to the Margining of Segregated
Futures Customer Accounts on a Gross Basis,'' Release No. 34-67921
(September 25, 2012), 77 FR 59998 (October 1, 2012).
\5\ In Amendment No. 1, OCC proposed wording changes and
responded to a CFTC interpretation concerning what constitutes
initial margin. Specifically, it amended the text of Rule 601 by
inserting the word ``initial'' before the word ``margin,'' to more
closely parallel CFTC Rule 39.13(g)(8)(i)1 which references
``initial margin.'' It also amended Item 3 of Form 19b-4 to, first,
include CFTC's definition of ``initial margin'' and second, to
clarify which components of OCC's margin calculations meets the
definition of ``initial margin'' as the term is defined under CFTC
Rules. Amendment No. 1 is technical in nature, and therefore the
Commission is not publishing Amendment No. 1 for public comment.
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II. Description of the Proposed Rule Change
This advance notice concerns a proposed rule change. The purpose of
this proposed rule change is to provide for the calculation of initial
margin for OCC segregated futures customer accounts on a gross basis,
as required by CFTC Rule 39.13(g)(8)(i).\6\
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\6\ 17 CFR 39.13(g)(8)(i).
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The CFTC's Customer Gross Margin Rule
On October 18, 2011, the CFTC issued final regulations implementing
many of the new statutory core principles for CFTC-registered
derivatives clearing organizations (``DCOs'') enacted under the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank
Act''). As a registered DCO (as well as a registered securities
clearing agency), OCC has previously implemented rule changes designed
to bring OCC into compliance with CFTC rules applicable to DCOs that
went into effect on January 9, 2012 \7\ and May 7, 2012.\8\ OCC
believes it is necessary to amend its Rules in order to ensure
compliance with the gross margin rule, which requires a DCO to
``collect initial margin on a gross basis for each clearing member's
customer account(s) equal to the sum of the initial margin amounts that
would be required by the derivatives clearing organization for each
individual customer within that account if each individual customer
were a clearing member'' \9\ as required by CFTC Rule 39.13(g)(8)(i).
The gross margin rule goes into effect on November 8, 2012; however,
OCC proposed to begin complying with the gross margin rule on November
5, 2012 as described herein.
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\7\ See SR-OCC-2011-18.
\8\ See SR-OCC-2012-06.
\9\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334, 69439 (November 8, 2011).
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OCC's System for Calculating Margin
OCC currently calculates margin requirements for each clearing
member's segregated futures customer account held at OCC on a net basis
by applying OCC's System for Theoretical Analysis and Numerical
Simulations (``STANS''). STANS calculates initial margin with respect
to each account of a clearing member, including each clearing member's
futures customer account(s), on a net basis. STANS includes both a net
asset value (``NAV'') component and a risk component, with the risk
component being the equivalent of ``initial margin'' as that term is
defined under CFTC Rules. The NAV component marks all positions to
market and nets long and short positions to determine the NAV of each
clearing member's portfolio of customer positions. The NAV component
represents the cost to liquidate the portfolio at current prices by
selling the net long positions and buying in the net short positions.
The risk component is estimated by means of an expected shortfall risk
measure obtained from
[[Page 67043]]
``Monte Carlo'' simulations designed to measure the additional asset
value required in any portfolio to eliminate an unacceptable level of
risk that the portfolio would liquidate to a deficit.
OCC presently lacks sufficient information about individual
customer positions to calculate initial margin at the level of each
individual customer. However, OCC has been coordinating with other DCOs
to establish an industry-wide mechanism for complying with the customer
gross margin rule. Pursuant to this new system, each DCO's clearing
members will submit data files to the DCO identifying positions by
numerical customer identifiers.\10\ OCC will use this information to
calculate initial margins, using STANS, for each customer identifier of
a clearing member and to aggregate those initial margin calculations to
determine the total futures customer margin requirement for the
clearing member's segregated futures customer account(s) held at
OCC.\11\ OCC will then compare the aggregate positions reported by each
clearing member with its own records and make any needed adjustments to
the initial margin calculation to ensure all positions on OCC's books
are properly margined.
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\10\ The position data provided to OCC by clearing members will
not include (a) information with respect to the allocation of margin
assets to particular customers, nor (b) information with respect to
settlement obligations arising from the exercise, assignment or
maturity of cleared contracts. For this reason, OCC will treat all
margin assets and settlement obligations for each account to which
the gross margin rule applies as being in sub-accounts of the
Clearing Member. OCC will calculate margin, using STANS, separately
for each sub-account and will aggregate the calculated margin
requirements at the level of the clearing member's segregated
futures customer account to which the sub-accounts relate.
\11\ OCC currently carries the following account types that are
segregated pursuant to Section 4d of the Commodity Exchange Act:
Segregated Futures Accounts, Segregated Futures Professional
Accounts, non-Proprietary X-M accounts, and internal non-proprietary
cross-margining accounts. All such accounts would be margined on a
gross basis under the proposed amendments to OCC Rule 601.
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Proposed By-Law and Rule Changes
The proposed changes to OCC's Rules provide for the calculation of
initial margin for segregated futures customer accounts on a gross
basis and mandate submission of the clearing member data files
necessary to allow OCC to calculate initial margin at the level of each
futures customer. In the event that the data included in these data
files is incomplete (for example, if OCC shows positions held in a
clearing member's segregated futures accounts, but those positions are
not reflected in the data file), OCC will create a separate sub-account
to be used for initial margin calculation purposes only. Positions
recorded on OCC's books and records, but not reflected in the data
file, will be attributed to this sub-account and an initial margin
amount will be calculated for the sub-account. This initial margin
amount will be added to a clearing member's initial margin requirement.
OCC has determined to adopt this approach to dealing with discrepancies
between its own records and clearing member data files in order to
ensure that OCC does not collect an inadequate amount of initial margin
from clearing members.
III. Description of the Advance Notice
OCC filed its proposed rule change as an advance notice pursuant to
Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision
Act of 2010 (``Clearing Supervision Act'') because OCC believed it
could be deemed to materially affect the nature or level of risks
presented by OCC. OCC's proposed rule changes would require the
collection of futures customer margin on a gross basis in order to
comply with CFTC Rule 39.13(g)(8)(i). This is expected to lead to an
increase in the amount of margin OCC collects from its clearing members
with respect to their segregated futures customer accounts held at OCC,
as well as a corresponding decrease in OCC's default risk with respect
to those accounts. This decreased risk may be material. While the
amount of initial margin collected by OCC with respect to segregated
futures customer accounts of clearing members will increase, the
fundamental processes used by OCC to calculate such initial margin
requirements will continue to rely on STANS, which OCC is not proposing
to change as a result of the gross margin rule. OCC therefore does not
expect that the nature of its risks with respect to segregated futures
customer accounts will change, merely that the level of such risk will
change.
The industry-wide effort to implement gross initial margining for
segregated futures customer accounts could pose operational risks to
OCC due to the complexities involved in the exchange of customer-level
position data between clearing members and OCC and in ensuring that OCC
is prepared to process the information received and incorporate it into
its own margin calculations. Implementing the customer gross margin
rule changes on November 8, 2012 (a Thursday) could also exacerbate the
operational challenges involved in implementing customer gross
margining. In order to mitigate these challenges, OCC and other DCOs
have determined that it is advisable to implement these changes in
advance of the CFTC's mandatory November 8, 2012 compliance date, on
November 5, 2012 (a Monday). This is being done in coordination with
other DCOs and in order to avoid a mid-week implementation date. As the
Rule change described herein is mandated by regulations to which OCC is
subject as a registered DCO, OCC has no discretion in whether to
implement these Rule changes. Nevertheless, OCC believes that these
Rule changes will not diminish OCC's ability to ensure the safeguarding
of securities and funds in OCC's custody or control or for which OCC is
responsible.
IV. Analysis of Advance Notice
Standard of Review
A registered clearing agency that has been designated as a
systemically important financial market utility (``FMU'') by the
Financial Stability Oversight Council (``FSOC'') must provide advance
notice of all changes to its rules, procedures or operations that
could, as defined in the rules of the supervisory agency, materially
affect the nature or level of risk presented by the clearing
agency.\12\ Absent an extension or request for additional information,
as discussed in greater detail below, the Commission is required to
notify the clearing agency of any objection regarding the proposed
change within the 60 day time frame established by Title VIII of the
Dodd-Frank Act (``Title VIII'').\13\ A designated clearing agency may
not implement a change to which its supervisory agency has objected;
\14\ however, the clearing agency is explicitly permitted to implement
a change if it has not received an objection from its supervisory
agency within the same 60 day time period.\15\
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\12\ 12 U.S.C. 5465(e). See also, Process for Submissions for
Review of Security-Based Swaps for Mandatory Clearing and Notice
Filing Requirements for Clearing Agencies; Technical Amendments to
Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory
Organizations, Rel. No. 34-63557 (December 15, 2010), 75 FR 82490
(December 30, 2010) (Proposing Release); Rel. No. 34-67286 (June 28,
2012), 77 FR 41602 (July 13, 2012) (Adopting Release).
\13\ 12 U.S.C. 5465(e)(1)(E).
\14\ 12 U.S.C. 5465(e)(1)(F).
\15\ 12 U.S.C. 5465(e)(1)(G).
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Although Title VIII does not specify a standard that the Commission
must apply to determine whether to object to an advance notice, the
Commission believes that the purpose of Title VIII, as stated under
Section 802(b),\16\ is relevant to the review of advance notices.
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\16\ 12 U.S.C. 5461(b).
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The stated purpose of Title VIII is to mitigate systemic risk in
the financial system and promote financial stability, by (among other
things) authorizing the Federal Reserve Board to promote uniform risk
management standards for systemically important FMUs, and providing an
enhanced role for the Federal Reserve Board in the supervising of risk
management standards for systemically important FMUs.\17\ Therefore,
the Commission believes that when reviewing advance notices for FMUs,
the consistency of an advance notice with Title VIII may be judged
principally by reference to the consistency of the advance notice with
applicable rules of the Federal Reserve Board governing payment,
clearing, and settlement activity of the designated FMU.\18\
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\17\ 12 U.S.C. 5461(b).
\18\ See Financial Market Utilities, 77 FR 45907 (Aug. 2, 2012).
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Section 805(a) requires the Federal Reserve Board and authorizes
the Commission to prescribe standards for the payment, clearing, and
settlement activities of FMUs designated as systemically important, in
consultation with the supervisory agencies. Section 805(b) of the
Clearing Supervision Act \19\ requires that the objectives and
principles for the risk management standards prescribed under Section
805(a) shall be to:
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\19\ 12 U.S.C. 5464(b).
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Promote robust risk management and safety and soundness;
Reduce systemic risks; and
Support the stability of the broader financial system.
The relevant rules of the Federal Reserve Board prescribing risk
management standards for designated FMUs by their terms do not apply to
designated FMUs that are clearing agencies registered with the
Commission.\20\ Therefore, the Commission believes that the objectives
and principles by which the Federal Reserve Board is required and the
Commission is authorized to promulgate such rules, as expressed in
Section 805(b) of Title VIII,\21\ are the appropriate standards at this
time by which to evaluate advance notices.\22\ Accordingly, the
analysis set forth below is organized by reference to the stated
objectives and principles in Section 805(b).
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\20\ 12 CFR 234.1(b).
\21\ 12 U.S.C. 5464(b).
\22\ The risk management standards that have been adopted by the
Commission in Rule 17Ad-22 are substantially similar to those of the
Federal Reserve Board applicable to designated FMUs other than those
designated clearing organizations registered with the CFTC or
clearing agencies registered with the Commission. See Clearing
Agency Standards, Exchange Act Release No. 34-68080 (Oct. 22, 2012).
To the extent such Commission standards are in effect at the time
advance notices are reviewed in the future, the standards would be
relevant to the analysis. Moreover, the analysis of clearing agency
rule filings under the Exchange Act would incorporate such standards
directly.
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Discussion of Advance Notice
OCC's proposed rule changes are expected to increase the amount of
margin collected with respect to clearing members' segregated futures
accounts held at OCC. This higher level of margin is expected to lead
to a corresponding decrease in OCC's default risk with respect to those
accounts. And while the level of risk is expected to change, OCC does
not expect that the nature of its risks to change because the
fundamental processes used to calculate initial margin will continue to
rely on the same system for margin calculations. In addition, OCC
represents that the rule change does not diminish OCC's ability to
ensure the safeguarding of the securities and funds in OCC's custody or
control.
Moreover, OCC is making these changes in order to facilitate
compliance with a CFTC requirement. Its ability to comply with relevant
regulatory requirements and to not be faced with inconsistent
regulatory requirements (as would be the case if the Commission
objected to the proposal) promotes legal certainty and predictability
as to what OCC will require from its clearing members. This legal
certainty and predictability promotes the objectives and principles
described above.
For these reasons, the Commission finds that OCC's proposed rule
change promotes robust risk management and safety and soundness,
reduces systemic risks and supports the stability of the broader
financial system, and therefore does not object to the advance notice.
V. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\23\ that, the Commission does not object to
proposed rule change (File No. SR-OCC-2012-17) and that OCC be and
hereby is authorized to implement proposed rule change (File No. SR-
OCC-2012-17) as of the date of this notice or the date of the ``Order
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto,
Relating to the Margining of Segregated Futures Customer Accounts on a
Gross Basis'' (File No. SR-OCC-2012-17), whichever is later.
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\23\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27292 Filed 11-7-12; 8:45 am]
BILLING CODE 8011-01-P