[Federal Register Volume 78, Number 115 (Friday, June 14, 2013)]
[Notices]
[Pages 36002-36005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-14112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69723; File No. SR-OCC-2013-08]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Reflect Enhancements in
OCC's System for Theoretical Analysis and Numerical Simulations as
Applied to Longer-Tenor Options
June 10, 2013.
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 May 30, 2013, The Options Clearing Corporation (``OCC'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
prepared by the clearing agency.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ OCC also filed the proposed rule change as an advance notice
under 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 (``Clearing Supervision
Act''). 12 U.S.C. 5465(e)(1). See SR-OCC-2013-803.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change would provide for enhancements in OCC's
margin model for longer-tenor options (i.e., those options with at
least three years of residual tenor) and would reflect those
enhancements in the description of OCC's margin model in OCC's Rules.
II. Clearing Agency'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 such statements.\4\
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\4\ The Commission has modified the text of the summaries
prepared by OCC.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
The purpose of this proposed rule change is to provide for
enhancements in OCC's margin model for longer-tenor options (i.e.,
those options with at least three years of residual tenor) and to
reflect those enhancements in the description of OCC's margin model in
OCC's Rules. OCC also proposes to make changes to the description of
OCC's margin model to clarify that description.
1. Background
On August 30, 2012, OCC submitted a rule change with respect to
OCC's proposal to clear certain over-the-counter options on the S&P 500
Index (``OTC Options'').\5\ The OTC Options Rule Filing, as amended,
added a statement appearing before Section 6 of Article XVII of OCC's
By-Laws that ``THE BY-LAWS IN THIS SECTION (OTC INDEX OPTIONS) ARE
[[Page 36003]]
INOPERATIVE UNTIL FURTHER NOTICE BY THE CORPORATION'' to clarify that
OCC would not commence clearing OTC Options until the changes being
made to OCC's margin model for longer-tenor options, as provided in
this rule change, were put in place, notwithstanding whether the OTC
Options Rule Filing had already been approved. OCC is now proposing to
remove this statement from Section 6, which will allow OCC to commence
clearing of OTC Options on the S&P 500 Index.
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\5\ See Release No. 34-67835; File No. SR-OCC-2012-14 (``OTC
Options Rule Filing''); published September 18, 2012 at 77 FR 57602.
SR-OCC-2012-14 replaced SR-OCC-2011-19, which was withdrawn on March
9, 2012. The OTC Options Rule Filing was subsequently amended to add
a statement to Section 6 of Article XVII of OCC's By-Laws providing
that the OTC Index Options By-Laws were to be inoperative until
further notice by OCC. See File No. SR-OCC-2012-14 Amendment No.1.
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Additional information concerning OCC's proposal to clear OTC
Options is included in the OTC Options Rule Filing. As described in the
OTC Options Rule Filing, OCC intends to use its STANS margin system to
calculate margin requirements for OTC Options on the same basis as for
exchange-listed options cleared by OCC. However, OCC is proposing to
implement enhancements to its risk models for all longer-tenor options
(including OTC Options) in order to better reflect certain risks of
longer-tenor options. The changes described herein would apply to all
longer-tenor options cleared by OCC and would be implemented before OCC
begins clearing OTC Options.
2. Description of Proposed Rule Changes
OCC states that the proposed rule change includes daily OTC quotes,
variations in implied volatility, and valuation adjustments in the
modeling of all longer-tenor options under STANS, thereby enhancing
OCC's ability to set margin requirements through the use of risk-based
models and parameters and encouraging clearing members to have
sufficient financial resources to meet their obligations to OCC. OCC
believes the proposed rule change would not affect OCC's safeguarding
of securities and funds in its custody or control because, though it
may change margin requirements in respect of certain longer-tenor
options, it does not change the manner in which margin assets are
pledged. In addition, OCC believes the proposed rule change allows OCC
to enhance its risk management procedures and controls related to
longer-tenor options.
OCC states that it calculates clearing-level margin using STANS,
which determines the minimum expected liquidating value of each account
using a large number of projected price scenarios created by large-
scale Monte Carlo simulations. OCC is proposing to implement
enhancements to the STANS margin calculation methodology with respect
to longer-tenor options and to amend Rule 601 to reflect these
enhancements as well as to make certain clarifying changes in the
description of STANS in Rule 601. The specific details of the
calculations performed by STANS are maintained in OCC's proprietary
procedures for the calculation of margin and coded into the computer
systems used by OCC to calculate daily margin requirements.
OCC has proposed at this time to clear only OTC Options on the S&P
500 index and only such options with tenors of up to five years.
However, OCC currently clears FLEX Options with tenors of up to fifteen
years. While OCC believes that its current risk management practices
are adequate for current clearing activity, OCC proposes to implement
risk modeling enhancements with respect to all longer-tenor options.
Daily OTC Indicative Quotes
OCC states that, in general, the market for listed longer-tenor
options is less liquid that the market for other options, with less
volume and therefore less price information. In order to supplement
OCC's pricing data derived from the listed markets, and to improve the
price discovery process for longer-tenor options, OCC proposes to
include in the daily dataset of market prices used by STANS to value
each portfolio indicative daily quotations obtained through a third-
party service provider that obtains these quotations through a daily
poll of OTC derivatives dealers. A third-party service provider was
selected to provide this data in lieu of having the data provided
directly by the OTC derivatives dealers in order to avoid unnecessarily
duplicating reporting that is already done in the OTC markets.
Variations in Implied Volatility
OCC states that, to date, the STANS methodology has assumed that
implied volatilities of option contracts do not change during the two-
day risk horizon used by OCC in the STANS methodology. According to
OCC, back testing of its margin models has identified few instances in
which this assumption would have, as a result of sudden changes in
implied volatility, resulted in margin deposits insufficient to
liquidate clearing member accounts without loss. However, as OCC
expects to begin clearing more substantial volumes of longer-tenor
options, including OTC Options, OCC believes that implied volatility
shocks may become more relevant due to the greater sensitivity of
longer-tenor options to implied volatility. OCC therefore proposes to
introduce variations in implied volatility in the modeling of all
longer-tenor options under STANS. OCC states that this will be achieved
by incorporating, into the set of risk factors whose behavior is
included in the econometric models underlying STANS, time series of
proportional changes in implied volatilities for a range of tenors and
in-the-money and out-of-the-money amounts representative of the dataset
provided by OCC's third-party service provider.
OCC states that it has reviewed individual S&P 500 Index put and
call options positions with varying in-the-money amounts and with four
to nine years of residual tenor and that such review indicates that the
inclusion of modeled implied volatilities tends to result in less
margin being held against short call positions and more margin being
held against short put positions. OCC believes these results are
consistent with what would be expected given the strong negative
correlation that exists between changes in implied volatility and
market returns.
OCC states that the description of the Monte Carlo simulations
performed within STANS in Rule 601 references revaluations of assets
and liabilities in an account under numerous price scenarios for
``underlying interests.'' In order to accommodate the proposed implied
volatility enhancements, OCC is proposing to amend this portion of Rule
601 to provide that the scenarios used may also involve projected
levels of other variables influencing prices of cleared contracts and
modeled collateral. Accordingly, the references to ``underlying
interests'' are proposed to be deleted.
Valuation Adjustment
OCC states that historically it has not cleared a significant
volume of longer-tenor options, but that it anticipates that there will
be growth in volume of longer-tenor options, including OTC Options,
being cleared with three to five year tenors. Longer-tenor options may
represent a larger portion of any clearing member's portfolio in the
future, and OCC has therefore identified a need to model anticipated
changes in the value of longer-tenor options on a portfolio basis in
order to address OCC's exposure to longer-tenor options that may have
illiquid characteristics. OCC proposes to introduce a valuation
adjustment into the portfolio net asset value used by STANS based upon
the aggregate sensitivity of any longer-tenor options in a portfolio to
the overall level of implied volatilities at three years and five years
and to the relationship between implied volatility and exercise prices
at both the three- and five-year tenors in order to allow for the
anticipated market impact of unwinding
[[Page 36004]]
a portfolio of longer-tenor options, as well as for any differences in
the quality of data in OCC's third party service provider's dataset,
given that month-end data may be subjected to more extensive validation
by the service provider than daily data. In order to accommodate the
planned valuation adjustment for longer-tenor options, OCC proposes to
add language to Rule 601 to indicate that the projected portfolio
values under the Monte Carlo simulations may be adjusted to account for
bid-ask spreads, illiquidity, or other factors.
Clarification of Pricing Model Reference in Rule 601
Rule 601 currently refers to the use of ``options pricing models''
to predict the impact of changes in values on positions in OCC-cleared
contracts. OCC is proposing to amend this description to reflect that
OCC currently uses non-options related models to price certain
instruments, such as futures contracts and U.S. Treasury securities.
OCC states that this change is not intended to be substantive and
simply clarifies the description in Rule 601.
Effect on Clearing Members
OCC believes that the proposed rule change will affect clearing
members who engage in transactions in longer-tenor options, and
indirectly their customers, by enhancing the STANS margin calculation
methodology for these options. The STANS enhancements could increase
margin requirements with respect to these positions. However, OCC
states that it does not believe that the enhancements will result in
significantly increased margin requirements for any particular clearing
member, and therefore that it is not aware of any significant problems
that clearing members are likely to have in complying with the proposed
rule change.
OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A(b)(3)(F) of the Act \6\ and
the rules and regulations thereunder, including Rules 17Ad-22(b)(2) and
(d)(2), because, by providing additional clarity to clearing members
and others concerning the current calculation of margin requirements
under OCC's Rules, while also enhancing the calculation of margin with
respect to longer-tenor options, the proposed modifications would help
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions,\7\ ensure that OCC's rules are reasonably designed to
have participation requirements that are objective and publicly
disclosed and permit fair and open access,\8\ and provide for a well-
founded, transparent, and enforceable legal framework.\9\ OCC states
that the proposed rule change is not inconsistent with any rules of
OCC, including any other rules proposed to be amended.
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\6\ 15 U.S.C. 78q-1.
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 17 CFR 240.17Ad-22(d)(2).
\9\ 17 CFR 240.17Ad-22(d)(1).
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(B) Clearing Agency's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. With respect to a burden on
competition among clearing agencies, OCC does not believe that the
proposed rule change would have any impact because OCC is the only
registered clearing agency that issues options and provides central
counterparty services to the options markets.
OCC does not believe that enhancing OCC's margin model for longer-
tenor options would inhibit access to any of OCC's services or
disadvantage or favor any user of OCC's services in relationship to any
other such user because the model enhancements would apply equally to
all clearing members clearing longer-tenor options. Moreover, OCC
believes that the proposed rule change would also promote competition
among participants in the longer-tenor options markets. The rule change
would enhance OCC's ability to manage risk within OCC's existing
structure, and improve OCC's ability to reduce systemic risk to the
longer-tenor options market in general as well as reduce inter-dealer
counterparty risk in the OTC Options market, allowing for increased
participation in this market.
For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Act applicable to clearing agencies, and would not
impose a burden on competition that is unnecessary or inappropriate in
furtherance of the purposes of the Act because the changes would
enhance OCC's margin methodology for longer-tenor options in ways that
help to promote the purposes of the Act and Rule 17Ad-22 thereunder as
described above.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments were not and are not intended to be solicited by
OCC with respect to the proposed rule change and none have been
received.
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 its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.\10\
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\10\ OCC also filed the proposed rule change as an advance
notice under Section 806(e)(1) of the Clearing Supervision Act. See
supra note 3.
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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 email to [email protected]. Please include
File Number SR-OCC-2013-08 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-2013-08. This file
number should be included on the subject line if email 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
[[Page 36005]]
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 Room, 100 F Street NE., Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of OCC and on OCC's Web site
(http://www.theocc.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-2013-08 and should be
submitted on or before July 5, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14112 Filed 6-13-13; 8:45 am]
BILLING CODE 8011-01-P