[Federal Register Volume 78, Number 171 (Wednesday, September 4, 2013)]
[Notices]
[Pages 54507-54509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21458]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70279; File No. SR-OCC-2013-14]
Clearing Agency; the Options Clearing Corporation; Notice of
Filing of Proposed Rule Change To Amend an Existing Interpretation and
Policy To Give OCC Discretion Not To Grant a Particular Clearing Member
Margin Credit for an Otherwise Eligible Security
August 28, 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 August 15, 2013, 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 by OCC.\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-2013-805.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
OCC proposes to amend an existing Interpretation and Policy so that
OCC has discretion to disapprove as margin collateral for a particular
clearing member, shares of an otherwise eligible security held as
margin.
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 these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose of the Proposed Rule Change
The purpose of the proposed rule change is to provide OCC with
discretion with regard to granting or not granting margin credit to a
clearing member. OCC currently may withhold margin credit from all
clearing members with respect to a specific security. OCC proposes to
address the risk presented by concentrated positions of securities
posted as margin by particular clearing members by withholding margin
credit from such clearing member's accounts. OCC proposes to enhance
its ability to limit its risk exposure to a concentrated position of
equity securities posted as margin by a specific clearing member by
providing OCC with the discretion to disregard, for the purposes of
granting margin credit, some or all of the otherwise eligible equity
securities posted as margin. In addition, the proposed rule change is
designed to provide OCC with discretion to make exceptions to proposed
Interpretation and Policy .14 with respect to a specific clearing
member. Accordingly, OCC may allow margin credit for an otherwise
ineligible security for a specific clearing member in situations in
which OCC determines that such security serves as a hedge to positions
in cleared contracts in the same account of such clearing member.
Rule 604 lists the acceptable types of assets that clearing members
may post with OCC to satisfy their margin requirements under Rule 601,
including equity securities, and establishes the eligibility criteria
for such assets. Equity securities are the most common form of margin
assets posted by clearing members and, under Rule 601, are included in
OCC's STANS margining system for the purposes of valuing such equity
securities and determining on a portfolio basis a clearing member's
margin obligation to OCC. Interpretation and Policy .14 to Rule 604
allows OCC to disapprove a security as margin collateral for all
clearing members based on a consideration of the factors set forth in
the interpretation, including number of outstanding shares, number of
outstanding shareholders and overall trading volume. The STANS system
currently takes into account the risk to a portfolio presented by
fluctuations in the market price ofconcentrated security positions by
identifying the two individual securities whose adverse price movements
would result in the largest losses in each account and applying
additional margin requirements to an account based on those losses if
appropriate.However, this test does not evaluate a large equity
securities position in relation to the securities position's average
daily trade volume, which would be relevant if OCC were required to
liquidate the position. OCC has determined that in the event of a
clearing member liquidation, OCC may be exposed to concentration risk
arising from a large equity security position deposited or pledged as
margin by a particular clearing member. Depending on the relationship
between the average daily trading volume of a particular security and
the number of outstanding shares of such security deposited by a
clearing member as margin, it is possible that the listed equities
markets may not be able to quickly absorb the equity securities OCC
seeks to sell, or without an
[[Page 54508]]
appreciable negative price impact, in the event OCC needs to liquidate
the clearing member's accounts. This risk is greatest when the number
of shares being sold is large and the average daily trading volume is
low. Neither the STANS system nor Rule 604 explicitly addresses this
type of concentration risk.
To address concentration risk arising from the potential need to
liquidate a particular clearing member's margin collateral, OCC
proposes to expand its discretion under Interpretation and Policy .14
to limit, in OCC's discretion, the margin credit granted to an
individual clearing member account which maintains a concentrated
equity securities position by disregarding some or all of the otherwise
eligible equity securities posted as margin based on an assessment of
specific factors listed in Interpretation and Policy .14. OCC considers
an equity security's average daily trading volume and the number of
shares a clearing member deposited as margin to be the two most
significant factors when making a decision to limit margin credit due
to concentration risk.\4\ In addition, OCC proposes to amend
Interpretation and Policy .14 so that it may grant margin credit when
otherwise ineligible securities are deposited as margin collateral if
such ineligible securities act as a hedge against cleared contracts
held in the same account. For example, if a clearing member deposits
otherwise ineligible equity securities as margin, OCC may nevertheless
deem such ineligible securities to be acceptable margin collateral to
the extent that the position is a hedge against a short position in its
cleared contracts, because a decline in the value of the securities
that serve as a hedge would be wholly or partially offset by an
increase in value in the hedged position thereby reducing or
eliminating the concentration risk. In such a situation, OCC will limit
the margin credit granted to the lesser of a multiple of the daily
trading volume or the ``delta equivalent position'' \5\ for the
particular equity security, taking into account the hedging
position.\6\
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\4\ The limit is currently two times the equity security's
average daily trading volume.
\5\ The ``delta equivalent position'' is the value of a
securities position that takes into account the position's use as a
hedge against cleared option or futures positions. This value is
calculated using the ``delta'' of the option or futures contract,
which is the ratio between the theoretical change in the price of an
underlying asset to the corresponding change in the price of the
options or futures contract. Thus, delta measures the sensitivity of
an options or futures contract price to changes in the price of the
underlying asset. For example, a delta of +0.7 means that for every
$1 increase in the price of the underlying stock, the price of a
call option will increase by $0.70. Delta for an option or future
can be expressed in shares of the underlying asset. For example, a
standard put option with a delta of times -.45 would have a delta of
-45 shares, because the unit of trading is 100 shares.
\6\ Assume, for example, an average daily trade volume of 250
shares, a threshold of 2 times the average daily trade volume, and a
delta of -300 shares for the options on a particular security in a
particular account. A position of 700 shares that did not hedge any
short options or futures would receive credit for only 500 shares
(i.e., 2 times the average daily trade volume). If the net long
position in the account, as adjusted for the delta of short option
and futures positions, were only 400, credit would be given for the
entire 700 shares since the delta equivalent position is below the
500 share threshold. However, if the option delta were +300, the net
long position would be 1000, and credit would only be given for 500
shares because the delta equivalent position would exceed the 500
share threshold.
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OCC staff has been monitoring concentrated securities positions and
assessing the impact of the proposed change described in this rule
filing. OCC believes that, with OCC's assistance by supplying
additional information to clearing members, clearing members will be
able to accommodate the proposed changes without undue hardship.
Accordingly, after receiving regulatory approval for the proposed rule
change, OCC will implement the change and work on an ``as needed''
manual basis with clearing members that are impacted until the limits
are imposed systematically and the distribution of the applicable files
and reports to clearing members is automated.
(2) Statutory Basis for the Proposed Rule Change
The proposed rule change is consistent with the purposes and
requirements of Section 17A(b)(3)(F) \7\ of the Act \8\ and the rules
and regulations thereunder, including Rules 17Ad-22(b)(1),\9\ 17Ad-
22(b)(2)\10\ and 17Ad-22(d)(2)\11\ for the following reasons. It
provides for the prompt and accurate clearance and settlement of
securities transactions and the protection of investors and the public
interest by improving OCC's risk management process related to deposits
as margin collateral of concentrated equity securities positions by
individual clearing members. The proposed rule change enhances OCC's
ability to limit its risk exposure to potential losses from defaults by
such clearing members under normal market conditions through the use of
risk-based parameters and encourages clearing members to have
sufficient financial resources to meet their obligations to OCC. The
proposed rule change is not inconsistent with any existing OCC By-Laws
or Rules, including those proposed to be amended.
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\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 15 U.S.C. 78a et seq.
\9\ 17 CFR 240.17Ad-22(b)(1).
\10\ 17 CFR 240.17Ad-22(b)(2).
\11\ 17 CFR 240.17Ad-22(d)(2).
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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.\12\ The proposed change will be
applied equally to every clearing member based on all the factors
listed in proposed Interpretation and Policy .14 and would encourage
clearing members to avoid depositing concentrated equity security
positions as margin, particularly where the average daily trading
volume of the deposited security is low, while taking into account the
use of equity securities as a hedge against short positions in cleared
options or futures contracts. By limiting margin credit granted as
proposed, OCC will reduce its risk exposure to a concentrated position
of equity securities posted as margin by any clearing member.
Accordingly, the proposed rule change contributes to the goal of OCC's
financial stability in the event of clearing member default, rendering
not unreasonable or inappropriate any burden on competition that the
changes could be regarded as imposing.
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\12\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited 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 the 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
[[Page 54509]]
with respect to the proposal are completed.\13\
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\13\ 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-2013-14 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-2013-14. 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 of submission. 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 10:00 a.m. and 3:00 p.m. Copies of such filing also will
be available for inspection and copying at the principal office of OCC
and on OCC's Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_13_14.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-2013-14 and
should be submitted on or before September 25, 2013.
For the Commission by the Division of Trading and Markets,
pursuant to delegated Authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-21458 Filed 9-3-13; 8:45 am]
BILLING CODE 8011-01-P