[Federal Register Volume 78, Number 179 (Monday, September 16, 2013)]
[Notices]
[Pages 56953-56955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-22405]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70366; File No. SR-OCC-2013-805]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of an Advance Notice 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
September 10, 2013.
Pursuant to Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\
and Rule 19b-4(n)(1)(i) \2\ of the Securities Exchange Act of 1934
(``Act''), notice is hereby given that on August 15, 2013, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission (``Commission'') the advance notice 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 advance
notice from interested persons.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ OCC is a designated financial market utility and is required
to file advance notices with the Commission. See 12 U.S.C. 5465(e).
OCC also filed the proposal contained in this advance notice as a
proposed rule change under Section 19(b)(1) of the Exchange Act and
Rule 19b-4 thereunder. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. See SR-OCC-2013-14.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Advance Notice
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 Advance Notice
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed advance notice and
discussed any comments it received on the proposed advance notice. 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)
and (B) below, of the most significant aspects of these statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Advance Notice
The purpose of the proposed advance notice 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 advance notice
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 of concentrated security positions by
identifying the two
[[Page 56954]]
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 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 -.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 advance
notice 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
advance notice, 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.
The proposed advance notice is consistent with Section 806(e)(1)(A)
\7\ of the Payment, Clearing, and Settlement Supervision Act of 2010
because the proposed change could be deemed to materially affect the
nature or level of risks presented by OCC. The proposed advance notice
enhances OCC's ability to limit its risk exposure to potential losses
from defaults by 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 advance notice is not inconsistent
with any existing OCC By-Laws or Rules, including those proposed to be
amended.
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\7\ 12 U.S.C. 5465(e)(l)(A).
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(B) Clearing Agency's Statement on Comments on the Proposed Advance
Notice Received From Members, Participants, or Others
Written comments on the proposed advance notice were not and are
not intended to be solicited with respect to the proposed advance
notice and none have been received.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The clearing agency may implement the proposed change pursuant to
Section 806(e)(1)(G) of the Clearing Supervision Act \8\ if it has not
received an objection to the proposed change within 60 days of the
later of (i) the date that the Commission received the advance notice
or (ii) the date the Commission receives any further information it
requested for consideration of the notice. The clearing agency shall
not implement the proposed change if the Commission objects to the
proposed change within the required time period.
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\8\ 12 U.S.C. 5465(e)(1)(G).
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The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date of receipt of the advance notice, or the date the
Commission receives any further information it requested, if the
Commission notifies the clearing agency in writing that it does not
object to the proposed change and authorizes the clearing agency to
implement the proposed change on an earlier date, subject to any
conditions imposed by the Commission.
The clearing agency shall post notice on its Web site of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required
[[Page 56955]]
with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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-2013-805 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-2013-805. 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 advance notice that are
filed with the Commission, and all written communications relating to
the advance notice 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 at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_13_805.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-2013-805 and should be submitted on or before
October 7, 2013.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22405 Filed 9-13-13; 8:45 am]
BILLING CODE 8011-01-P