[Federal Register Volume 79, Number 106 (Tuesday, June 3, 2014)]
[Notices]
[Pages 32009-32011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12769]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72266; File No. SR-OCC-2014-10]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Require That Intraday Margin Be Collected and Margin Assets Not Be
Withdrawn When a Clearing Member's Reasonably Anticipated Settlement
Obligations to OCC Would Exceed the Liquidity Resources Available to
OCC To Satisfy Such Settlement Obligations
May 28, 2014.
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 19, 2014, 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. OCC filed the proposal pursuant to Section
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(1) thereunder \4\ so that
the proposal was effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(1).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change by OCC would amend OCC's Rules to require
(rather than continue to permit as a discretionary determination) that
intraday margin be collected and margin assets not be withdrawn when a
clearing member's reasonably anticipated settlement obligations to OCC
would exceed the liquidity resources available to OCC to satisfy such
settlement obligations.
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
The purpose of the proposed rule change is to modify existing OCC
Rules 608 and 609 (collectively, the ``Rules''), which address the
withdrawal of margin and deposit of intra-day margin, respectively.
More specifically, OCC is proposing to modify these Rules to require
that intraday margin be collected and to preclude margin assets from
being withdrawn, to the extent that a clearing member's reasonably
anticipated settlement obligations to OCC would exceed the liquidity
resources available to OCC to satisfy such settlement obligations (a
``Liquidity Situation'').
OCC Rule 608 (``Rule 608'') already permits OCC to prohibit margin
withdrawals in a Liquidity Situation, and OCC Rule 609 (``Rule 609'')
already permits OCC to require the collection of intraday margin in a
Liquidity Situation. In 2012,\5\ OCC adopted an interpretation under
each of the Rules to put clearing members on notice that OCC may refuse
a margin withdrawal request or request additional intra-day margin
where a clearing member's future settlement obligations could result in
a need for liquidity in excess of liquidity resources available to OCC.
In adopting the interpretations, OCC made it clear that such action
might be taken even though OCC has made no adverse determination as to
the financial condition of the clearing member,\6\ the market risk of
the clearing member's positions, or the adequacy of the clearing
member's total overall margin deposit in the accounts in question.
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\5\ See Securities Exchange Act Release No. 68308 (November 28,
2012), 77 FR 71848 (December 4, 2012) (SR-OCC-2012-21).
\6\ Id at 71849.
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OCC further identified that a circumstance in which OCC might
desire to reject a margin withdrawal request or make an intra-day
margin call to ensure it had sufficient liquidity concerned the
``unwinding'' of a ``box spread'' position. A box spread position
involves a combination of two long and two short options on the same
underlying interest with the same expiration date that results in an
amount to be paid or received upon settlement that is fixed regardless
of fluctuations in the price of the underlying interest. Box spreads
can be used as financing transactions, and they may require very large
fixed payments upon expiration. In this situation, if much of the
margin deposited by the relevant clearing member is in the form of
common stock and if the clearing member failed to make the settlement
payment, the available liquidity resources might be insufficient to
cover the settlement obligation. In anticipation of this settlement,
OCC might therefore require the clearing member to deposit intra-day
margin in the form of cash, or reject a requested withdrawal of cash or
U.S. Government securities, so that liquidity resources would be
sufficient to cover the clearing member's obligations. Under the
adopted interpretations, OCC would always include margin assets of the
relevant clearing member in the form of cash in determining available
liquidity resources and could, in its discretion, consider the amount
of margin assets in the form of highly liquid U.S. Government
securities and/or the amount that OCC would be able to borrow on short
order.
Since the adoption of these interpretations, OCC has effected
margin calls and precluded clearing members from withdrawing liquid
forms of margin assets in three instances, each of which involved the
``unwind'' of a box
[[Page 32010]]
spread.\7\ In two instances, the affected clearing member had
sufficient ``liquid'' forms of margin (i.e., cash and cash equivalents)
already on deposit with OCC to meet the applicable intraday margin
calls.\8\ However, in the third instance, the affected clearing member
did not have a sufficient amount of liquid forms of margin on deposit
with OCC and was required to make a margin deposit in the form of
cash.\9\ In all of the instances, the amount of margin that OCC
prohibited from being withdrawn was less than thirty percent of the
affected clearing member's total margin deposit at OCC.
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\7\ With respect to each of the three instances, there were
several different dates on which OCC made an intraday margin call
and prohibited the withdrawal of margin assets. Moreover, and with
respect to the intraday margin calls, OCC required the clearing
member to deposit additional cash, or cash equivalents, so that the
clearing member's anticipated settlement obligation less OCC's
liquid financial resources equaled the amount of the clearing
member's cash, or cash equivalent, margin on deposit at OCC on the
day the intraday margin call was made. In this context, OCC only
considers letters of credit to be cash equivalents.
\8\ It is not uncommon for clearing members to deposit with OCC
amounts in excess of their margin requirement.
\9\ With respect to the one instance, there were several
different dates when OCC required the deposit of additional intra-
day margin.
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While the current rule authority has achieved its intended purpose,
going forward, and for the protection of its clearing members and the
public, OCC believes it should make the margin withdrawal prohibition
and the intra-day collection of margin mandatory, not discretionary, in
a Liquidity Situation. Moreover, making these actions mandatory in a
Liquidity Situation would create greater certainty that OCC's liquidity
resources, under such circumstances, would be sufficient to cover the
clearing member's settlement obligations.
Accordingly, the proposed changes to Rules 608 and 609 would make
OCC's application of the withdrawal restriction and intraday margin
collection requirement non-discretionary in a Liquidity Situation.
Additional amendments to Interpretation & Policy .02 to Rule 608 and
Interpretation & Policy .01 to Rule 609 are designed to remove any
references suggesting that the margin withdrawal restriction or
intraday margin collection requirement, respectively, is discretionary.
OCC has already provided its clearing members with notification
concerning the proposed rule change. In addition, OCC individually
contacted the clearing members that OCC identified to be most affected
by the proposed rule change. No concerns were raised.
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A(b)(3)(F) of the Act,\10\ and the rules and regulations thereunder,
including Rule 17Ad-22(b)(3),\11\ because the proposed rule change
provides for the safeguarding of securities and funds in the custody
and control of OCC for which it is responsible as well as ensuring that
OCC maintains sufficient liquid financial resources to withstand the
default of a clearing member to which it has the largest exposure in
extreme, but plausible, market conditions. The proposed change will
enhance OCC's margin policies by making certain intra-day margin calls
and certain prohibitions of margin withdrawals mandatory rather than
discretionary, thereby strengthening OCC's risk management process as
its relates to OCC's access to financial resources with minimal delay
in the event of clearing member default (including the default of the
clearing member to which OCC has the largest exposure) in extreme, but
plausible, market conditions. Improving OCC's available liquid
financial resources enhances OCC's financial stability and,
consequently, reduces systemic risk within the financial system as a
whole. Additionally, making the margin withdrawal restriction and
intraday margin collection requirements mandatory, rather than applied
only at OCC's discretion, furthers the goal of Rule 17Ad-22(d)(1) \12\
by ensuring that OCC will maintain written policies and procedures that
provide for a well-founded, transparent, and enforceable legal
framework for its activities. The proposed rule change is not
inconsistent with the existing rules of OCC, including any other rules
proposed to be amended.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(b)(3).
\12\ 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.\13\ This proposed rule change affects OCC
clearing members and OCC believes that the proposed rule change would
not disadvantage or favor any particular clearing member in
relationship to another clearing member because the non-discretionary
margin collection requirements and margin withdrawal restrictions will
be applied equally to every clearing member in a Liquidity Situation.
Accordingly, the proposed rule change will not impose any burden on
competition.
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\13\ 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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \14\ and paragraph (f)(1) of Rule 19b-4
thereunder.\15\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.\16\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(1).
\16\ Notwithstanding the foregoing, implementation of this rule
change will be delayed until this rule change is deemed certified
under CFTC Regulation Sec. 40.6.
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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-2014-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2014-10. 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 submission, all subsequent amendments, all
written statements
[[Page 32011]]
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-2014-10 and should be
submitted on or before June 24, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12769 Filed 6-2-14; 8:45 am]
BILLING CODE 8011-01-P