[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45523-45526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18430]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72717; File No. SR-OCC-2014-14]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Better Manage Risks
Concentration and Other Risks Associated With Accepting Deposits of
Common Stocks for Margin Purposes
July 30, 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 July 15, 2014, 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. 12 U.S.C. 5465(e)(1). See
SR-OCC-2014-803.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
OCC proposes to amend its Rules to permit OCC to better manage
concentration and other risks (i.e., wrong-way risk) associated with
accepting deposits of common stock for margin purposes. In order to
manage such risks, OCC proposes to add an proposed Interpretation and
Policy that will provide OCC with discretion with respect to giving
value to margin collateral deposited by a single clearing member.
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.
[[Page 45524]]
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to permit OCC to better
manage concentration risk and other risks (i.e., wrong-way risk)
associated with accepting deposits of common stock for margin
purposes.\4\ Accordingly, in order to manage such risks, OCC proposes
to add an Interpretation and Policy to Rule 604, which specifies the
forms of margin assets accepted by OCC, that will provide OCC with
discretion with respect to giving value to assets deposited by a single
clearing member to satisfy its margin requirement(s). In addition, OCC
proposes to make clarifying amendments to an existing Interpretation
and Policy under Rule 604 that gives OCC discretion to not give value
to a particular type of margin collateral across all clearing members.
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\4\ This proposed rule change has also been filed as an advance
notice filing (SR-OCC-2014-803).
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Background
OCC Rule 604 lists the types of assets that clearing members may
deposit with OCC to satisfy their margin requirement(s) as well as sets
forth eligibility criteria for such assets. Common stocks, including
Exchange Traded Funds (``ETFs'') and Exchange Traded Notes (``ETNs''),
are the most common form of margin assets deposited by clearing members
and currently comprise 68% of the $60.6 billion in clearing member
margin deposits held by OCC (not including deposits in lieu of margin).
Since 2009, OCC has used STANS, its daily automated Monte Carlo
simulation-based margining methodology, to value common stocks
deposited by clearing members as margin.\5\ The value given to margin
deposits depends on factors that include the price volatility and the
price correlation relationship of common stock collateral to the
balance of the cleared portfolio. The approach used by STANS
incentivizes clearing members who chose to meet their margin
obligations with deposits of common stocks to choose common stocks that
hedge their related open positions.
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\5\ See Securities Exchange Act Release No. 58158 (July 15,
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20).
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Notwithstanding the value STANS gives to deposits of common stocks,
certain factors warrant OCC adjusting the value STANS gives to all
clearing member margin deposits of a particular type of margin
collateral. Such factors are set forth in Rule 604, Interpretation and
Policy .14, and include the number of outstanding shares, number of
outstanding shareholders and overall trading volume. OCC is proposing
to add a new Interpretation and Policy to Rule 604 (the
``Interpretation'') so that OCC has discretion to not give margin
credit to a particular clearing member when such clearing member
deposits a concentrated amount of any common stock and when a common
stock, deposited as margin, presents ``wrong-way risk'' to OCC. In
addition, the Interpretation will provide OCC discretion to grant
margin credit to a clearing member when it deposits shares of common
stock that serve as a hedge to the clearing member's related open
positions and would otherwise be not be given margin credit.\6\
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\6\ Consistent with the language contained in existing
Interpretation & Policy .14, the Interpretation provides OCC with
discretion in determining the amount of margin credit given to
deposits of common stock by an individual clearing member as such
determination would be based on positions held and common stock
deposits made by such clearing member on a given business day.
However, as discussed in the following two sections, OCC also has
developed certain automated processes as well as additional internal
policies that describe how OCC presently intends to exercise such
discretion. These additional internal policies are included in OCC's
collateral risk management policy, which will not be implemented
until approval of this rule change with changes thereto being
subject to additional rule filings.
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Concentrated Deposits of Common Stock
OCC has determined that in the event it is necessary to liquidate a
clearing member's positions (including the clearing member's margin
collateral), OCC may be exposed to risk arising from a large quantity
of a particular common stock deposited as margin by a clearing member.
Specifically, 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 all of the common stock OCC seeks to sell, or OCC may not be
able to auction such securities, without an appreciable negative price
impact. This occurrence, referred to as ``concentration risk,'' is
greatest when the number of shares being sold is large and the average
daily trading volume is low.
OCC's existing authority to not give value to otherwise eligible
forms of margin is broad in its application since such authority only
provides OCC with the discretion to not give value across all clearing
member deposits of a particular common stock. However, concentration
risk may be a clearing member and account-specific risk. In order to
mitigate the concentration risk of a single clearing member, OCC plans
to implement automated processes to monitor the composition of a
clearing member's margin deposits. Such processes will identify
concentration risk at both an account level and across all accounts of
a clearing member. OCC proposes to add the Interpretation so that OCC
has discretion to limit the margin credit granted to an individual
clearing member that maintains a concentrated margin deposit of
otherwise eligible common stock.
For the reasons stated above, OCC considers a common stock'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.
Accordingly, OCC will not give margin credit to clearing member margin
deposits of a particular common stock in respect of a particular
account when the deposited amount of such common stock is in excess of
two times the average daily trade volume of such common stock over the
most recent three month period. OCC's systems will continually assess
the composition of clearing member margin deposits for each account
maintained by the clearing member, including intra-day collateral
substitutions in such accounts, to determine if a clearing member has a
margin deposit with a concentrated amount of common stock. With respect
to a given account, OCC's systems will automatically set appropriate
limits on the amount of a particular common stock for which a clearing
member may be given margin credit for any one of a its tier accounts.
In addition, and with respect to all of a clearing member's accounts,
OCC will impose an add-on margin charge if, in aggregate, a clearing
member deposits a concentrated amount of a particular common stock as
margin across all of its accounts.\7\ The add-on margin charge will
operate to negate the margin credit given to the concentrated margin
deposit, and will be collected, when applicable, as part of OCC's
standard morning margin process.\8\ OCC
[[Page 45525]]
will assess the add-on margin charge across all of a clearing member's
accounts on a pro-rata basis (based on the amount of the particular
common stock in each of a clearing member's accounts).
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\7\ OCC believes that this policy is consistent with proposed
Rule 17Ad-22(e)(5), which requires covered clearing agencies to set
and enforce concentration limits to manage its or its participant's
credit exposure. See 79 FR 16866, 16972 (March 26, 2014).
\8\ Since the 2-day limit is first checked at each account, it
is possible that a clearing member with multiple accounts may have
more than 2-days of a given common stock on deposit in aggregate. To
control this condition, a final check is done on the aggregate
amount of shares held by a clearing member across all of its
accounts. For example, if a particular clearing member has three
accounts each holding 2-days volume of a specific common stock, the
clearing member check would identify that the member was holding six
days of volume in aggregate. To mitigate this risk, an add-on charge
equal to the market value of four days of volume would be applied to
all accounts holding that security on a pro-rata basis.
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OCC staff has been monitoring concentrated common stock positions,
assessing the impact of the proposed rule change described in this
filing and contacting clearing members affected by the proposed rule
change. OCC believes that clearing members will be able to comply with
the proposed rule change without making significant changes to their
day-to-day business operations. In December 2013, an information memo
was posted to inform all members of the upcoming change. Since January
2014, staff has been in contact with any clearing member that would be
affected by the proposed rule change. On a weekly basis, any clearing
member that would see a reduction of 10% or more of its collateral
value is contacted and provided an explanation of the policy and a list
of concentrated positions observed in this analysis. On a monthly
basis, all clearing members exhibiting any concentration risk are
contacted to provide an explanation of the proposed policy and a list
of concentrated positions. In both cases, clearing members are
encouraged to proactively reduce concentrated positions to conform to
the proposed policy. As of June 2014, twenty-five members would be
affected. Implementation of the Interpretation would result in
disallowing $1.2 billion in collateral value and result in margin calls
for six members totaling $710 million. Moreover, in July 2014, OCC made
an automated report concerning concentrated margin deposits of common
stock available to all clearing members.
Wrong-Way Risk
OCC is also proposing to use the Interpretation to address the risk
that the common stock a clearing member has deposited as margin and
which is issued by the clearing member itself or an affiliate of the
clearing member will lose value in the event the clearing member
providing such margin defaults, which is known as ``wrong-way risk.''
Wrong-way risk occurs when a clearing member makes a deposit of common
stock issued by it or an affiliate and, in the event the clearing
member defaults, the clearing member's common stock margin deposit will
also be losing value at the same time because there is likely to be a
strong correlation between the clearing member's creditworthiness and
the value of such common stock. In order to address wrong-way risk, the
Interpretation will implement automated systems that will not give
margin credit to a clearing member that deposits common stock issued by
such clearing member or an affiliate as margin collateral. OCC proposes
to define ``affiliate'' broadly in the Interpretation to include any
entity with direct or indirect equity ownership of 10% of the clearing
member, or any entity for which the clearing member holds 10% of the
direct or indirect equity ownership.\9\
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\9\ This standard is based on the provisions of OCC Rule
215(a)(5).
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OCC has addressed the impact of the change designed to address
wrong-way risk. As of June 2014, there were 73 clearing members whose
parent or an affiliate has issued securities trading on U.S. exchanges.
There are six clearing members that would be affected by virtue of
having made margin deposits of their own or an affiliate's common
stock. In total, these shares equaled $132 million and accounted for
less than one half of one percent of the total market value of valued
securities pledged as margin at OCC. In July 2014, OCC made information
available to each clearing member that indicates which of its deposits
of common stock would not receive margin credit due to wrong-way risk
considerations, as described above.\10\
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\10\ OCC believes that by providing such information clearing
members will be better able to adjust their margin deposits at OCC
to conform to the proposed rule change once it is approved.
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Deposits That Hedge Open Positions
In addition to the above, OCC also proposes to include language in
the Interpretation so that it has discretion to give margin credit to
common stock deposited as margin that would otherwise not be given
margin credit in circumstances when such common stock acts as a hedge
(i.e., the member holds an equivalent short position in cleared
contracts on the same underlying security). This condition will be
checked in both the account and clearing member level. For example, if
a clearing member deposits the common stock of an affiliate as margin
collateral, which, pursuant to the above, would ordinarily not be given
value for the purposes of granting margin credit, OCC may nevertheless
give value to such common stock for the purposes of granting margin
credit to the extent such common stock acts as a hedge against open
positions of the clearing member. In this case, a decline in the value
of the margin deposit would be wholly or partially offset by an
increase in the value in the open position. Moreover, in such a
situation, OCC will systematically limit the margin credit granted to
the lesser of a multiple of the daily trading volume or the ``delta
equivalent position'' \11\ for the particular common stock, taking into
account the hedging position.\12\ OCC believes that this policy will
further encourage clearing members to deposit margin collateral that
hedges their related open positions and is in line with the valuation
methods within STANS. This policy will also facilitate OCC's management
of its and its participants' credit exposure \13\ as well as the
liquidation of a clearing member's portfolio should the need arise.
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\11\ The ``delta equivalent position'' is the equivalent number
of underlying shares represented by the aggregation of cleared
products on that same underlying instrument. 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
the options or futures contract to the corresponding change in the
price of an underlying asset. 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.
\12\ 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, when combined with the delta of short
option and futures position, 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.
\13\ OCC also believes that this policy is consistent with
proposed Rule 17Ad-22(e)(5). See Fn.6, supra.
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Other Proposed Changes
OCC is also proposing to make certain clarifying changes in order
to accommodate the adoption of the Interpretation into its Rules.
Primarily, OCC proposes to add language to OCC Rule 604, Interpretation
and Policy .14, to clarify that such Interpretation and Policy concerns
OCC's authority to not give value to certain margin deposits for all
clearing members (whereas the Interpretation applies to particular
clearing member(s)). In addition, OCC
[[Page 45526]]
proposes to remove language from OCC Rule 604, Interpretation and
Policy .14, to improve readability as well as to remove ``factors''
concerning number of shares and affiliates since OCC's authority with
respect to such factors will be more clearly described in the
Interpretation. Finally, OCC proposes to renumber the Interpretations
and Policies of Rule 604 in order to accommodate the adoption of the
Interpretation.
2. Statutory Basis
OCC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \14\ because it will assure the
safeguarding of securities and funds which are in the custody and
control of OCC. In addition, the proposed rule change will promote the
prompt and accurate clearance and settlement of securities transactions
for which it is responsible. OCC believes that the proposed changes to
its margin policy, as described above, will reduce the risk that
clearing member margin assets would be insufficient should OCC need to
use such assets to close-out positions of a defaulted clearing member.
For the same reasons, the proposed rule change will promote confidence
that OCC will be able to timely meet its settlement obligations because
the proposed rule change will diminish the likelihood a large
percentage of a defaulting clearing member's margin assets would not be
available to OCC in the event of a clearing member default. 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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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition
OCC believes that the proposed rule change would impose a burden on
competition, and that such burden is appropriate in furtherance of the
purposes of the Act.\15\ As state [sic] above, the proposed rule change
will affect the composition of certain clearing members' margin
deposits. Clearing members may be required to modify their business
practices and potentially incur costs in doing so. However, the
proposed rule change will not place a significant burden on clearing
members, will better assure the safeguarding of securities and funds in
OCC's custody and control and promote the prompt and accurate clearance
and settlement of securities transactions for which it is responsible.
By implementing the proposed rule change, it is less likely OCC will
experience negative consequences due to exposure to a concentrated
position of common stock deposited as margin by any clearing member as
well as due to any wrong-way risk presented by a clearing member
default. Accordingly, the proposed rule change contributes to the goal
of OCC's financial stability in the event of clearing member default.
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\15\ 15 U.S.C. 78q-1(b)(3)(I).
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Moreover, and after implementation of the proposed rule change, OCC
will still accept a large variety of common stocks as margin
collateral, and no clearing member has indicated to OCC that it will
have difficulty satisfying its margin requirement(s) once OCC
implements the proposed rule change. Therefore, OCC believes that any
burden on competition imposed by the proposed rule change is
appropriate in furtherance of the purposes of the Act.
(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 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.\16\
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\16\ 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. 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-2014-14 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-2014-14. 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. 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 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/components/docs/legal/rules_and_bylaws/sr_occ_14_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-2014-14 and should be submitted on or before August
26, 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. 2014-18430 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P