[Federal Register Volume 79, Number 202 (Monday, October 20, 2014)]
[Notices]
[Pages 62684-62688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24779]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73343; File No. SR-OCC-2014-805]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of an Advance Notice Concerning Enhancements to the
Risk Management Framework Applied to the Clearance of Confirmed Trades
Executed in Extended and Overnight Trading Sessions
October 14, 2014.
Pursuant to 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 \1\ (``Payment,
Clearing and Settlement Supervision Act'') and Rule 19b-4(n)(1)(i) \2\
of the Securities Exchange Act of 1934 notice is hereby given that on
September 17, 2014, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
advance notice as described in Items I and II below, which Items have
been prepared by OCC. The Commission is publishing this notice to
solicit comments on the advance notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice is filed by OCC in connection with a proposed
change to OCC's operations that is designed to enhance the risk
management framework applied to the clearance of confirmed trades
executed in extended and overnight trading sessions (hereinafter,
``overnight trading sessions'') offered by exchanges for which OCC
provides clearance and settlement services.
[[Page 62685]]
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 advance notice and
discussed any comments it received on the 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 on Comments on the Advance Notice
Received From Members, Participants or Others
Written comments on the advance notice were not and are not
intended to be solicited with respect to the advance notice and none
have been received.
(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing and Settlement Supervision Act
Description of Change
This advance notice is being filed in connection with a proposed
change to OCC's operations to enhance the risk management framework
applied to the clearance of confirmed trades executed in overnight
trading sessions offered by exchanges for which OCC provides clearance
and settlement services. OCC currently clears overnight trading
activity for CBOE Futures Exchange, LLC (``CFE'').\3\ The total number
of trades submitted to OCC from overnight trading sessions is nominal,
typically less than 3,000 contracts per session. However, OCC has
recently observed an industry trend whereby exchanges are offering
overnight trading sessions beyond traditional hours. Exchanges offering
overnight trading sessions have indicated that such sessions benefit
market participants by providing additional price transparency and
hedging opportunities for products traded in such sessions, which, in
turn, promotes market stability.\4\
---------------------------------------------------------------------------
\3\ ELX Futures LP (``ELX'') previously submitted overnight
trading activity to OCC, but currently does not submit trades from
overnight trading sessions to OCC. OCC will re-evaluate ELX's risk
controls in the event ELX re-institutes its overnight trading
sessions.
\4\ See CFE-2014-010 at http://cfe.cboe.com/publish/CFErulefilings/SR-CFE-2014-010.pdf .
---------------------------------------------------------------------------
OCC recently has re-evaluated the risks associated with providing
clearing services for overnight trading sessions and, based on such
review, is proposing to enhance its risk management framework for
clearing overnight trading activity by incorporating a procedure to
confirm that the relevant exchanges have implemented certain applicable
pre-trade risk controls, complemented by kill-switch capabilities, and
minimum exchange operational staffing requirements during overnight
trading sessions.\5\ OCC also is proposing to implement enhanced
monitoring and credit risk controls as well as imposing minimum
operational staffing requirements on clearing members that participate
in such sessions. These changes (described in greater detail below) are
designed to reduce and mitigate the risks associated with clearing
trades executed in overnight trading sessions.
---------------------------------------------------------------------------
\5\ The Chicago Board Options Exchange, Incorporated (``CBOE'')
has approached OCC to provide clearance services for a proposed
overnight trading session from 2:00 a.m. to 8:15 a.m. (Central Time)
Monday through Friday (``Extended Trading Hours''). CBOE initially
plans to list VIX and SPX options during Extended Trading Hours.
---------------------------------------------------------------------------
OCC's standards for determining whether to provide clearing
services for overnight trading sessions offered by an exchange and
enhanced risk management framework are designed to work in conjunction
with the risk controls of the exchanges that allow overnight trading
sessions. OCC will confirm an exchange's risk controls as well as its
staffing levels as they relate to overnight trading sessions to
determine if OCC may reasonably rely on such risk controls to reduce
risk presented to OCC by the exchange's overnight trading sessions.
Such exchange risk controls may consist of: (1) Price reasonability
checks, (2) controls to prevent orders from being executed beyond a
certain percentage (determined by the exchange) from the initial
execution price, (3) activity based protections such as a maximum
quantity per order and the ability to cancel all quotes when a
threshold of contracts are traded in an individual option during a
brief window, and (4) kill switch capabilities, which may be initiated
by the exchange and can cancel all open quotes or all orders of a
particular participant. OCC believes that confirming the existence of
applicable pre-trade risk controls as well as overnight staffing at the
relevant exchanges is essential to mitigating risks presented to OCC
from overnight trading sessions.\6\ Providing clearing services to
exchanges offering such sessions is consistent with OCC's mission to
provide market participants with clearing and risk management solutions
that respond to changes in the marketplace. Cleared contract volume
also may increase as a result of providing such services.
---------------------------------------------------------------------------
\6\ Comparable controls are applied to futures and future option
trades executed in overnight trading sessions currently cleared by
OCC, although such controls have been implemented by clearing
futures commission merchants (``clearing FCMs'') pursuant to
Commodity Futures Trading Commission (``CFTC'') Regulation 1.73,
which also requires such clearing FCMs to monitor for adherence to
such controls during regular and overnight trading sessions. OCC
believes that it may reasonably rely on such regulation to reduce
risk presented to OCC during futures markets overnight trading
sessions. See 17 CFR 1.73. OCC also confirmed CFE maintains kill
switch capabilities.
---------------------------------------------------------------------------
Enhanced Risk and Operational Controls at OCC
In order to mitigate the risks associated with the clearance of
transactions executed during overnight trading sessions, and to promote
robust risk management, OCC proposes to implement enhancements to its
risk management framework specific to overnight trading sessions. The
enhanced risk management framework will include post-trade credit
controls that have been designed to identify and mitigate credit risk
associated with clearing trades executed during overnight trading
sessions as well as requiring clearing members that participate in
overnight trading sessions to have operational staff available to OCC
during overnight trading sessions.
1. Overnight Monitoring and Credit Controls
OCC plans to implement overnight monitoring and credit controls in
order to better monitor clearing members' credit risk during overnight
trading sessions. Such monitoring of credit risk is similar to existing
OCC practices concerning futures cleared during overnight trading hours
and includes automated processes within ENCORE to measure, by clearing
member: (i) the aggregate mark-to-market amounts of a clearing member's
positions, including positions created during overnight trading, based
on current prices using OCC's Portfolio Revaluation system, (ii) the
aggregate incremental margin produced by all positions resulting from
transactions executed during overnight trading, and (iii) with respect
to options cleared during overnight trading hours, the aggregate net
trade premium positions resulting from trades executed during overnight
trading (each of these measures being a ``Credit Risk Number''). ENCORE
will generate hourly credit reports, which will contain the Credit Risk
Numbers expressed in terms of both dollars and, except for the mark-to-
market position values, as a percentage of net capital for each
clearing member trading during overnight trading sessions. The Credit
Risk Numbers are the same information
[[Page 62686]]
used by OCC staff to evaluate clearing member exposure during regular
trading hours and, in addition to OCC's knowledge of its clearing
members' businesses, are effective measures of the risk presented to
OCC by each clearing member. OCC's Operations staff will review such
reports as they are generated and, in the event that any of the Credit
Risk Numbers for positions established by a clearing member during an
overnight trading session exceeds established thresholds, staff will
alert OCC's Financial Risk Management staff \7\ of the exceedance in
accordance with established procedures, as described below. Financial
Risk Management staff will follow a standardized process concerning
such exceedances, including escalation to OCC's management, if required
by such process. Given the nominal volume of trades executed in
overnight trading sessions that are presently submitted for clearance,
no changes in current staffing levels that support overnight clearing
activities is contemplated at this time. However, such staffing levels
will be periodically assessed and adjusted, as appropriate.
---------------------------------------------------------------------------
\7\ OCC's Member Services staff will also receive alerts in
order to contact clearing members as may be necessary.
---------------------------------------------------------------------------
With respect to OCC's escalation thresholds, if any Credit Risk
Number of a clearing member is $10 million or more, or any Credit Risk
Number equals 10% or more of the clearing member's net capital, OCC's
Operations staff will be required to provide email notification to
Financial Risk Management. If any Credit Risk Number is $50 million or
more, or equals 25% or more of the clearing member's net capital,
Operations staff will be required to contact, by telephone: (i)
Financial Risk Management staff, (ii) the applicable exchange for
secondary review, and (iii) the clearing member's designated contacts.
If any Credit Risk Number is $75 million or more, or equals 50% or more
of the clearing member's net capital, Operations staff will be required
to contact, by telephone, a designated Senior Vice President or the
Chief Risk Officer. Such officer will review the situation and
determine whether to issue an intra-day margin call, increase a
clearing member's margin requirement in order to prevent the withdrawal
of a specified amount of excess margin collateral, if any, the clearing
member has on deposit with OCC, whether further escalation is warranted
in order for OCC to take protective measures pursuant to OCC Rule 305,
as described below or contact the exchange in order to invoke use of
its kill switch. OCC chose the above described escalation thresholds
based on its analysis of historical overnight trading activity across
the futures industry. OCC believes that these thresholds strike an
appropriate balance between effective risk monitoring and operational
efficiency.
2. Operational/Staffing Requirements
In order to mitigate operational risks associated with clearing for
overnight trading sessions, clearing members that participate in such
trading sessions will be required to provide contact information to OCC
for operational personnel available to be contacted by OCC during such
sessions. Under OCC Rule 201, each clearing member is required to
maintain facilities for conducting business with OCC, and a
representative of the clearing member authorized in the name of the
clearing member to take all action necessary for conducting business
with OCC is required to be available at the facility during such hours
as may be specified from time-to-time by OCC. Similarly, OCC Rules
214(c) and (d) require clearing members to ensure that they have the
appropriate number of qualified personnel and to maintain the ability
to process anticipated volumes and values of transactions. OCC will use
this existing authority to require clearing members trading during
overnight trading sessions to maintain operational staff that may be
contacted by OCC during such sessions. Each morning, shortly after the
end of the overnight trading sessions, ENCORE will generate a report
identifying clearing members that participated during that day's
overnight trading sessions that have not provided OCC with overnight
operational contacts. Clearing members who participated during
overnight trading sessions that did not provide operational contacts to
OCC, or whose operational contacts for overnight trading sessions were
unavailable had OCC attempted to contact such individuals, will be
subject to a minor rule violation fine.\8\ OCC believes that, by having
clearing member operational contacts available during overnight trading
hours, operational issues that may arise during such trading hours can
quickly be resolved thereby lowering the operational risk presented to
OCC by clearing trades executed in overnight trading sessions.
---------------------------------------------------------------------------
\8\ See OCC Rule 1201(b).
---------------------------------------------------------------------------
Existing Risk Controls as They Relate to Overnight Trading Hours
In addition to implementing enhanced risk management practices
specific to clearing trades executed in overnight trading sessions, OCC
will apply, and in certain instances modify, existing (or planned) risk
management controls to mitigate risks presented by clearance
activities, including OCC's ability to issue an intra-day margin call,
OCC's performance of a post-trade price reasonableness check and
exercising OCC's authority to take protective action pursuant to OCC
Rule 305. These controls, as they relate to clearing trades executed in
such sessions, are discussed below.
1. Intra-day Margin Call Authority
In order to address credit risk associated with trading during
overnight trading sessions, OCC staff will monitor and analyze the
impact that positions established during such sessions have on a
clearing member's overall exposure. Should the need arise, and pursuant
to OCC Rule 609, OCC may require the deposit of additional margin
(``intra-day margin'') by any clearing member that increases its
incremental risk as a result of trading activity during overnight
trading sessions. Accordingly, a clearing member's positions
established during such sessions will be incorporated into OCC's intra-
day margin process. Should a clearing member's exposure significantly
increase while settlement banks are not open to process an intra-day
margin call, OCC has the authority under OCC Rule 601 to increase a
clearing member's margin requirement which would restrict its ability
to withdraw excess margin collateral. The implementation of these
measures is discussed more fully below.
In the event that a clearing member's exposure during overnight
trading sessions causes a clearing member to exceed OCC's intra-day
margin call threshold for overnight night trading sessions, OCC will
require the clearing member to deposit intra-day margin equal to the
increased incremental risk presented by the clearing member.
Specifically, if a clearing member has a total risk charge \9\
exceeding 25% (a reduction of the usual figure of 50%), as computed
overnight by OCC's STANS system, and a loss of greater than $25,000
from an overnight trading session(s), as computed by Portfolio
[[Page 62687]]
Revaluation, OCC will initiate an intra-day margin call. OCC will know
at approximately 8:30 a.m. if it will need to initiate an intra-day
margin call on a clearing member based on breaches of these thresholds.
This ``start of business'' margin call is in addition to daily margin
OCC collects from clearing members pursuant to OCC Rule 605, any intra-
day margin call that OCC may initiate as a result of regular trading
sessions or special margin call that OCC may initiate.
---------------------------------------------------------------------------
\9\ Total risk charge is a number derived from STANS outputs and
is the sum of expected shortfall, stress test charges and any add-on
charges computed by STANS. STANS is OCC's proprietary margin
methodology.
---------------------------------------------------------------------------
In addition to, or instead of, requiring additional intra-day
margin, OCC Rule 601\10\ and OCC's clearing member margin call policy
work together to authorize Financial Risk Management staff to increase
a clearing member's margin requirement which may be in an amount equal
to an intra-day margin call.\11\ (Any increased margin requirement will
remain in effect until the next business day.) This action will
immediately prevent clearing members from withdrawing any excess margin
collateral (in the amount of the increased margin requirement) the
clearing member has deposited with OCC. With respect to clearing trades
executed in overnight trading sessions, and in the event OCC requires
additional margin from a clearing member, Financial Risk Management
staff may use increased margin requirements as a means of
collateralizing the increase in incremental risk a clearing member
incurred during such sessions without having to wait for banks to open
to process an intra-day margin call.\12\ Such action may be taken by
OCC instead of or in addition to issuing an intra-day margin call
depending on the amount of excess margin a clearing member has on
deposit with OCC and the amount of the incremental risk presented by
such clearing member. The expansion of OCC's intra-day margin call
process as described in the preceding paragraph, including OCC's
ability to manually increase clearing members' margin requirements,
will mitigate the risk that OCC is under-collateralized as a result of
overnight trading hours.
---------------------------------------------------------------------------
\10\ In addition, OCC Rule 601 provides OCC with the authority
to fix the margin requirement for any account or any class of
cleared contracts at such amount as it deems necessary or
appropriate under the circumstances to protect the respective
interests of clearing members, OCC and the public.
\11\ Clearing members frequently deposit margin at OCC in excess
of requirements.
\12\ Clearing members would be able to substitute the locked-up
collateral during normal time frames (i.e., 6 a.m. to 5 p.m.
(Central Time) for equity securities).
---------------------------------------------------------------------------
2. Post-Trade Price Reasonableness
In a separate pending rule filing, OCC has proposed to add an
interpretation and policy concerning its administration of Article VI,
Section 7(c) of its By-Laws and to implement price reasonableness
checks in connection with the reporting of confirmed trades in
standardized options and futures options to OCC by an exchange under
Article VI, Section 7.\13\ The new Interpretation and Policy to Article
VI, Section 7(c) will allow OCC to review the reasonableness of prices
for options transactions reported as confirmed trades and ask reporting
exchanges to consider whether new or revised trade information is
required to properly clear the transaction.\14\ To promote OCC's
ability to protect itself and clearing members from the negative
effects of clearing trades in options that may contain erroneous
premium information, OCC will apply a premium price threshold to
accepted trades that will trigger further scrutiny of certain trades
that exceed the threshold. This premium price threshold will apply to
trades occurring during overnight trading sessions, upon regulatory
approval, and thus will increase OCC's ability to monitor and mitigate
risk arising from clearing trades executed during such trading
sessions.
---------------------------------------------------------------------------
\13\ Exchange Act Release No. 32718 (July 30, 2014), 79 FR 45527
(August 5, 2014) (SR-OCC-2014-16). This filing, as amended, is
pending regulatory approval.
\14\ See Article VI, Section 7(c); see also Exchange Act Release
No. 46734 (October 28, 2002), 67 FR 67229 (November 4, 2002) (SR-
OCC-2002-18) (approving amendments to OCC's By-Laws and Rules
supporting the transition to near real-time reporting of matched
trade information, including amendments to Article VI, Section 7 to
allow instructions to OCC under certain conditions to disregard a
matched trade).
---------------------------------------------------------------------------
3. Protective Action Pursuant to OCC Rule 305
Pursuant to OCC Rule 305, the Executive Chairman or the President
of OCC, in certain situations, has the authority to impose limitations
and restrictions on the transactions, positions and activities of a
clearing member. This authority will be used, as needed, in the event a
clearing member accumulates significant credit risk during overnight
trading sessions, or a clearing member's activities during such trading
sessions otherwise warrant OCC taking protective action.
Anticipated Effect on and Management of Risk
Clearing transactions executed in overnight trading sessions may
increase risk presented to OCC due to the period of time between trade
acceptance and settlement, the staffing levels at clearing members
during such trading sessions and the deferment of executing intra-day
margin calls until banking settlement services are operational.
However, OCC will expand its risk management practices in order to
mitigate these risks by implementing, and expanding, the various tools
discussed above. For example, OCC will modify its existing risk
management practices in order to closely monitor clearing members'
credit risk from trades placed during overnight trading sessions as
well as implement processes so that OCC takes appropriate action when
such credit risk exceeds certain limits. OCC will also use its existing
authority to require adequate clearing member staffing during such
trading sessions, which will mitigate the operational risk associated
with clearing members trading while they are not fully staffed. These
risk management functions will work in tandem with risk controls,
including the implementation of kill switch capabilities, adopted by
the exchanges operating overnight trading sessions or by clearing FCMs,
as applicable.
In addition to the above, OCC will adapt existing processes so that
such processes can be used to mitigate risk associated with overnight
trading sessions. Specifically, OCC will have the ability to issue
margin calls, and prevent the withdrawal of excess margin on deposit at
OCC, as a result of activity during such trading sessions as a means of
reducing risk. OCC also will apply, pending regulatory approval, a
post-trade price reasonability check to trades reported during
overnight trading sessions, and therefore mitigate the risk of losses
from erroneous trades. Finally, OCC will be able to take protective
action pursuant to OCC Rule 305 as a result of clearing member activity
during such sessions.
Consistency with the Payment, Clearing and Settlement Supervision Act
OCC believes that the proposed change is consistent with Section
805(b) of the Payment, Clearing and Settlement Supervision Act \15\
because the proposed change will promote robust risk management.\16\
OCC believes that the proposed enhancements to its risk management
functions will provide OCC with the tools necessary to mitigate risks
that may occur as a result of overnight trading sessions. As described
above, OCC will implement new risk monitoring processes designed to
identify increases in credit risk
[[Page 62688]]
presented to OCC as a result of such sessions as well as implement
changes designed to mitigate operational risk associated with overnight
trading sessions. In addition, OCC will adapt certain existing
practices to accommodate these overnight trading sessions including its
margin call process and its authority to take protective action
pursuant to OCC Rule 305. The new and modified practices are designed
to identify and mitigate risks that may be presented to OCC as a result
of overnight trading sessions and thereby promote robust risk
management.
---------------------------------------------------------------------------
\15\ 12 U.S.C. 5464(b).
\16\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the Commission receives the notice of proposed change, or
(ii) the date the Commission receives any further information it
requests for consideration of the notice. The clearing agency shall not
implement the proposed change if the Commission has any objection to
the proposed change.
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 the advance noticed is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not objected 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.
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-2014-805 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-2014-805. 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. 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 http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_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-2014-805
and should be submitted on or before November 10, 2014.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24779 Filed 10-17-14; 8:45 am]
BILLING CODE 8011-01-P