[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60252-60253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27230]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82311; File No. SR-OCC-2017-008]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change Related to The Options Clearing
Corporation's Collateral Risk Management Policy
December 13, 2017.
I. Introduction
On October 27, 2017, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-
OCC-2017-008) to formalize and update OCC's Collateral Risk Management
Policy. The proposed rule change was published for comment in the
Federal Register on November 9, 2017.\3\ The Commission received one
comment letter regarding the proposed change.\4\ For the reasons
discussed below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 82009 (Nov. 3, 2017), 82
FR 52079 (Nov. 9, 2017) (SR-OCC-2017-008) (``Notice'').
\4\ Letter from Michael Kitlas, dated November 3, 2017. See
comments on the proposed rule change (SR-OCC-2017-008), https://www.sec.gov/comments/sr-occ-2017-008/occ2017008.htm.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
This proposed rule change would formalize and update OCC's
Collateral Risk Management Policy (``CRM Policy''). The CRM Policy
describes the categories of risk that are considered by OCC in
determining which asset classes should be acceptable forms of
collateral as margin assets and Clearing Fund contributions. OCC's
assessment of an asset class generally includes an evaluation of credit
risk, liquidity risk, and market risk.\5\ With respect to credit risk,
the CRM Policy requires OCC staff to evaluate the creditworthiness of
counterparties, including custodial agents and settlement banks and to
monitor the health of such counterparties on an ongoing basis.\6\
Regarding liquidity risk, OCC gives no value to a participant for its
own (or its affiliate's) debt or equity securities, and limits the
amount of a particular asset type that a participant may pledge under
the CRM Policy.\7\ With respect to market risks, the CRM Policy
provides that eligible asset classes are accepted after consideration
of their liquidity, price transparency, price volatility, offset
potential with contracts cleared by OCC, modeling implications and
projected inventories.\8\
---------------------------------------------------------------------------
\5\ Notice, 82 FR at 52080.
\6\ Id.
\7\ Id.
\8\ Id.
---------------------------------------------------------------------------
The CRM Policy describes OCC's approach to valuing collateral and
setting and applying haircuts. OCC's pricing information, as described
in the CRM Policy, feeds into OCC's processes for establishing
haircuts, daily mark-to-market valuation of collateral, and intraday
valuation of collateral. Given the importance of pricing data to inform
these processes, OCC maintains redundant information feeds from
multiple sources to help ensure accuracy and quality.\9\
---------------------------------------------------------------------------
\9\ Notice, 82 FR at 52080-81.
---------------------------------------------------------------------------
The CRM Policy also summarizes OCC's two approaches for valuing
collateral: Collateral in Margins (``CiM'') and haircuts.\10\ Under the
CiM approach, the current market value of margin assets is included as
a positive asset value in the calculation of a portfolio's net asset
value within OCC's System for Theoretical Analysis and Numerical
Simulations (``STANS''). OCC then offsets this positive asset value
based on, among other things, the expected shortfall and stress test
charges associated with an account, resulting in a net excess or net
deficit.\11\ For collateral that is not managed using the CiM process,
the CRM Policy provides that OCC subjects such collateral to percentage
haircuts established at the
[[Page 60253]]
time the collateral is accepted by OCC and that are monitored regularly
to help ensure the haircuts remain adequate.\12\
---------------------------------------------------------------------------
\10\ Notice, 82 FR at 52081.
\11\ Notice, 82 FR at 52081, note 23.
\12\ Notice, 82 FR at 52081.
---------------------------------------------------------------------------
Additionally, the CRM Policy provides that OCC's Credit and
Liquidity Working Group must review the policy's performance and
adequacy on at least an annual basis, including with respect to
collateral eligibility, concentration limits, collateral haircuts and
monitoring processes.\13\
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
III. Summary of Comment Received
The Commission received one comment letter in response to the
proposed rule change.\14\ The commenter stated that the proposed rule
change is consistent with the Act.\15\
---------------------------------------------------------------------------
\14\ See supra note 4.
\15\ Id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\16\ After carefully considering the proposed rule change
and the comment letter, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to OCC. More specifically, the
Commission finds that the proposal is consistent with Section
17A(b)(3)(F) of the Act and Rule 17Ad-22(e)(5) under the Act.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
registered clearing agency be designed to do, among other things, the
following: (1) Promote the prompt and accurate clearance and settlement
of securities transactions; (2) assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible; and (3) in general protect investors and
the public interest.\17\
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The CRM Policy describes OCC's process for limiting the collateral
that it accepts to assets with low credit, liquidity, and market risk.
The acceptance of only low-risk collateral increases the likelihood
that such collateral can be liquidated in a timely manner, thereby
enhancing OCC's ability to continue to perform its critical services
for the financial markets while also managing a default. The CRM Policy
also describes how OCC haircuts such collateral, and requires review of
such haircuts at least annually. Ensuring that collateral haircuts are
appropriately set and reviewed on a regular basis increases the
likelihood that OCC will collect and hold collateral that can be
liquidated at a value at or above the value attributed to it. This
approach thereby increases the likelihood that OCC will be able to
continue to meet its settlement obligations and manage the default of a
clearing member by liquidating the defaulting clearing member's
collateral in a timely and effective manner.
The timely liquidation of collateral at or above the expected value
would, therefore, support OCC's ability to continue to meet settlement
obligations on time, promoting the prompt and accurate clearance and
settlement of securities transactions. In addition, being able to
successfully liquidate collateral in a timely and effective manner
would reduce the likelihood of OCC having to draw on mutualized
resources, including Clearing Fund contributions. As such, the
Commission believes that the proposal would help assure the
safeguarding of securities and funds which are in the custody or
control of OCC, or for which OCC is responsible. As a result, the
Commission also finds that the proposed rule change, in general,
protects investors and the public interest. Accordingly, the Commission
finds that the proposed rule change is consistent with Section 17A of
the Act.\18\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(3) of the Act
Rule 17Ad-22(e)(5) requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to limit the assets it accepts as
collateral to those with low credit, liquidity, and market risks; set
and enforce appropriately conservative haircuts and concentration
limits if the covered clearing agency requires collateral to manage its
or its participants' credit exposure; and, require a review of the
sufficiency of its collateral haircuts and concentration limits to be
performed not less than annually.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
As discussed above, the proposed CRM Policy would address each
component of Rule 17Ad-22(e)(5).\20\ First, the proposed CRM Policy
requires that, in determining forms of collateral as margin assets and
Clearing Fund contributions, OCC evaluates the market, credit, and
liquidity risk of an asset class. Second, the CRM Policy provides for
the maintenance of redundant pricing information feeds from multiple
sources to ensure the availability of information that is critical to
OCC's daily and intraday processes for collateral valuation. The CRM
Policy further describes OCC's processes for setting haircuts either
via the use of STANS or percentage-based haircuts. Third, the proposed
CRM requires at least annual review of concentration limits and
collateral haircuts. The Commission finds, therefore, that the proposed
rule change is consistent with Rule 17Ad-22(e)(5).\21\
---------------------------------------------------------------------------
\20\ Id.
\21\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed change is consistent with the requirements of the Act, and in
particular, with the requirements of Section 17A of the Act \22\ and
the rules and regulations thereunder.
---------------------------------------------------------------------------
\22\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-OCC-2017-008) be, and hereby is,
approved.
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27230 Filed 12-18-17; 8:45 am]
BILLING CODE 8011-01-P