[Federal Register Volume 78, Number 79 (Wednesday, April 24, 2013)]
[Pages 24257-24258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-09632]



[Release No. 34-69403; File No. SR-OCC-2013-02]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Implement a Revised Method of 
Calculating Clearing Members' Respective Contributions to OCC's 
Clearing Fund

April 18, 2013.

I. Introduction

    On February 19, 2013 The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2013-02 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on March 8, 2013.\3\ The Commission received no 
comment letters. This order approves the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-69026 (March 4, 
2013), 78 FR 15088 (March 8, 2013).

II. Description of the Proposed Rule Change

    The purpose of this proposed rule change is to revise OCC's By-Laws 
and Rules to implement a revised method of calculating Clearing 
Members' contributions to OCC's Clearing Fund. Currently, Clearing 
Members contribute to the Clearing Fund in proportion to average daily 
open interest, i.e., the total number of cleared contracts and open 
positions plus units of stock underlying open stock loan or borrow 
positions, over the calendar month preceding the date of calculation, 
subject to a $150,000 minimum contribution.
    OCC has developed a new allocation formula that it believes will 
equitably allocate contributions among its Clearing Members based on 
each Clearing Member's particular activities and use of OCC's 
facilities.\4\ The revised formula will include the following 
components and weights: (1) Open interest (50% of total); (2) total 
risk charge (35% of total); and (3) volume (15% of total).\5\

    \4\ OCC believes the new allocation formula generally reflects 
similar practices that are in place at the other clearing agencies 
registered with the Commission. See supra note 3, Securities 
Exchange Act Release No. 34-69026 (March 4, 2013), 78 FR 15088 
(March 8, 2013).
    \5\ Because Execution-Only Clearing Members do not clear their 
own trades, the measure of volume applicable to them would be 
executed volume rather than cleared volume.

    The total risk charge is intended to measure the economic 
significance of the activities of a Clearing Member. The total risk 
charge is equal to the margin requirement, as determined by OCC, of the 
accounts of the Clearing Member exclusive of the net asset value of 
those accounts. OCC notes that a range of factors influence the 
relationship between the open interest in a Clearing Member's account 
and its associated risk charge. For example, for each Clearing Member 
these factors include, but are not limited to, the types of positions, 
number of long positions versus short positions, value of the 
securities underlying the contracts, volatility of the underlying, 
diversification, number of accounts of the Clearing Member, and the 
extent to which the Clearing Member's options positions are in-the-
money or out-of-the-money.
    Volume, like open interest, is a measure of a Clearing Member's 
level of usage of OCC's facilities. However, volume is distinct from 
open interest in that it is a function of the average turnover of the 
positions in the Clearing Member's account. Therefore, according to 
OCC, market-making, high frequency trading, and execution-only services 
are all examples of activities that might elevate volume relative to 
open interest. By contrast, holding long term positions in long term 
contracts is an example of activity that might lower a Clearing 
Member's volume relative to its open interest.
    OCC believes that its proposed allocation formula is preferable to 
its current formula because, by incorporating measurements of volume 
and certain risk charges, it will apportion contributions based on more 
sophisticated measurements of Clearing Members' usage of OCC's 
facilities and recognize demands on OCC's services and facilities that 
are not captured by open interest alone.
    OCC believes it is appropriate for open interest to continue to 
serve as the most heavily weighted component because open interest, 
generally speaking, is a measure of a Clearing Member's overall usage 
of OCC's facilities. The definition of open interest in proposed Rule 
1001(d) is different than the definition of open interest in existing 
Rule 1001(b), which OCC is deleting, in a non-material way as a result 
of the use of the defined term ``cleared contract'' in proposed Rule 
1001(d) instead of specifically naming the individual types of 
contracts that make up ``cleared contracts.''

[[Page 24258]]

    OCC also believes that risk and volume are relevant factors because 
they distinctly measure material aspects of clearance and settlement 
activity and therefore a Clearing Member's use of OCC's resources. OCC 
notes that Clearing Members whose OCC accounts contain positions that 
are well-diversified and/or exhibit relatively little exposure to 
overall market direction will likely have a smaller required 
contribution under the proposed formula. Clearing Members exhibiting a 
relatively large exposure to market direction, a concentration in 
contracts that individually present high amounts of risk, and 
undiversified accounts will generally experience a larger required 
contribution than is the case under the current formula.
    OCC notes that most Clearing Member Groups\6\ will experience a 
material change (i.e., an increase or decrease of 10% or greater in the 
dollar amount of a Clearing Member Group's aggregated Clearing Fund 
requirement) under the new formula. OCC notes that smaller single firms 
with lower initial Clearing Fund requirements may experience an 
increase under the new allocation formula because (i) they may have 
portfolios lacking the diversification that lowers the risk compared 
with open interest for larger firms, and (ii) the new formula adds a 
Clearing Fund share on top of the $150,000 minimum as opposed to 
instead of it.

    \6\ The term ``Clearing Member Group'' is defined in Article I, 
Section 1 of OCC's By-Laws as ``a Clearing Member and any Member 
Affiliates of such Clearing Member.''

    The Clearing Fund requirements under the new allocation formula 
will be communicated to Clearing Members with significant lead time to 
allow Clearing Members to review and prepare for any changes they may 
experience in their specific Clearing Fund contribution amount. OCC 
will contact those Clearing Members that will be negatively impacted in 
a material manner (i.e., an increase of 10% or greater in the dollar 
amount of a Clearing Member Group's aggregate Clearing Fund 
requirement) to confirm such Clearing Members have reviewed the pro 
forma Clearing Fund requirement numbers and they are ready to meet the 
new requirement upon implementation. OCC will then begin a two stage 
phase in process for the new Clearing Fund requirements. The first 
stage of implementation will occur within 180 calendar days from the 
date that OCC provides notice to Clearing Members of its intent to 
implement the new formula. At that stage, open interest, total risk 
charge, and volume will be applied in the formula with weightings of 
75%, 17.5%, and 7.5%, respectively. The second stage of implementation 
and the final weightings of 50%, 35%, and 15% will then be implemented 
within 360 days from the same date of the original notice to Clearing 
Members concerning implementation of the new formula.
    The proposed rule change will also create a defined term in OCC's 
By-Laws, ``Futures-Only Affiliated Clearing Member,'' to refer to a 
Clearing Member that is admitted solely for the purpose of clearing 
transactions in security futures, commodity futures, and/or futures 
options.\7\ While the definition is new, there will be no substantive 
change to Section 2 of Article VIII, under which, if such a Clearing 
Member is a member affiliate of an earlier-admitted Clearing Member, 
the Clearing Member's initial Clearing Fund contribution may be fixed 
by the Board as an amount that excludes the minimum Clearing Fund 
component of $150,000, so long as the earlier-admitted Clearing Member 
already satisfies that requirement.

    \7\ Article VIII, Section 2 of OCC's By-Laws actually refers 
also to ``commodity options,'' but options directly on an underlying 
commodity--as opposed to options on futures--are now included in 
Section 1a(47) of the Commodity Exchange Act to fall within the 
definition of a ``swap.'' 7 U.S.C. 1a(47). Since OCC does not 
currently have rules for the clearing of swaps, the reference to 
commodity options is being omitted from the new definition.

III. Discussion

    Section 19(b)(2)(C) of the Act \8\ 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. Section 17A(b)(3)(F) of the Act \9\ 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, and to the extent applicable derivative 
agreements, contracts, and transactions, to 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 to protect 
investors and the public interest. Section 17A(b)(3)(D) of the Act \10\ 
requires that the rules of the clearing agency provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its participants. Rule 17Ad-22(b)(2) \11\ requires a registered 
clearing agency that performs central counterparty services to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to use risk-based models and parameters 
to set margin requirements and review such margin requirements and the 
related risk-based models and parameters at least monthly.

    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 15 U.S.C. 78q-1(b)(3)(D).
    \11\ 17 CFR 240.17Ad-22(b)(3).

    The proposed rule change accomplishes these purposes by enhancing 
the Clearing Fund allocation methodology by incorporating measures that 
OCC believes will apportion contributions based on more sophisticated 
measurements of Clearing Members' usage of OCC's facilities and 
recognize demands on OCC's services and facilities that are not 
captured by the current methodology.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \12\ and the 
rules and regulations thereunder.

    \12\ 15 U.S.C. 78q-1.

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-OCC-2013-02) be and 
hereby is APPROVED.\14\

    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\15\

    \15\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09632 Filed 4-23-13; 8:45 am]