[Federal Register Volume 78, Number 79 (Wednesday, April 24, 2013)]
[Notices]
[Pages 24257-24258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-09632]
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SECURITIES AND EXCHANGE COMMISSION
[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.
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\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).
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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\
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\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.
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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.
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\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.''
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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.
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\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.
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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.
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\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).
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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.
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\12\ 15 U.S.C. 78q-1.
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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\
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\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\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09632 Filed 4-23-13; 8:45 am]
BILLING CODE 8011-01-P