80 FR 26127 - Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change Concerning the Provision of Clearance and Settlement Services for Energy Futures and Options on Energy Futures

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 87 (May 6, 2015)

Page Range		26127-26130
FR Document		2015-10504
Federal Register, Volume 80 Issue 87 (Wednesday, May 6, 2015)
[Federal Register Volume 80, Number 87 (Wednesday, May 6, 2015)]
[Notices]
[Pages 26127-26130]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-10504]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74853; File No. SR-OCC-2015-006]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning the Provision of 
Clearance and Settlement Services for Energy Futures and Options on 
Energy Futures

April 30, 2015.
    On March 2, 2015, The Options Clearing Corporation (``OCC'') filed 
with

[[Page 26128]]

the Securities and Exchange Commission (``Commission'') the proposed 
rule change OCC-2015-006 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 20, 2015.\3\ The Commission received no comments on the 
proposed rule change. This order approves the rule change as proposed.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Release No. 74511 (March 16, 2015), 80 
FR 15042 (March 20, 2015).
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I. Description

    OCC is amending its rules to provide clearance and settlement 
services to NASDAQ Futures, Inc. (``NFX'') for certain enumerated 
Energy Futures contracts and options on Energy Futures. OCC further 
proposed to add new risk models to its System for Theoretical Analysis 
and Numerical Simulations (``STANS'') methodology \4\ to risk manage 
Energy Futures contracts. OCC's STANS methodology already accommodates 
the margining of futures and futures options, and after adopting the 
models described more fully in the proposed rule change, Energy Futures 
contracts will be risk managed using the same methodology as futures 
products currently cleared and settled by OCC.\5\
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    \4\ OCC's STANS methodology is used to measure the exposure of 
portfolios of options, futures and cash instruments cleared and 
carried by OCC on behalf of its clearing member firms. STANS allows 
clearing institutions to measure, monitor and manage the level of 
risk exposure of their members' portfolios. For more information, 
see www.optionsclearing.com/risk-management/margins.
    \5\ OCC will compute initial margin requirements for segregated 
futures accounts Through the Standard Portfolio Analysis of Risk 
(``SPAN''[supreg]) margin calculation system without further 
modification, subject to OCC's collection of enhanced margin to be 
deposited in the segregated futures account in the event that the 
margin requirement as calculated under STANS would exceed the 
requirement calculated under SPAN. See Securities Exchange Act 
Release No. 72331 (June 5, 2014), 79 FR 33607 (June 11, 2014) (SR-
OCC-2014-13). See also Securities Exchange Act Release No. 74268 
(February 12, 2015), 80 FR 8917 (February 19, 2015) (SR-OCC-2014-
24). This rule change has been approved by the Commission.
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    Because these Energy Futures contracts and options on Energy 
Futures do not fall within the scope of contracts for which OCC has 
previously agreed to provide clearance and settlement services to 
NFX,\6\ OCC also added a new ``Schedule C'' to its Agreement for 
Clearing and Settlement Services (``Clearing Agreement'') with NFX. The 
Schedule C to the Clearing Agreement has been approved by the 
Commission.\7\
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    \6\ NFX previously operated as a designated contract market 
(``DCM'') regulated by the Commodity Futures Trading Commission 
(``CFTC''), and OCC provided clearing and settlement services 
pursuant to a January 13, 2012 agreement (``Previous Agreement''). 
NFX became a dormant contract market and ceased operations as a DCM 
as of January 31, 2014, thus terminating the Previous Agreement. The 
CFTC later approved NFX as a DCM and the Clearing Agreement permits 
OCC to once again provide clearing services to NFX.
    \7\ See Securities Exchange Act Release No. 74432 (March 4, 
2015), 80 FR 12652 (March 10, 2015) (SR-OCC-2015-03)(notice of 
filing of proposed rule change concerning execution of a clearing 
and settlement agreement between OCC and NFX); See also Securities 
Exchange Act Release No. 74747(April 16, 2015), 80 FR 22591 (April 
22, 2015)(order approving the proposed clearing and settlement 
agreement between OCC and NFX).
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Background

    As proposed in its rule change OCC will clear and settle Energy 
Futures contracts and options on Energy Futures that are to be traded 
on NFX.\8\ They include nine futures contracts on petrol and natural 
gas products, three of which will have related options contracts, along 
with 16 electricity futures contracts. The Energy Futures contracts are 
all cash-settled, and the options contracts will settle into the 
underlying futures contract. All of the Energy Futures contracts are 
``look-alike'' products to futures products already traded on U.S. 
futures exchanges and cleared by other Derivatives Clearing 
Organizations (``DCOs'').\9\
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    \8\ In addition to trading in the regular session, Energy 
Futures and options on Energy Futures will also trade during 
overnight trading sessions. See Securities Exchange Act Release No. 
74241 (February 10, 2015), 80 FR 8383 (February 17, 2015) SR-OCC-
2014-812.
    \9\ More specifically, Energy Futures contracts are look-alike 
products to futures products that are currently traded on the New 
York Mercantile Exchange, Inc. and ICE Futures, U.S., and cleared by 
the Chicago Mercantile Exchange Inc. and ICE Clear U.S., Inc., 
respectively.
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Petrol and Natural Gas Futures Products
    NFX will list petrol and natural gas Energy Futures contracts and 
options on petrol Energy Futures. These Energy Futures contracts are 
based on a variety of refined oil fuels and natural gasses that are 
commonly used for hedging market participants' portfolios. 
Specifically, NFX will list the following cash-settled petrol and 
natural gas Energy Futures contracts: NFX Brent Crude Financial Futures 
(BFQ), NFX Gasoil Financial Futures (GOQ), NFX Heating Oil Financial 
Futures (HOQ), NFX WTI Crude Oil Financial Futures (CLQ), NFX RBOB 
Gasoline Financial Futures (RBQ), NFX Henry Hub Natural Gas Financial 
Futures--10,000 (HHQ), NFX Henry Hub Natural Gas Financial Futures--
2,500 (NNQ), NFX Henry Hub Natural Gas Penultimate Financial Futures--
2,500 (NPQ) and NFX Henry Hub Natural Gas Penultimate Financial 
Futures--10,000 (HUQ). Further, NFX will list options on NFX WTI Crude 
Financial Futures (LOQ), NFX Brent Crude Financial Futures (BCQ) and 
the NFX Henry Hub Penultimate Financial Futures (LNQ) that settle 
directly into the referenced futures contract.
Electricity Futures Products
    NFX will also list electricity Energy Futures contracts, which are 
based on electricity prices at different hubs and smaller nodes from 
across the United States reflecting different power distribution grids 
and circuits and are look-alike products to products traded on ICE 
Futures, U.S. and cleared by ICE Clear U.S., Inc. For each of these 
nodes, there is a ``peak'' and ``off-peak'' future representing prices 
at time periods in the day when electricity usage is high compared to 
when the demand on the grid is lower. The electricity Energy Futures 
contracts NFX selected for listing are the most popular nodes and hubs 
within the electricity futures market. More specifically, NFX will list 
the following electricity contracts, to be settled on final settlement 
prices based on an average regional transmission organization, 
independent system operator (``ISO'') published real-time or day-ahead 
locational marginal prices (``LMPs'') \10\ for a pre-determined set of 
peak or off-peak hours for a contract month:
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    \10\ Locational marginal pricing reflects the value of the 
energy at the specific location and time it is delivered.
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     NFX ISO-NE Massachusetts Hub Day-Ahead Off-Peak Financial 
Future (NOPQ), settling on final settlement prices based on average 
day-ahead hourly off-peak LMPs for the contract month for the 
Massachusetts Hub.
     NFX ISO-NE Massachusetts Hub Day-Ahead Peak Financial 
Futures (NEPQ), settling on final settlement prices based on average 
day-ahead hourly peak LMPs for the contract month for the Massachusetts 
Hub.
     NFX MISO Indiana Hub Real-Time Peak Financial Futures 
(CINQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the Indiana Hub as 
published by the Midcontinent Independent System Operator, Inc. 
(``MISO'').
     NFX MISO Indiana Hub Real-Time Off-Peak Financial Futures 
(CPOQ), settling on final settlement prices based on average real-time 
hourly off-peak LMPs for the contract month for the Indiana Hub as 
published by MISO.
     NFX PJM AEP Dayton Hub Real-Time Peak Financial Futures 
(MSOQ), settling on final settlement prices based

[[Page 26129]]

on average real-time hourly peak LMPs for the contract month for the 
AEP Dayton Hub.
     NFX PJM AEP Dayton Hub Real-Time Off-Peak Financial 
Futures (AODQ), settling on final settlement prices based on average 
real-time hourly off-peak LMPs for the contract month for the AEP 
Dayton Hub.
     NFX PJM Northern Illinois Hub Real-Time Peak Financial 
Futures (PNLQ), settling on final settlement prices based on average 
real-time hourly peak LMPs for the contract month for the Northern 
Illinois Hub.
     NFX PJM Northern Illinois Hub Real-Time Off-Peak Financial 
Futures (NIOQ), settling on final settlement prices based on average 
real-time hourly off-peak LMPs for the contract month for the Northern 
Illinois Hub.
     NFX PJM Western Hub Day-Ahead Off-Peak Financial Futures 
(PJDQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Day-Ahead Peak Financial Futures 
(PJCQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Real-Time Off- Peak Financial Futures 
(OPJQ), settling on final settlement prices based on average real-time 
hourly off-peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Real-Time Peak Financial Future 
(PJMQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the Western Hub.
     NFX CAISO NP-15 Hub Day-Ahead Off-Peak Financial Futures 
(ONPQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the NP-15 Hub.
     NFX CAISO NP-15 Hub Day-Ahead Peak Financial Futures 
(NPMQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the NP-15 Hub.
     NFX CAISO SP-15 Hub Day-Ahead Off-Peak Financial Futures 
(OFPQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the SP-15 Hub.
     NFX CAISO SP-15 Hub Day-Ahead Peak Financial Futures 
(SPMQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the SP-15 Hub.

Risk Model Changes

    As noted above, the Energy Futures contracts that OCC will clear 
are look-alike products to energy futures traded on other futures 
exchanges and cleared by other DCOs. According to OCC, there is a 
significant amount of historical data and academic literature 
concerning risk models for energy futures, and OCC has used such data 
and literature in the development of its risk models for Energy Futures 
contracts. Based on its analysis of that information, OCC stated that 
it has identified two characteristics specific to Energy Futures 
contracts (compared to futures contracts already cleared, settled and 
risk managed by OCC) for which new risk models needed to be added to 
the STANS methodology: \11\
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    \11\ In developing its risk models for Energy Futures, OCC 
stated in its proposed rule change that it had also considered a 
third characteristic, namely that electricity markets are known to 
be geographically segmented, which can cause abrupt and 
unanticipated changes in spot prices. However, after reviewing 
relevant academic literature and performing internal testing, OCC 
determined that adjusting its futures risk models to account for 
changes in the spot price of electricity was not appropriate. 
Securities Exchange Release No. 74511 (March 16, 2015), 80 FR 15042 
(March 20, 2015). See Kholopova, M. (2006) ``Estimating a two-factor 
model for the forward curve of electricity,'' Ph.D. dissertation.
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     Energy Futures prices are known to be more volatile as 
contracts approach delivery because of the convergence with cash-market 
prices and the potential for real-life trading and delivery 
complications of the underlying commodity. This phenomenon is known as 
the ``Samuelson effect,'' \12\ and
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    \12\ See Samuelson, Paul A., ``Proof that Properly Anticipated 
Prices Fluctuate Randomly,'' Industrial Management Review, Vol. 6 
(1965). OCC stated that no other futures contracts for which it 
provides clearance and settlement services exhibit the Samuelson 
effect.
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     The price volatility of certain energy futures display a 
seasonal pattern (a/k/a ``seasonality'').
    To address these characteristics, OCC designed multi-factor risk 
modeling capabilities that can risk model based on up to three factors: 
a short-run factor, a seasonal factor and a long-run factor. The short-
run factor is designed to account for the Samuelson effect, which 
becomes more pronounced the closer the contract is to maturity (i.e., 
delivery). The seasonal factor accounts for Energy Futures contracts 
that display volatility in a seasonal pattern, and the long-run factor 
accounts for the risk of a given Energy Future contract not addressed 
by either the short-run factor or the seasonal factor. Pursuant to its 
rule change as proposed, OCC's multi-factor models can be further 
categorized as either a two-factor model or three-factor model, with 
the two factor model consisting of a short-run and long-run factor, 
while the three-factor model consists of a short-run factor, a long-run 
factor, and a seasonality factor.
Two-Factor Model
    OCC will use a two-factor risk model to compute theoretical prices 
for NFX Brent Crude Financial Futures contracts and NFX WTI Crude Oil 
Financial Futures contracts because such futures do not exhibit 
seasonality.\13\ The two-factor risk model will derive a given Energy 
Future contract's price based on a long-run factor and a short-run 
factor. The long-run factor component captures changes to the 
equilibrium price (i.e., the prevailing market price at a point in 
time) of a given Energy Future contract based on factors such as 
expectations of the exhaustion of existing supply, improving technology 
for production, the discovery of additional supply of the commodity, 
inflation and political and regulatory effects. Using historical data, 
OCC assumed that such long-run factors cause the equilibrium price for 
a given Energy Future contract to evolve according to a stochastic 
process that accounts for asymmetric skewness and excess kurtosis.\14\ 
The short-run component captures short-run changes in demand or supply 
due to real-life factors such as variation in the weather or 
intermittent supply disruptions as well as increased volatility (i.e., 
the Samuelson effect).\15\ The short-run component of the model is mean 
reverting; therefore, in the absence of such short-term changes in 
demand or supply the long-run factor should determine the price for a 
given Energy Future contract. Additionally, the short-run factor is 
less noticeable as the tenor of the Energy Futures contract increases.
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    \13\ See Schwartz, E. and J. Smith (2000) ``Short-term 
variations and long-term dynamics in commodity prices,'' Management 
Science, vol. 46, pp. 893-911. OCC provided that the supply of Brent 
Crude Oil and WTI Crude Oil is not affected by seasonal variation in 
demand because there are low-cost transportation methods for Brent 
Crude Oil and WTI Crude Oil as well as the ability to store Brent 
Crude Oil and WTI Crude Oil.
    \14\ The model assumes that past price information is already 
incorporated into the current price and the next price movement is 
conditionally independent of past price movements. Additionally, the 
long-run factor accounts for ``fat tail'' events.
    \15\ This is often observed as shorter dated futures contracts 
exhibit greater volatility than longer dated futures contracts.
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Three-Factor Model
    OCC will use a three-factor risk model in order to compute 
theoretical prices for the remainder of the Energy Futures 
contracts.\16\ The three-factor model uses

[[Page 26130]]

the same long-run and short-fun factor components as the two-factor 
model and adds a seasonality factor. Using historical data, OCC asserts 
that Energy Futures contracts, except for Energy Futures contracts on 
Brent Crude Oil and WTI Crude Oil, experience seasonality.\17\ To 
address seasonality, OCC will employ a trigonometric function,\18\ 
which it states will capture price dynamics in different seasons.
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    \16\ OCC's proposed model is based upon recent academic 
literature on energy futures. See Mirantes, A., J. Poblacion and G. 
Serna (2012) ``The stochastic seasonal behavior of natural gas 
prices,'' European Financial Management, vol. 18, pp. 410-443.
    \17\ OCC provides that this is due to the lack of low-cost 
transportation and limited, or no ability to store the commodity.
    \18\ See note 14 supra.
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    OCC stated its belief that the proposed enhancements to STANS are 
appropriately designed to support the clearance and settlement of 
Energy Futures contracts, based on model back testing results. 
Moreover, OCC asserts that the Energy Futures contracts are not new or 
novel contracts, and that the clearance and settlement of Energy 
Futures contracts will not present material risk to OCC.\19\
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    \19\ OCC provides that cleared futures contracts account for 
less than two percent of its total overall volume and, in 2011, OCC 
cleared 1,388 contracts traded on NFX. In 2012, OCC cleared 518,360 
contracts traded on NFX (NFX did not have any cleared futures 
contract volume in 2013 and 2014). By way of reference, OCC's 
average daily cleared contract volume in through February 19, 2015, 
is 17 million contracts.
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Schedule C to the Clearing Agreement

    Pursuant to approved rule change 2015-OCC-03, OCC added a Schedule 
C to the Clearing Agreement to support the clearance and settlement of 
Energy Futures contracts and options on Energy Futures. Pursuant to the 
Clearing Agreement between OCC and NFX, OCC has agreed to clear the 
specifically enumerated contracts and may agree to clear and settle 
additional types of contracts should both parties execute a new 
Schedule C to the Clearing Agreement. This was necessary because Energy 
Futures contracts and options on Energy Futures were not enumerated in 
either the Previous Agreement, or in any existing Schedule C to the 
Previous Agreement. The approved rule change adds this new Schedule C 
to allow OCC to provide for the clearance and settlement of Energy 
Futures contracts and options on Energy Futures.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \20\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization. The Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act \21\ because it assures 
the safeguarding of securities and funds in the custody and control of 
OCC and permits OCC to risk manage Energy Futures contracts and options 
on Energy Futures through appropriate risk models as described above. 
Such risk models should reduce the risk that clearing members' margin 
assets will be insufficient in the event that OCC needs such assets to 
close-out the positions of a defaulted clearing member and, in turn 
also help protect investors and the public interest. Furthermore, the 
proposed rule change is also consistent with Rule 17Ad-22(b)(2) under 
the Act,\22\ because it will allow OCC to implement risk-based models 
and parameters to set margin requirements for clearing members who 
trade Energy Futures contracts and Energy Futures Options.
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 17 CFR 240.17Ad-22(b)(2).
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III. 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 \23\ and the 
rules and regulations thereunder.
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    \23\ 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).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-OCC-2015-006) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-10504 Filed 5-5-15; 8:45 am]
BILLING CODE 8011-01-P
Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Notices 26127

from fees for MXEA and MXEF as discussed above. For example, Commission, 100 F Street NE.,
facilitation orders executed in AIM, Market-Makers have quoting obligations Washington, DC 20549–1090.
open outcry, or as a CFLEX transaction that other market participants do not All submissions should refer to File
will apply to all such orders. have. Number SR–CBOE-2015–041. This file
The Exchange believes it’s reasonable The Exchange does not believe that number should be included on the
to count MXEA and MXEF volume the proposed rule changes will impose subject line if email is used. To help the
towards the average daily volume any burden on intermarket competition Commission process and review your
thresholds for the CBOE Proprietary that is not necessary or appropriate in comments more efficiently, please use
Product Sliding Scale because other furtherance of the purposes of the Act only one method. The Commission will
proprietary index products such as DJX because MXEA and MXEF will be post all comments on the Commission’s
and XSP are also included towards the exclusively listed on CBOE. To the Internet Web site (http://www.sec.gov/
qualification thresholds of the CBOE extent that the proposed changes make rules/sro.shtml). Copies of the
Proprietary Products Sliding Scale.20 CBOE a more attractive marketplace for submission, all subsequent
The Exchange believes the proposed market participants at other exchanges, amendments, all written statements
inclusion of MXEA and MXEF in the such market participants are welcome to with respect to the proposed rule
qualifying volume is equitable and not become CBOE market participants. change that are filed with the
unfairly discriminatory because it will Commission, and all written
apply to all Clearing Trading Permit C. Self-Regulatory Organization’s
Statement on Comments on the communications relating to the
Holder Proprietary MXEA and MXEF proposed rule change between the
orders Proposed Rule Change Received From
Members, Participants, or Others Commission and any person, other than
Finally, excepting MXEA and MXEF
those that may be withheld from the
from the Marketing Fee, VIP, and the The Exchange neither solicited nor public in accordance with the
ORS and CORS Programs is reasonable received comments on the proposed provisions of 5 U.S.C. 552, will be
because other proprietary index rule change. available for Web site viewing and
products (e.g., DJX and XSP) are also
III. Date of Effectiveness of the printing in the Commission’s Public
excepted from these fees and
Proposed Rule Change and Timing for Reference Room, 100 F Street NE.,
programs.21 It seems equitable to except
Commission Action Washington, DC 20549 on official
MXEA and MXEF from items on the
Fees Schedule from which other business days between the hours of
The foregoing rule change has become 10:00 a.m. and 3:00 p.m. Copies of the
proprietary index products are also effective pursuant to Section 19(b)(3)(A)
excepted. Similarly, the Exchange filing also will be available for
of the Act 23 and paragraph (f) of Rule inspection and copying at the principal
believes it’s reasonable to exclude 19b–4 24 thereunder. At any time within
MXEA and MXEF from the calculation office of the Exchange. All comments
60 days of the filing of the proposed rule received will be posted without change;
of the qualifying volume for the Floor change, the Commission summarily may
Broker Trading Permit Fees rebate the Commission does not edit personal
temporarily suspend such rule change if identifying information from
because other proprietary index it appears to the Commission that such
products such as DJX and XSP are also submissions. You should submit only
action is necessary or appropriate in the information that you wish to make
excluded.22 The Exchange also believes public interest, for the protection of
the proposed exclusion of MXEA and available publicly. All submissions
investors, or otherwise in furtherance of should refer to File Number SR–CBOE-
MXEF from the qualifying calculation is the purposes of the Act. If the
equitable and not unfairly 2015–041 and should be submitted on
Commission takes such action, the or before May 27, 2015.
discriminatory because the exclusion Commission will institute proceedings
will apply to all MXEA and MXEF to determine whether the proposed rule For the Commission, by the Division of
orders. change should be approved or Trading and Markets, pursuant to delegated
authority.25
B. Self-Regulatory Organization’s disapproved.
Brent J. Fields,
Statement on Burden on Competition IV. Solicitation of Comments Secretary.
The Exchange does not believe that Interested persons are invited to [FR Doc. 2015–10505 Filed 5–5–15; 8:45 am]
the proposed rule changes will impose submit written data, views, and BILLING CODE 8011–01–P
any burden on competition that are not arguments concerning the foregoing,
necessary or appropriate in furtherance including whether the proposed rule
of the purposes of the Act. The change is consistent with the Act. SECURITIES AND EXCHANGE
Exchange does not believe that the Comments may be submitted by any of COMMISSION
proposed rule change will impose any the following methods:
burden on intramarket competition that [Release No. 34–74853; File No. SR–OCC–
Electronic comments 2015–006]
is not necessary or appropriate in
furtherance of the purposes of the Act • Use the Commission’s Internet Self-Regulatory Organizations; The
because, while different fees are comment form (http://www.sec.gov/ Options Clearing Corporation; Order
assessed to different market participants rules/sro.shtml); or Approving Proposed Rule Change
in some circumstances, these different • Send an email to rule-comments@ Concerning the Provision of Clearance
market participants have different sec.gov. Please include File Number SR– and Settlement Services for Energy
obligations and different circumstances CBOE–2015–041 on the subject line. Futures and Options on Energy
tkelley on DSK3SPTVN1PROD with NOTICES

20 See CBOE Fees Schedule, CBOE Proprietary Paper comments Futures
Products Sliding Scale.
21 See CBOE Fees Schedule, Volume Incentive
• Send paper comments in triplicate April 30, 2015.
Program, Marketing Fee, Footnote 6 and Order to Secretary, Securities and Exchange On March 2, 2015, The Options
Router Subsidy Program and Complex Order Clearing Corporation (‘‘OCC’’) filed with
Subsidy Program, Footnotes 29 and 30. 23 15 U.S.C. 78s(b)(3)(A).
22 See CBOE Fees Schedule, Footnote 25. 24 17 CFR 240.19b–4(f). 25 17 CFR 200.30–3(a)(12).

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26128 Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Notices

the Securities and Exchange ‘‘Schedule C’’ to its Agreement for Futures—10,000 (HUQ). Further, NFX
Commission (‘‘Commission’’) the Clearing and Settlement Services will list options on NFX WTI Crude
proposed rule change OCC–2015–006 (‘‘Clearing Agreement’’) with NFX. The Financial Futures (LOQ), NFX Brent
pursuant to Section 19(b)(1) of the Schedule C to the Clearing Agreement Crude Financial Futures (BCQ) and the
Securities Exchange Act of 1934 has been approved by the Commission.7 NFX Henry Hub Penultimate Financial
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2 Background Futures (LNQ) that settle directly into
The proposed rule change was the referenced futures contract.
published for comment in the Federal As proposed in its rule change OCC
will clear and settle Energy Futures Electricity Futures Products
Register on March 20, 2015.3 The
Commission received no comments on contracts and options on Energy Futures NFX will also list electricity Energy
the proposed rule change. This order that are to be traded on NFX.8 They Futures contracts, which are based on
approves the rule change as proposed. include nine futures contracts on petrol electricity prices at different hubs and
and natural gas products, three of which smaller nodes from across the United
I. Description will have related options contracts, States reflecting different power
OCC is amending its rules to provide along with 16 electricity futures distribution grids and circuits and are
clearance and settlement services to contracts. The Energy Futures contracts look-alike products to products traded
NASDAQ Futures, Inc. (‘‘NFX’’) for are all cash-settled, and the options on ICE Futures, U.S. and cleared by ICE
certain enumerated Energy Futures contracts will settle into the underlying Clear U.S., Inc. For each of these nodes,
contracts and options on Energy futures contract. All of the Energy there is a ‘‘peak’’ and ‘‘off-peak’’ future
Futures. OCC further proposed to add Futures contracts are ‘‘look-alike’’ representing prices at time periods in
new risk models to its System for products to futures products already the day when electricity usage is high
Theoretical Analysis and Numerical traded on U.S. futures exchanges and compared to when the demand on the
Simulations (‘‘STANS’’) methodology 4 cleared by other Derivatives Clearing grid is lower. The electricity Energy
to risk manage Energy Futures contracts. Organizations (‘‘DCOs’’).9 Futures contracts NFX selected for
OCC’s STANS methodology already Petrol and Natural Gas Futures Products listing are the most popular nodes and
accommodates the margining of futures hubs within the electricity futures
and futures options, and after adopting NFX will list petrol and natural gas market. More specifically, NFX will list
the models described more fully in the Energy Futures contracts and options on the following electricity contracts, to be
proposed rule change, Energy Futures petrol Energy Futures. These Energy settled on final settlement prices based
contracts will be risk managed using the Futures contracts are based on a variety on an average regional transmission
same methodology as futures products of refined oil fuels and natural gasses organization, independent system
currently cleared and settled by OCC.5 that are commonly used for hedging operator (‘‘ISO’’) published real-time or
Because these Energy Futures market participants’ portfolios. day-ahead locational marginal prices
contracts and options on Energy Futures Specifically, NFX will list the following (‘‘LMPs’’) 10 for a pre-determined set of
do not fall within the scope of contracts cash-settled petrol and natural gas peak or off-peak hours for a contract
for which OCC has previously agreed to Energy Futures contracts: NFX Brent month:
provide clearance and settlement Crude Financial Futures (BFQ), NFX • NFX ISO–NE Massachusetts Hub
services to NFX,6 OCC also added a new Gasoil Financial Futures (GOQ), NFX Day-Ahead Off-Peak Financial Future
Heating Oil Financial Futures (HOQ), (NOPQ), settling on final settlement
1 15 U.S.C. 78s(b)(1). NFX WTI Crude Oil Financial Futures prices based on average day-ahead
2 17 CFR 240.19b–4. (CLQ), NFX RBOB Gasoline Financial hourly off-peak LMPs for the contract
3 Securities Exchange Release No. 74511 (March
Futures (RBQ), NFX Henry Hub Natural month for the Massachusetts Hub.
16, 2015), 80 FR 15042 (March 20, 2015).
4 OCC’s STANS methodology is used to measure
Gas Financial Futures—10,000 (HHQ), • NFX ISO–NE Massachusetts Hub
the exposure of portfolios of options, futures and
NFX Henry Hub Natural Gas Financial Day-Ahead Peak Financial Futures
cash instruments cleared and carried by OCC on Futures—2,500 (NNQ), NFX Henry Hub (NEPQ), settling on final settlement
behalf of its clearing member firms. STANS allows Natural Gas Penultimate Financial prices based on average day-ahead
clearing institutions to measure, monitor and Futures—2,500 (NPQ) and NFX Henry
manage the level of risk exposure of their members’
hourly peak LMPs for the contract
portfolios. For more information, see
Hub Natural Gas Penultimate Financial month for the Massachusetts Hub.
www.optionsclearing.com/risk-management/ • NFX MISO Indiana Hub Real-Time
margins. Agreement. The CFTC later approved NFX as a Peak Financial Futures (CINQ), settling
5 OCC will compute initial margin requirements DCM and the Clearing Agreement permits OCC to
once again provide clearing services to NFX.
on final settlement prices based on
for segregated futures accounts Through the
Standard Portfolio Analysis of Risk (‘‘SPAN’’®) 7 See Securities Exchange Act Release No. 74432 average real-time hourly peak LMPs for
margin calculation system without further (March 4, 2015), 80 FR 12652 (March 10, 2015) (SR– the contract month for the Indiana Hub
modification, subject to OCC’s collection of OCC–2015–03)(notice of filing of proposed rule as published by the Midcontinent
enhanced margin to be deposited in the segregated change concerning execution of a clearing and Independent System Operator, Inc.
futures account in the event that the margin settlement agreement between OCC and NFX); See
requirement as calculated under STANS would also Securities Exchange Act Release No. (‘‘MISO’’).
exceed the requirement calculated under SPAN. See 74747(April 16, 2015), 80 FR 22591 (April 22, • NFX MISO Indiana Hub Real-Time
Securities Exchange Act Release No. 72331 (June 5, 2015)(order approving the proposed clearing and Off-Peak Financial Futures (CPOQ),
2014), 79 FR 33607 (June 11, 2014) (SR–OCC–2014– settlement agreement between OCC and NFX). settling on final settlement prices based
13). See also Securities Exchange Act Release No. 8 In addition to trading in the regular session,

74268 (February 12, 2015), 80 FR 8917 (February Energy Futures and options on Energy Futures will
on average real-time hourly off-peak
19, 2015) (SR–OCC–2014–24). This rule change has also trade during overnight trading sessions. See LMPs for the contract month for the
been approved by the Commission. Securities Exchange Act Release No. 74241 Indiana Hub as published by MISO.
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6 NFX previously operated as a designated (February 10, 2015), 80 FR 8383 (February 17, 2015) • NFX PJM AEP Dayton Hub Real-
contract market (‘‘DCM’’) regulated by the SR–OCC–2014–812.
Time Peak Financial Futures (MSOQ),
Commodity Futures Trading Commission (‘‘CFTC’’), 9 More specifically, Energy Futures contracts are

and OCC provided clearing and settlement services look-alike products to futures products that are settling on final settlement prices based
pursuant to a January 13, 2012 agreement currently traded on the New York Mercantile
(‘‘Previous Agreement’’). NFX became a dormant Exchange, Inc. and ICE Futures, U.S., and cleared 10 Locational marginal pricing reflects the value of

contract market and ceased operations as a DCM as by the Chicago Mercantile Exchange Inc. and ICE the energy at the specific location and time it is
of January 31, 2014, thus terminating the Previous Clear U.S., Inc., respectively. delivered.

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Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Notices 26129

on average real-time hourly peak LMPs alike products to energy futures traded consists of a short-run factor, a long-run
for the contract month for the AEP on other futures exchanges and cleared factor, and a seasonality factor.
Dayton Hub. by other DCOs. According to OCC, there
• NFX PJM AEP Dayton Hub Real- Two-Factor Model
is a significant amount of historical data
Time Off-Peak Financial Futures and academic literature concerning risk OCC will use a two-factor risk model
(AODQ), settling on final settlement models for energy futures, and OCC has to compute theoretical prices for NFX
prices based on average real-time hourly used such data and literature in the Brent Crude Financial Futures contracts
off-peak LMPs for the contract month development of its risk models for and NFX WTI Crude Oil Financial
for the AEP Dayton Hub. Energy Futures contracts. Based on its Futures contracts because such futures
• NFX PJM Northern Illinois Hub analysis of that information, OCC stated do not exhibit seasonality.13 The two-
Real-Time Peak Financial Futures that it has identified two characteristics factor risk model will derive a given
(PNLQ), settling on final settlement specific to Energy Futures contracts Energy Future contract’s price based on
prices based on average real-time hourly (compared to futures contracts already a long-run factor and a short-run factor.
peak LMPs for the contract month for cleared, settled and risk managed by The long-run factor component captures
the Northern Illinois Hub. OCC) for which new risk models needed changes to the equilibrium price (i.e.,
• NFX PJM Northern Illinois Hub to be added to the STANS the prevailing market price at a point in
Real-Time Off-Peak Financial Futures methodology: 11 time) of a given Energy Future contract
(NIOQ), settling on final settlement • Energy Futures prices are known to based on factors such as expectations of
prices based on average real-time hourly be more volatile as contracts approach the exhaustion of existing supply,
off-peak LMPs for the contract month delivery because of the convergence improving technology for production,
for the Northern Illinois Hub. with cash-market prices and the the discovery of additional supply of the
• NFX PJM Western Hub Day-Ahead potential for real-life trading and commodity, inflation and political and
Off-Peak Financial Futures (PJDQ), delivery complications of the regulatory effects. Using historical data,
settling on final settlement prices based underlying commodity. This OCC assumed that such long-run factors
on average day-ahead hourly off-peak phenomenon is known as the cause the equilibrium price for a given
LMPs for the contract month for the ‘‘Samuelson effect,’’ 12 and Energy Future contract to evolve
Western Hub. • The price volatility of certain
according to a stochastic process that
• NFX PJM Western Hub Day-Ahead energy futures display a seasonal
accounts for asymmetric skewness and
Peak Financial Futures (PJCQ), settling pattern (a/k/a ‘‘seasonality’’).
To address these characteristics, OCC excess kurtosis.14 The short-run
on final settlement prices based on component captures short-run changes
average day-ahead hourly peak LMPs for designed multi-factor risk modeling
capabilities that can risk model based in demand or supply due to real-life
the contract month for the Western Hub. factors such as variation in the weather
• NFX PJM Western Hub Real-Time on up to three factors: a short-run factor,
a seasonal factor and a long-run factor. or intermittent supply disruptions as
Off- Peak Financial Futures (OPJQ),
The short-run factor is designed to well as increased volatility (i.e., the
settling on final settlement prices based
account for the Samuelson effect, which Samuelson effect).15 The short-run
on average real-time hourly off-peak
becomes more pronounced the closer component of the model is mean
LMPs for the contract month for the
the contract is to maturity (i.e., reverting; therefore, in the absence of
Western Hub.
such short-term changes in demand or
• NFX PJM Western Hub Real-Time delivery). The seasonal factor accounts
for Energy Futures contracts that display supply the long-run factor should
Peak Financial Future (PJMQ), settling
volatility in a seasonal pattern, and the determine the price for a given Energy
on final settlement prices based on
long-run factor accounts for the risk of Future contract. Additionally, the short-
average real-time hourly peak LMPs for
a given Energy Future contract not run factor is less noticeable as the tenor
the contract month for the Western Hub.
• NFX CAISO NP–15 Hub Day-Ahead addressed by either the short-run factor of the Energy Futures contract increases.
Off-Peak Financial Futures (ONPQ), or the seasonal factor. Pursuant to its Three-Factor Model
settling on final settlement prices based rule change as proposed, OCC’s multi-
on average day-ahead hourly off-peak factor models can be further categorized OCC will use a three-factor risk model
LMPs for the contract month for the NP– as either a two-factor model or three- in order to compute theoretical prices
15 Hub. factor model, with the two factor model for the remainder of the Energy Futures
• NFX CAISO NP–15 Hub Day-Ahead consisting of a short-run and long-run contracts.16 The three-factor model uses
Peak Financial Futures (NPMQ), settling factor, while the three-factor model
13 See Schwartz, E. and J. Smith (2000) ‘‘Short-
on final settlement prices based on term variations and long-term dynamics in
11 In developing its risk models for Energy
average day-ahead hourly peak LMPs for commodity prices,’’ Management Science, vol. 46,
Futures, OCC stated in its proposed rule change that
the contract month for the NP–15 Hub. it had also considered a third characteristic, namely pp. 893–911. OCC provided that the supply of Brent
• NFX CAISO SP–15 Hub Day-Ahead that electricity markets are known to be Crude Oil and WTI Crude Oil is not affected by
Off-Peak Financial Futures (OFPQ), geographically segmented, which can cause abrupt seasonal variation in demand because there are low-
and unanticipated changes in spot prices. However, cost transportation methods for Brent Crude Oil and
settling on final settlement prices based WTI Crude Oil as well as the ability to store Brent
after reviewing relevant academic literature and
on average day-ahead hourly off-peak performing internal testing, OCC determined that Crude Oil and WTI Crude Oil.
LMPs for the contract month for the SP– adjusting its futures risk models to account for 14 The model assumes that past price information

15 Hub. changes in the spot price of electricity was not is already incorporated into the current price and
• NFX CAISO SP–15 Hub Day-Ahead appropriate. Securities Exchange Release No. 74511 the next price movement is conditionally
independent of past price movements.
(March 16, 2015), 80 FR 15042 (March 20, 2015).
Peak Financial Futures (SPMQ), settling See Kholopova, M. (2006) ‘‘Estimating a two-factor Additionally, the long-run factor accounts for ‘‘fat
tkelley on DSK3SPTVN1PROD with NOTICES

on final settlement prices based on model for the forward curve of electricity,’’ Ph.D. tail’’ events.
average day-ahead hourly peak LMPs for dissertation. 15 This is often observed as shorter dated futures

the contract month for the SP–15 Hub. 12 See Samuelson, Paul A., ‘‘Proof that Properly contracts exhibit greater volatility than longer dated
Anticipated Prices Fluctuate Randomly,’’ Industrial futures contracts.
Risk Model Changes Management Review, Vol. 6 (1965). OCC stated that 16 OCC’s proposed model is based upon recent

no other futures contracts for which it provides academic literature on energy futures. See Mirantes,
As noted above, the Energy Futures clearance and settlement services exhibit the A., J. Poblacion and G. Serna (2012) ‘‘The stochastic
contracts that OCC will clear are look- Samuelson effect. Continued

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Document Created: 2015-12-16 07:41:10
Document Modified: 2015-12-16 07:41:10
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		80 FR 26127