80 FR 37323 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to an Advance Notice Concerning Modifications To Backtesting Procedures in Order To Enhance Monitoring of Margin Coverage and Model Risk Exposure

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 125 (June 30, 2015)

Page Range		37323-37326
FR Document		2015-15994

Federal Register, Volume 80 Issue 125 (Tuesday, June 30, 2015)

[Federal Register Volume 80, Number 125 (Tuesday, June 30, 2015)]
[Notices]
[Pages 37323-37326]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2015-15994]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75290; File No. SR-OCC-2014-810]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to an Advance Notice Concerning Modifications To
Backtesting Procedures in Order To Enhance Monitoring of Margin
Coverage and Model Risk Exposure

June 24, 2015.
On November 13, 2014, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2014-810 (``Advance Notice'') pursuant to Section
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of
2010 (``Payment, Clearing and Settlement Supervision Act'') \1\ and
Rule 19b-4(n)(1)(i) under

[[Page 37324]]

the Securities Exchange Act of 1934 (``Exchange Act'') to modify
backtesting procedures to better identify and make improvements to its
monitoring of its margin methodology and to enhance its ability to
manage risk.\2\ The Advance Notice was published for comment in the
Federal Register on December 11, 2014.\3\ On January 9, 2015, pursuant
to section 806(e)(1)(D) of the Payment, Clearing and Settlement
Supervision Act,\4\ the Commission required OCC to provide additional
information concerning the Advance Notice.\5\ The Commission did not
receive any comments on the Advance Notice. This publication serves as
a notice of no objection to the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council designated OCC a systemically important financial market
utility on July 18, 2012. See Financial Stability Oversight Council
2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is
required to comply with the Clearing Supervision Act and file
advance notices with the Commission. See 12 U.S.C. 5465(e).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ See Securities Exchange Act Release No. 73749 (December 5,
2014), 79 FR 73673 (December 11, 2014) (SR-OCC-2014-810)
(``Notice'').
\4\ 12 U.S.C. 5465(e)(1)(D).
\5\ The Commission received a response from OCC with the
additional information for consideration on April 29, 2015, which,
pursuant to Sections 806(e)(1)(E) and (G) of the Payment, Clearing
and Settlement Supervision Act, initiated a new 60 day period of
review. See 12 U.S.C. 5465(e)(1)(E) and 12 U.S.C. 5465(e)(1)(G).
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I. Description of the Advance Notice

As described in OCC's Notice,\6\ the proposed change modifies OCC's
backtesting procedures to enhance its monitoring of margin coverage and
model risk exposure. Such monitoring will allow OCC to better identify
and make improvements to its margin methodology and thus enhance OCC's
ability to manage risk.\7\
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\6\ See supra note 3.
\7\ If OCC determines that the results of these modified
backtesting procedures require changes to its margin model, OCC may
be required to file an advance notice to effect those changes. See
id.
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OCC implements backtesting procedures to test its methodology for
determining the amount of margin to collect from clearing members and
validate the assumptions and mechanisms inherent in its methodology and
to make any necessary changes to the methodology. Each trading day, OCC
estimates the risk exposure of accounts and uses this estimate as a
basis for each account's margin charge. On the following business day,
OCC's current backtesting procedures compare an account's observed
profit and loss (``P&L'') with the prior day's estimated risk using a
variety of analytical and statistical tools. These daily tests measure
the performance of OCC's risk measures for each account, and,
therefore, also measure the performance of OCC's underlying margin
methodology. OCC's backtesting program enables OCC to assess
performance of its margining systems and determine whether financial
risks are adequately or inadequately captured by the quantitative
models in use.
OCC has conducted daily backtesting of margin accounts since 2006.
OCC employs the ``traffic light'' test published by the Basel Committee
on Banking Supervision in 1996 (the ``Traffic Light Test'').\8\ In
conducting the Traffic Light Test, OCC determines the actual number of
instances in which the realized loss on an account exceeded the margin,
referred to as an ``exceedance,'' over an observation period of one
year. The number of exceedances during the observation period is
compared against the number of expected exceedances under the
assumption that the exceedances are independent and identically
distributed over time. When backtesting results reveal the potential
opportunity for remediation of OCC's margin methodology, OCC undertakes
a root cause analysis to determine the cause of any issues. Any
significant shortcomings of OCC's methodology lead to OCC undertaking a
model improvement project designed to correct the problems. After
analyzing the exceedances, OCC provides monthly reports to OCC's
Enterprise Risk Management Committee (``ERMC''), which include, among
other things, pertinent conclusions based on results from the full set
of backtests.
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\8\ See ``Supervisory Framework for the Use of `Backtesting' in
Conjunction with Internal Model Approach to Market Risk Capital
Requirement.'' Located at http://www.bis.org/publ/bcbs22.htm.
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OCC analyzed its backtesting program and identified several
enhancements to the program, as discussed in more detail below: (1)
Enhancement of and increase in the number of statistical tests, (2)
data set changes, (3) forecast horizon changes, and (4) root cause
analysis changes.

1. Enhancement of and Increase in the Number of Statistical Tests

As proposed in the Notice, OCC will enhance an existing statistical
test and add three new statistical tests. OCC proposed to enhance its
existing Traffic Light Test so that it may be applied to exceedances
across all of OCC's margin accounts. Given that exceedances are not
independent across margin accounts, OCC will enhance this test to
address the dependency of exceedances between accounts.
In addition to the enhanced Traffic Light Test, OCC will implement
three other industry standard tests related to exceedances in order to
provide a more comprehensive set of tests. First, OCC will add the
Kupiec Test,\9\ which is a new proportion of failures test that
compares the actual number of exceedances with the number that would be
expected in light of the confidence level associated with the
calculation of margin. For example, when calculating margin with a
confidence level of 99%, the number of exceedances is expected to be 1%
of the total observations (i.e., the P&Ls for all accounts for all days
during the measurement period). If the actual number of exceedances is
near the expected number, this is an indication that the calculated
margin requirements are not inaccurate estimates of the accounts'
estimated losses.
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\9\ See, Kupiec, P. ``Techniques for Verifying the Accuracy of
Risk Management Models,'' Journal of Derivatives, v3, P73-84 (1995).
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Second, OCC will add the Christoffersen Independence Test,\10\
which is a new statistical test that measures the extent to which
exceedances are independent of each other. Specifically, if OCC's
margin models are correctly assessing risk, the probability of an
exceedance occurring at any two points in time should be the same as
the probability of an exceedance occurring at either point in time,
individually, without the exceedance occurring at the other point in
time. Third, OCC will add the Probtile test, which compares the
distribution of the daily observed P&L to the daily forecasted P&L
distribution. If the distribution of these P&L ratios approximates a
uniform random distribution, this is an indication that OCC's margin
models are not providing inaccurate forecasts of potential losses in an
account. Combined, these new statistical tests will provide OCC with
additional pertinent information to evaluate the effectiveness of its
models in determining margin coverage.
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\10\ See, Christoffersen, Peter, ``Evaluating Interval
Forecasts.'' International Economic Review, 39 (4), 841-862 (1998).
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2. Data Set Changes

In addition to the changes to its backtesting program, as described
above, OCC also will make two enhancements to the data sets being
backtested to allow for testing against various assumed portfolio and
market data scenarios, in addition to the performance of actual
portfolios against actual, current market conditions. First, OCC will
backtest hypothetical portfolios, allowing for the design and
monitoring of portfolios that have magnified sensitivities to
particular aspects of the models used in the

[[Page 37325]]

margin computations. Backtesting against hypothetical portfolios will
provide a more comprehensive insight into the adequacy of the
underlying model assumptions under market conditions prevailing in the
backtest observation periods.
Under the second data set enhancement, OCC will backtest current
accounts against earlier observation periods. The market data observed
over the observation period is used to generate the margin forecasts
and P&L and observation periods will be chosen to reflect special
market conditions. OCC believes this enhancement should be useful
because even though margin coverage might be adequate in the current
environment, margin coverage could be inadequate under stressed
conditions, such as periods of high volatility. The ability to select
specific observation periods will not limit the backtesting to the
current environments but rather will highlight performance of margin
coverage and model performance in market scenarios other than
prevailing market conditions.

3. Forecast Horizons Changes

Currently, OCC conducts backtesting using a one-day time horizon,
which means that it compares calculated margin with realized P&Lthat
occur on the business day following the calculation. However, OCC's
margin calculations assume that positions will be liquidated over a
two-day period, resulting in the test comparing two-day margin numbers
to a one-day P&L calculation. This difference requires OCC to make
adjustments to its existing backtesting methodology in its testing to
account for the difference between the two-day liquidation period used
in its margin calculation and the one-day horizon used in the P&L
calculation.
Pursuant to the proposal, OCC will revise its backtesting
methodology to take into account losses over a two-day time horizon,
which will match the two-day liquidation period used in the margin
calculation without such adjustments. OCC will implement the necessary
functionality into its backtesting system to conduct a two-day time
horizon backtest, which will compare calculated margin against a two-
day P&L calculation. OCC also will revise its backtesting methodology
to compare one-day margin calculations against one-day P&L
calculations, and will implement system functionality for such a test.
All issues identified in any of these backtesting results will be
reported to the ERMC. OCC believes that its adoption of the additional
forecast horizons tests will allow it to have a more accurate view of
the sufficiency of its margin methodology.

4. Root Cause Analysis Changes

Currently, OCC's backtesting staff conducts investigations, as
necessary, in order to identify the root cause of exceedances. The
investigation itself is a manual process that is dependent upon the
facts and circumstances pertaining to a given exceedance. Pursuant to
its proposal, OCC will now make system modifications that will provide
OCC's backtesting staff with additional tools to facilitate such
investigations. Specifically, OCC will add system functionality that
should reveal attribution of losses due to underlying price movements
and implied volatility movements. Further, these improvements will
allow OCC to incorporate hypothetical accounts and positions into the
tests and will allow OCC to identify risk factors that move above or
below the projected values. These changes should improve OCC's ability
to conduct investigations and root cause analyses that identify the
root cause of exceedances by providing OCC with additional automated
investigative tools which should, in turn, lead to improving OCC's
backtesting methodology and its margin coverage.

II. Discussion and Commission Findings

Although Title VIII does not specify a standard of review for an
advance notice, the Commission believes that the stated purpose of
Title VIII is instructive.\11\ The stated purpose of Title VIII is to
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically-important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\12\
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\11\ See 12 U.S.C. 5461(b).
\12\ Id.
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Section 805(a)(2) of the Payment, Clearing and Settlement
Supervision Act \13\ authorizes the Commission to prescribe risk
management standards for the payment, clearing, and settlement
activities of designated clearing entities and financial institutions
engaged in designated activities for which it is the supervisory agency
or the appropriate financial regulator. Section 805(b) of the Payment,
Clearing and Settlement Supervision Act \14\ states that the objectives
and principles for the risk management standards prescribed under
Section 805(a) shall be to:
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\13\ 12 U.S.C. 5464(a)(2).
\14\ 12 U.S.C. 5464(b).
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Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Payment, Clearing and Settlement Supervision Act
(``Clearing Agency Standards'').\15\ The Clearing Agency Standards
became effective on January 2, 2013, and require registered clearing
agencies that perform central counterparty (``CCP'') services to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for their operations and risk management practices on an
ongoing basis.\16\ As such, it is appropriate for the Commission to
review advance notices against these Clearing Agency Standards, and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Payment, Clearing and Settlement
Supervision Act.\17\
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\15\ 17 CFR 240.17Ad-22.
\16\ The Clearing Agency Standards are substantially similar to
the risk management standards established by the Board of Governors
of the Federal Reserve System governing the operations of designated
financial market utilities that are not clearing entities and
financial institutions engaged in designated activities for which
the Commission or the Commodity Futures Trading Commission is the
Supervisory Agency. See Financial Market Utilities, 77 FR 45907
(August 2, 2012).
\17\ 12 U.S.C. 5464(b).
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The Commission believes that the proposal in this Advance Notice is
designed to further the objectives and principles of Section 805(b) of
the Payment, Clearing and Settlement Supervision Act.\18\ The
Commission believes that the additional backtesting improvements should
promote robust risk management by providing OCC with additional tools
to test the performance of its margin methodology in a more
comprehensive manner and better evaluate the effectiveness of its
models in determining model coverage. First, the enhancement to OCC's
existing Traffic Light Test and the adoption of the three new
statistical tests should provide a more comprehensive set of tests for
it to use to evaluate its margin models. Second, the enhancement of the
data sets to be backtested should provide OCC with additional
informative data on the performance of margin coverage and model
performance in market scenarios other than prevailing market
conditions.

[[Page 37326]]

Third, revising the backtesting methodology to take into account losses
over a two-day time horizon, should allow OCC to have a more accurate
view of the sufficiency of its margin methodology. Finally, system
modifications that should reveal attribution of losses due to
underlying price movements and implied volatility movements should
provide OCC with additional, automated investigative tools to conduct
analysis into the root causes of exceedances.
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\18\ 12 U.S.C. 5464(b).
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In addition, the Commission believes that the proposal in this
Advance Notice is consistent with Clearing Agency Standards, in
particular, Rule 17Ad-22(b)(4) under the Exchange Act,\19\ which, in
relevant part, requires registered clearing agencies that perform
central counterparty services establish, implement, maintain, and
enforce written policies and procedures reasonably designed to provide
for an annual model validation consisting of evaluating the performance
of the clearing agency's margin models and the related parameters and
assumptions associated with such models. The Commission believes that
this proposal is consistent with Exchange Act Rule 17Ad-22(b)(4) \20\
because it provides OCC with the ability to employ improved statistical
tests to better evaluate the performance of its margin models and thus
improving its ability to validate such models.
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\19\ 17 CFR 240.17Ad-22(b)(3).
\20\ Id.
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III. Conclusion

It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Payment, Clearing and Settlement Supervision Act,\21\ that the
Commission does not object to advance notice proposal (SR-OCC-2014-810)
and that OCC is authorized to implement the proposal.
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\21\ 12 U.S.C. 5465(e)(1)(I).

By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-15994 Filed 6-29-15; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 80, No. 125 / Tuesday, June 30, 2015 / Notices 37323

The Exchange also believes that necessary or appropriate in furtherance change that are filed with the
having the CFR serve in the advisory of the purposes of the Exchange Act. Commission, and all written
capacity of the Market Performance The proposed rule change is not communications relating to the
Committee and Regulatory Advisory intended to address competitive issues proposed rule change between the
Committee is consistent with and but rather is concerned solely with the Commission and any person, other than
facilitates a governance and regulatory administration and functioning of the those that may be withheld from the
structure that furthers the objectives of Exchange’s board of directors. public in accordance with the
Section 6(b)(5) of the Exchange Act. The provisions of 5 U.S.C. 552, will be
Exchange believes that member C. Self-Regulatory Organization’s available for Web site viewing and
participation on the proposed CFR Statement on Comments on the printing in the Commission’s Public
would be sufficient to provide for the Proposed Rule Change Received From Reference Room, 100 F Street, NE.,
fair representation of members in the Members, Participants, or Others Washington, DC 20549, on official
administration of the affairs of the No written comments were solicited business days between the hours of
Exchange, including rulemaking and the or received with respect to the proposed 10:00 a.m. and 3:00 p.m. Copies of the
disciplinary process, consistent with rule change. filing will also be available for
Section 6(b)(3) of the Exchange Act. inspection and copying at the NYSE’s
The Exchange believes that III. Date of Effectiveness of the
Proposed Rule Change and Timing for principal office and on its Internet Web
eliminating references to ‘‘Chief site at www.nyse.com. All comments
Executive Officer’’ of NYSE Regulation Commission Action
received will be posted without change;
in Rules 48, 49 and 86 and replacing Within 45 days of the date of the Commission does not edit personal
them with CRO, which is used publication of this notice in the Federal identifying information from
throughout the Exchange’s rules, Register or up to 90 days (i) as the submissions. You should submit only
removes impediments to and perfects a Commission may designate if it finds information that you wish to make
national market system because it such longer period to be appropriate available publicly. All submissions
would reduce potential confusion that and publishes its reasons for so finding should refer to File Number SR–NYSE–
may result from retaining different or (ii) as to which the self-regulatory 2015–27 and should be submitted on or
designations for the same individual in organization consents, the Commission before July 21, 2015.
the Exchange’s rulebook. Removing will:
For the Commission, by the Division of
potentially confusing conflicting (A) By order approve or disapprove
Trading and Markets, pursuant to delegated
designations would also further the goal the proposed rule change, or authority.57
of transparency and add consistency to (B) institute proceedings to determine
Robert W. Errett,
the Exchange’s rules. whether the proposed rule change
Deputy Secretary.
Finally, making conforming should be disapproved.
amendments to Rules 0, 1, 22, 36, 37, [FR Doc. 2015–15984 Filed 6–29–15; 8:45 am]
IV. Solicitation of Comments
46, 46A, 48, 49, 54, 70, 103, 103A, 103B, BILLING CODE 8011–01–P

104, 308, 422, 475, 476, 476A, 497 and Interested persons are invited to
9310 in connection with creation of the submit written data, views, and
proposed ROC and the CFR arguments concerning the foregoing, SECURITIES AND EXCHANGE
subcommittee and termination of the including whether the proposed rule COMMISSION
Delegation Agreement removes change is consistent with the Act. [Release No. 34–75290; File No. SR–OCC–
impediments to and perfects the Comments may be submitted by any of 2014–810]
mechanism of a free and open market by the following methods:
removing confusion that may result Self-Regulatory Organizations; The
Electronic Comments Options Clearing Corporation; Notice
from having obsolete references in the
Exchange’s rulebook. The Exchange • Use the Commission’s Internet of No Objection to an Advance Notice
further believes that the proposal comment form (http://www.sec.gov/ Concerning Modifications To
removes impediments to and perfects rules/sro.shtml); or Backtesting Procedures in Order To
the mechanism of a free and open • Send an email to rule-comments@ Enhance Monitoring of Margin
market by ensuring that persons subject sec.gov. Please include File Number SR– Coverage and Model Risk Exposure
to the Exchange’s jurisdiction, NYSE–2015–27 on the subject line.
June 24, 2015.
regulators, and the investing public can Paper Comments On November 13, 2014, The Options
more easily navigate and understand the Clearing Corporation (‘‘OCC’’) filed with
Exchange’s rulebook. The Exchange • Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities the Securities and Exchange
believes that eliminating obsolete Commission (‘‘Commission’’) advance
references would not be inconsistent and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090. notice SR–OCC–2014–810 (‘‘Advance
with the public interest and the Notice’’) pursuant to Section 806(e)(1) of
protection of investors because investors All submissions should refer to File
Number SR–NYSE–2015–27. This file the Payment, Clearing, and Settlement
will not be harmed and in fact would Supervision Act of 2010 (‘‘Payment,
benefit from increased transparency, number should be included on the
subject line if email is used. To help the Clearing and Settlement Supervision
thereby reducing potential confusion. Act’’) 1 and Rule 19b–4(n)(1)(i) under
Commission process and review your
asabaliauskas on DSK5VPTVN1PROD with NOTICES

Removing such obsolete references will
also further the goal of transparency and comments more efficiently, please use 57 17CFR 200.30–3(a)(12).
add clarity to the Exchange’s rules. only one method. The Commission will 1 12U.S.C. 5465(e)(1). The Financial Stability
post all comments on the Commission’s Oversight Council designated OCC a systemically
B. Self-Regulatory Organization’s Internet Web site (http://www.sec.gov/ important financial market utility on July 18, 2012.
Statement on Burden on Competition rules/sro.shtml). Copies of the See Financial Stability Oversight Council 2012
Annual Report, Appendix A, http://
The Exchange does not believe that submission, all subsequent www.treasury.gov/initiatives/fsoc/Documents/
the proposed rule change will impose amendments, all written statements 2012%20Annual%20Report.pdf. Therefore, OCC is
any burden on competition that is not with respect to the proposed rule Continued

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37324 Federal Register / Vol. 80, No. 125 / Tuesday, June 30, 2015 / Notices

the Securities Exchange Act of 1934 backtesting program enables OCC to exceedances in order to provide a more
(‘‘Exchange Act’’) to modify backtesting assess performance of its margining comprehensive set of tests. First, OCC
procedures to better identify and make systems and determine whether will add the Kupiec Test,9 which is a
improvements to its monitoring of its financial risks are adequately or new proportion of failures test that
margin methodology and to enhance its inadequately captured by the compares the actual number of
ability to manage risk.2 The Advance quantitative models in use. exceedances with the number that
Notice was published for comment in OCC has conducted daily backtesting would be expected in light of the
the Federal Register on December 11, of margin accounts since 2006. OCC confidence level associated with the
2014.3 On January 9, 2015, pursuant to employs the ‘‘traffic light’’ test calculation of margin. For example,
section 806(e)(1)(D) of the Payment, published by the Basel Committee on when calculating margin with a
Clearing and Settlement Supervision Banking Supervision in 1996 (the confidence level of 99%, the number of
Act,4 the Commission required OCC to ‘‘Traffic Light Test’’).8 In conducting the exceedances is expected to be 1% of the
provide additional information Traffic Light Test, OCC determines the total observations (i.e., the P&Ls for all
concerning the Advance Notice.5 The actual number of instances in which the accounts for all days during the
Commission did not receive any realized loss on an account exceeded measurement period). If the actual
comments on the Advance Notice. This the margin, referred to as an number of exceedances is near the
publication serves as a notice of no ‘‘exceedance,’’ over an observation expected number, this is an indication
objection to the Advance Notice. period of one year. The number of that the calculated margin requirements
exceedances during the observation are not inaccurate estimates of the
I. Description of the Advance Notice
period is compared against the number accounts’ estimated losses.
As described in OCC’s Notice,6 the of expected exceedances under the Second, OCC will add the
proposed change modifies OCC’s assumption that the exceedances are Christoffersen Independence Test,10
backtesting procedures to enhance its independent and identically distributed which is a new statistical test that
monitoring of margin coverage and over time. When backtesting results measures the extent to which
model risk exposure. Such monitoring reveal the potential opportunity for exceedances are independent of each
will allow OCC to better identify and remediation of OCC’s margin other. Specifically, if OCC’s margin
make improvements to its margin methodology, OCC undertakes a root models are correctly assessing risk, the
methodology and thus enhance OCC’s cause analysis to determine the cause of probability of an exceedance occurring
ability to manage risk.7 any issues. Any significant at any two points in time should be the
OCC implements backtesting same as the probability of an
shortcomings of OCC’s methodology
procedures to test its methodology for exceedance occurring at either point in
lead to OCC undertaking a model
determining the amount of margin to time, individually, without the
improvement project designed to correct
collect from clearing members and exceedance occurring at the other point
the problems. After analyzing the
validate the assumptions and in time. Third, OCC will add the
exceedances, OCC provides monthly
mechanisms inherent in its Probtile test, which compares the
reports to OCC’s Enterprise Risk
methodology and to make any necessary distribution of the daily observed P&L to
Management Committee (‘‘ERMC’’),
changes to the methodology. Each the daily forecasted P&L distribution. If
which include, among other things,
trading day, OCC estimates the risk the distribution of these P&L ratios
pertinent conclusions based on results
exposure of accounts and uses this approximates a uniform random
from the full set of backtests.
estimate as a basis for each account’s distribution, this is an indication that
OCC analyzed its backtesting program
margin charge. On the following OCC’s margin models are not providing
and identified several enhancements to
business day, OCC’s current backtesting inaccurate forecasts of potential losses
the program, as discussed in more detail
procedures compare an account’s in an account. Combined, these new
below: (1) Enhancement of and increase
observed profit and loss (‘‘P&L’’) with statistical tests will provide OCC with
in the number of statistical tests, (2) data
the prior day’s estimated risk using a additional pertinent information to
set changes, (3) forecast horizon
variety of analytical and statistical tools. evaluate the effectiveness of its models
changes, and (4) root cause analysis
These daily tests measure the in determining margin coverage.
changes.
performance of OCC’s risk measures for
2. Data Set Changes
each account, and, therefore, also 1. Enhancement of and Increase in the
measure the performance of OCC’s Number of Statistical Tests In addition to the changes to its
underlying margin methodology. OCC’s backtesting program, as described
As proposed in the Notice, OCC will above, OCC also will make two
enhance an existing statistical test and enhancements to the data sets being
required to comply with the Clearing Supervision
Act and file advance notices with the Commission. add three new statistical tests. OCC backtested to allow for testing against
See 12 U.S.C. 5465(e). proposed to enhance its existing Traffic various assumed portfolio and market
2 17 CFR 240.19b–4(n)(1)(i). Light Test so that it may be applied to data scenarios, in addition to the
3 See Securities Exchange Act Release No. 73749
exceedances across all of OCC’s margin performance of actual portfolios against
(December 5, 2014), 79 FR 73673 (December 11, accounts. Given that exceedances are
2014) (SR–OCC–2014–810) (‘‘Notice’’). actual, current market conditions. First,
4 12 U.S.C. 5465(e)(1)(D). not independent across margin OCC will backtest hypothetical
5 The Commission received a response from OCC accounts, OCC will enhance this test to portfolios, allowing for the design and
with the additional information for consideration address the dependency of exceedances monitoring of portfolios that have
asabaliauskas on DSK5VPTVN1PROD with NOTICES

on April 29, 2015, which, pursuant to Sections between accounts. magnified sensitivities to particular
806(e)(1)(E) and (G) of the Payment, Clearing and In addition to the enhanced Traffic
Settlement Supervision Act, initiated a new 60 day aspects of the models used in the
period of review. See 12 U.S.C. 5465(e)(1)(E) and 12 Light Test, OCC will implement three
U.S.C. 5465(e)(1)(G). other industry standard tests related to 9 See, Kupiec, P. ‘‘Techniques for Verifying the
6 See supra note 3. Accuracy of Risk Management Models,’’ Journal of
7 If OCC determines that the results of these 8 See ‘‘Supervisory Framework for the Use of Derivatives, v3, P73–84 (1995).
modified backtesting procedures require changes to ‘Backtesting’ in Conjunction with Internal Model 10 See, Christoffersen, Peter, ‘‘Evaluating Interval

its margin model, OCC may be required to file an Approach to Market Risk Capital Requirement.’’ Forecasts.’’ International Economic Review, 39 (4),
advance notice to effect those changes. See id. Located at http://www.bis.org/publ/bcbs22.htm. 841–862 (1998).

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Federal Register / Vol. 80, No. 125 / Tuesday, June 30, 2015 / Notices 37325

margin computations. Backtesting more accurate view of the sufficiency of management standards prescribed under
against hypothetical portfolios will its margin methodology. Section 805(a) shall be to:
provide a more comprehensive insight • Promote robust risk management;
4. Root Cause Analysis Changes • promote safety and soundness;
into the adequacy of the underlying
model assumptions under market Currently, OCC’s backtesting staff • reduce systemic risks; and
conditions prevailing in the backtest conducts investigations, as necessary, in • support the stability of the broader
observation periods. order to identify the root cause of financial system.
The Commission has adopted risk
Under the second data set exceedances. The investigation itself is
management standards under Section
enhancement, OCC will backtest current a manual process that is dependent
805(a)(2) of the Payment, Clearing and
accounts against earlier observation upon the facts and circumstances
Settlement Supervision Act (‘‘Clearing
periods. The market data observed over pertaining to a given exceedance.
Agency Standards’’).15 The Clearing
the observation period is used to Pursuant to its proposal, OCC will now
Agency Standards became effective on
generate the margin forecasts and P&L make system modifications that will
January 2, 2013, and require registered
and observation periods will be chosen provide OCC’s backtesting staff with
clearing agencies that perform central
to reflect special market conditions. additional tools to facilitate such
counterparty (‘‘CCP’’) services to
OCC believes this enhancement should investigations. Specifically, OCC will
establish, implement, maintain, and
be useful because even though margin add system functionality that should
enforce written policies and procedures
coverage might be adequate in the reveal attribution of losses due to
that are reasonably designed to meet
current environment, margin coverage underlying price movements and
certain minimum requirements for their
could be inadequate under stressed implied volatility movements. Further,
operations and risk management
conditions, such as periods of high these improvements will allow OCC to
practices on an ongoing basis.16 As
volatility. The ability to select specific incorporate hypothetical accounts and
such, it is appropriate for the
observation periods will not limit the positions into the tests and will allow
Commission to review advance notices
backtesting to the current environments OCC to identify risk factors that move
against these Clearing Agency
but rather will highlight performance of above or below the projected values.
Standards, and the objectives and
margin coverage and model These changes should improve OCC’s
principles of these risk management
performance in market scenarios other ability to conduct investigations and
standards as described in Section 805(b)
than prevailing market conditions. root cause analyses that identify the root
of the Payment, Clearing and Settlement
cause of exceedances by providing OCC
3. Forecast Horizons Changes Supervision Act.17
with additional automated investigative
The Commission believes that the
Currently, OCC conducts backtesting tools which should, in turn, lead to
proposal in this Advance Notice is
using a one-day time horizon, which improving OCC’s backtesting
designed to further the objectives and
means that it compares calculated methodology and its margin coverage.
principles of Section 805(b) of the
margin with realized P&Lthat occur on
II. Discussion and Commission Payment, Clearing and Settlement
the business day following the
Findings Supervision Act.18 The Commission
calculation. However, OCC’s margin
believes that the additional backtesting
calculations assume that positions will Although Title VIII does not specify a improvements should promote robust
be liquidated over a two-day period, standard of review for an advance risk management by providing OCC
resulting in the test comparing two-day notice, the Commission believes that the with additional tools to test the
margin numbers to a one-day P&L stated purpose of Title VIII is performance of its margin methodology
calculation. This difference requires instructive.11 The stated purpose of in a more comprehensive manner and
OCC to make adjustments to its existing Title VIII is to mitigate systemic risk in better evaluate the effectiveness of its
backtesting methodology in its testing to the financial system and promote models in determining model coverage.
account for the difference between the financial stability by, among other First, the enhancement to OCC’s
two-day liquidation period used in its things, promoting uniform risk existing Traffic Light Test and the
margin calculation and the one-day management standards for systemically- adoption of the three new statistical
horizon used in the P&L calculation. important financial market utilities and tests should provide a more
Pursuant to the proposal, OCC will strengthening the liquidity of comprehensive set of tests for it to use
revise its backtesting methodology to systemically important financial market to evaluate its margin models. Second,
take into account losses over a two-day utilities.12 the enhancement of the data sets to be
time horizon, which will match the two- Section 805(a)(2) of the Payment, backtested should provide OCC with
day liquidation period used in the Clearing and Settlement Supervision additional informative data on the
margin calculation without such Act 13 authorizes the Commission to performance of margin coverage and
adjustments. OCC will implement the prescribe risk management standards for model performance in market scenarios
necessary functionality into its the payment, clearing, and settlement other than prevailing market conditions.
backtesting system to conduct a two-day activities of designated clearing entities
time horizon backtest, which will and financial institutions engaged in 15 17 CFR 240.17Ad–22.
compare calculated margin against a designated activities for which it is the 16 The Clearing Agency Standards are
two-day P&L calculation. OCC also will supervisory agency or the appropriate substantially similar to the risk management
revise its backtesting methodology to standards established by the Board of Governors of
asabaliauskas on DSK5VPTVN1PROD with NOTICES

financial regulator. Section 805(b) of the the Federal Reserve System governing the
compare one-day margin calculations Payment, Clearing and Settlement operations of designated financial market utilities
against one-day P&L calculations, and Supervision Act 14 states that the that are not clearing entities and financial
will implement system functionality for objectives and principles for the risk institutions engaged in designated activities for
such a test. All issues identified in any which the Commission or the Commodity Futures
Trading Commission is the Supervisory Agency.
of these backtesting results will be 11 See 12 U.S.C. 5461(b). See Financial Market Utilities, 77 FR 45907 (August
reported to the ERMC. OCC believes that 12 Id. 2, 2012).
its adoption of the additional forecast 13 12 U.S.C. 5464(a)(2). 17 12 U.S.C. 5464(b).

horizons tests will allow it to have a 14 12 U.S.C. 5464(b). 18 12 U.S.C. 5464(b).

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37326 Federal Register / Vol. 80, No. 125 / Tuesday, June 30, 2015 / Notices

Third, revising the backtesting SECURITIES AND EXCHANGE concerning the securities of McIntosh
methodology to take into account losses COMMISSION Bancshares Inc. (CIK No. 872545)
over a two-day time horizon, should (‘‘MITB’’), a Georgia corporation with its
[File No. 500–1]
allow OCC to have a more accurate view principal place of business in Jackson,
of the sufficiency of its margin In the Matter of Aspire Japan, Inc., Georgia, with stock quoted on OTC
methodology. Finally, system Market & Research Corp. (n/k/a MRC Link, because it has not filed any
modifications that should reveal Group Ltd.), McIntosh Bancshares Inc., periodic reports since the period ended
attribution of losses due to underlying Pure Minerals, Inc. (f/k/a Pure September 30, 2010. On April 29, 2013,
price movements and implied volatility Pharmaceuticals Corp.) and Salamon Corporation Finance sent a delinquency
Group, Inc.; Order of Suspension of letter to MITB requesting compliance
movements should provide OCC with
Trading with its periodic reporting obligations at
additional, automated investigative
the address shown in its then-most
tools to conduct analysis into the root June 26, 2015. recent filing with the Commission, but
causes of exceedances. It appears to the Securities and MITB did not receive the delinquency
In addition, the Commission believes Exchange Commission that there is a letter due to its failure to maintain a
that the proposal in this Advance Notice lack of current and accurate information valid address on file with the
is consistent with Clearing Agency concerning the securities of Aspire Commission as required by Commission
Standards, in particular, Rule 17Ad– Japan, Inc. (CIK No. 1317838) rules (Rule 301 of Regulation S–T, 17
22(b)(4) under the Exchange Act,19 (‘‘ASJP’’ 1), a void Delaware corporation CFR 232.301 and Section 5.4 of the
which, in relevant part, requires with its principal place of business in EDGAR Filer Manual).
registered clearing agencies that perform Los Angeles, California, with stock It appears to the Securities and
central counterparty services establish, quoted on OTC Link (previously, ‘‘Pink Exchange Commission that there is a
implement, maintain, and enforce Sheets’’) operated by OTC Markets lack of current and accurate information
Group Inc. (‘‘OTC Link’’) because it has concerning the securities of Pure
written policies and procedures
not filed any periodic reports since the Minerals, Inc. (f/k/a Pure
reasonably designed to provide for an
period ended April 30, 2011. On June Pharmaceuticals Corp.) (CIK No.
annual model validation consisting of 1364326) (‘‘PPMA’’), a revoked Nevada
26, 2013, the Division of Corporation
evaluating the performance of the Finance (‘‘Corporation Finance’’) sent a corporation with its principal place of
clearing agency’s margin models and the delinquency letter to ASJP requesting business in Montreal, Quebec, Canada,
related parameters and assumptions compliance with its periodic reporting with stock quoted on OTC Link, because
associated with such models. The obligations at the address shown in its it has not filed any periodic reports
Commission believes that this proposal then-most recent filing with the since the period ended December 31,
is consistent with Exchange Act Rule Commission, but ASJP did not receive 2010. On June 25, 2013, Corporation
17Ad–22(b)(4) 20 because it provides the delinquency letter due to its failure Finance sent a delinquency letter to
OCC with the ability to employ to maintain a valid address on file with PPMA requesting compliance with its
improved statistical tests to better the Commission as required by periodic reporting obligations at the
evaluate the performance of its margin Commission rules (Rule 301 of address shown in its then-most recent
models and thus improving its ability to Regulation S–T, 17 CFR 232.301 and filing with the Commission which was
validate such models. Section 5.4 of the EDGAR Filer Manual). delivered.
It appears to the Securities and It appears to the Securities and
III. Conclusion Exchange Commission that there is a Exchange Commission that there is a
lack of current and accurate information lack of current and accurate information
It is therefore noticed, pursuant to concerning the securities of Salamon
concerning the securities of Market &
Section 806(e)(1)(I) of the Payment, Group, Inc. (CIK No. 1274211)
Research Corp. (n/k/a MRC Group Ltd.
Clearing and Settlement Supervision (CIK No.) 1009830) (‘‘MTRE’’), a void (‘‘SLMU’’), a revoked Nevada
Act,21 that the Commission does not Delaware corporation with its principal corporation with its principal place of
object to advance notice proposal (SR– place of business in Westport, business in Kelowna, British Columbia,
OCC–2014–810) and that OCC is Connecticut, with stock quoted on OTC with stock quoted on OTC Link because
authorized to implement the proposal. Link, because it has not filed any it has not filed any periodic reports
By the Commission. periodic reports since the period ended since the period ended June 30, 2012.
June 30, 2010. On April 29, 2013, On September 16, 2014, Corporation
Robert W. Errett,
Corporation Finance sent a delinquency Finance sent a delinquency letter to
Deputy Secretary. SLMU requesting compliance with its
letter to MTRE requesting compliance
[FR Doc. 2015–15994 Filed 6–29–15; 8:45 am] periodic reporting obligations at the
with its periodic reporting obligations at
BILLING CODE 8011–01–P the address shown in its then-most address shown in its then-most recent
recent filing with the Commission, but filing with the Commission, but SLMU
MTRE did not receive the delinquency did not receive the delinquency letter
letter due to its failure to maintain a due to its failure to maintain a valid
valid address on file with the address on file with the Commission as
Commission as required by Commission required by Commission rules (Rule 301
of Regulation S–T, 17 CFR 232.301 and
asabaliauskas on DSK5VPTVN1PROD with NOTICES

rules (Rule 301 of Regulation S–T, 17
CFR 232.301 and Section 5.4 of the Section 5.4 of the EDGAR Filer Manual).
EDGAR Filer Manual). The Commission is of the opinion that
It appears to the Securities and the public interest and the protection of
Exchange Commission that there is a investors require a suspension of trading
lack of current and accurate information in the securities of the above-listed
19 17 CFR 240.17Ad–22(b)(3). companies. Therefore, it is ordered,
20 Id. 1 The short form of each issuer’s name is also its pursuant to Section 12(k) of the
21 12 U.S.C. 5465(e)(1)(I). ticker symbol. Securities Exchange Act of 1934, that

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Document Created: 2018-02-22 11:17:22
Document Modified: 2018-02-22 11:17:22

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 37323