82_FR_13080 82 FR 13036 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning the Options Clearing Corporation's Margin Coverage During Times of Increased Volatility

82 FR 13036 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning the Options Clearing Corporation's Margin Coverage During Times of Increased Volatility

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 44 (March 8, 2017)

Page Range13036-13039
FR Document2017-04498

Federal Register, Volume 82 Issue 44 (Wednesday, March 8, 2017) 
[Federal Register Volume 82, Number 44 (Wednesday, March 8, 2017)]
[Notices]
[Pages 13036-13039]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-04498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80143; File No. SR-OCC-2017-801]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Filing Concerning the Options 
Clearing Corporation's Margin Coverage During Times of Increased 
Volatility

March 2, 2017.
    The Options Clearing Corporation (``OCC'') filed on January 4, 2017 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2017-801 (``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) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') to modify its process for systematically monitoring 
market conditions and performing adjustments to its margin coverage 
when market volatility increases beyond historically observed levels. 
The Advance Notice was published for comment in the Federal Register on 
February 7, 2017.\3\ The Commission has not received any comments on 
the Advance Notice to date. This publication serves as 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 Payment, Clearing and Settlement 
Supervision Act and file advance notices with the Commission.
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ See Securities Exchange Act Release No. 79915 (February 1, 
2017), 82 FR 9613 (February 7, 2017) (File No. SR-OCC-2017-801). OCC 
also filed a proposed rule change with the Commission pursuant to 
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, 
seeking approval of changes to its rules necessary to implement the 
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. This proposed rule change was published in the Federal 
Register on January 25, 2017. Securities Exchange Act Release No. 
79818 (January 18, 2017), 82 FR 8455 (January 25, 2017) (SR-OCC-
2017-001).
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I. Background

    OCC protects itself against potential losses that could result from 
the default of a clearing member by requiring margin to be posted in 
connection with each member's positions. The amount of margin 
calculated and collected from OCC's clearing members, along with 
mutualized clearing-fund resources, is intended to make available to 
OCC sufficient financial resources for the orderly transfer or 
liquidation of a defaulting clearing member's positions. OCC's 
proprietary risk management system, the System for Theoretical Analysis 
and Numerical Simulations (``STANS''), calculates each clearing 
member's margin requirement by utilizing Monte Carlo simulations to 
forecast price movements related to the positions in each clearing 
member's portfolio. The STANS margin requirement is intended to be 
sufficient to collateralize the member's losses across its portfolio 
over a two-day period, under normal market conditions.
    To determine margin requirements, STANS utilizes time-series data, 
including pricing data on assets underlying the options contracts that 
OCC clears, and performs calculations related to, among other things, 
the volatilities of these underliers. The margin amount collected from 
each clearing member also accounts for expected changes in the value of 
collateral posted in connection with that member's portfolio.
    One of the primary risk drivers in the STANS methodology relates to 
the volatility of individual equity securities, which is derived from 
pricing data imported monthly into STANS. Between data feeds, the STANS 
margin methodology relies on a process that adjusts the individual 
volatility measures of equity-based option underliers (e.g., GE or IBM) 
by a multiplier derived from the volatility of the Standard 
&Poor's[supreg] 500 index (``SPX''). OCC refers to that multiplier as 
the uniform scale factor. To account for intra-month changes in 
volatility, the uniform scale factor adjusts individual volatilities of 
applicable underliers by a factor tied to the relationship between the 
short-term and long term volatility of the SPX. Specifically, the 
uniform scale factor is used as a proxy to ``scale up'' volatilities of 
equity-based option underliers \4\ when near-term volatility estimates 
fall below a certain ratio relative to long-term average volatility, 
based on the volatility of the SPX. OCC asserts that, by applying a 
scale factor in this way, margin requirements better account for intra-
month volatility risks for individual equity-based option underliers 
and thereby better ensure that clearing members maintain sufficient 
margin assets in connection with option positions based upon those 
underliers.
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    \4\ The uniform scale factor applies to the volatility measures 
for single-name and index underliers. It does not apply to exchange-
traded funds, futures, or volatility-based underliers. For the 
latter types of options, STANS uses a constant volatility measure 
calculated from monthly data feeds.
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II. Description of the Advance Notice

    OCC proposes a number of enhancements to its STANS margin 
methodology to more accurately compute its clearing member margin 
requirements. Specifically, OCC proposes the following: (1) )To change 
the length of time-series data used to calculate the uniform scale 
factor; (2) to introduce new equity index-based scale factors; (3) to 
anchor individual risk factor volatilities to longer-term averages; and 
(4) to implement daily data updates of risk factors in OCC's 
statistical models used to value U.S. Treasury securities for 
collateral and margin purposes. Each proposed change is discussed in 
greater detail below.
    First, OCC proposes to change the time-series data period and 
thereby the data set used to calculate the uniform scale factor. One 
aspect of the uniform scale factor calculation relies on pricing 
information, or time-series data, relating to the individual components 
of the S&P 500 index dating back to 1946, which pre-dates the 1957 
introduction of SPX. Because the time-series data pre-dates the SPX's 
publication, OCC's current practice is to supplement the published SPX 
data with additional pricing information that relies upon assumptions 
about what theoretically

[[Page 13037]]

could have been the index's composition prior to 1957. OCC proposes to 
discontinue that practice going forward, and instead rely on post-1957 
information only. According to OCC, this change would improve the 
quality of data used in the uniform scale factor calculation.
    Second, OCC proposes to introduce four new scale factors for 
equity-based options. As noted above, the uniform scale factor is 
derived from SPX pricing information and currently serves as OCC's sole 
volatility proxy applicable to equity-based option underliers. 
According to OCC, the new scale factors are based upon indices whose 
volatility characteristics more closely correlate with the volatility 
characteristics of the underliers to which they will be applied; thus 
the new scale factors will serve as more appropriate volatility proxies 
for those products. More specifically, OCC proposes to introduce new 
scale factors based upon the following indices: (1) The Russell 
2000[supreg] Index (12/29/1978); (2) the Dow Jones Industrial Average 
Index (9/23/1997); (3) the NASDAQ-100 Index (2/4/1985); and (4) the S&P 
100 Index (1/2/1976).\5\ Although the SPX-based uniform scale factor 
will continue to serve as the default scale factor for most equity-
based products, the new scale factors will apply to a number of index 
options and options on exchange-traded funds and exchange-traded notes 
that more closely correlate to the indices used in the proposed scale 
factor calculations.
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    \5\ The dates in parentheticals are the dates from which OCC has 
historical data on the specified index.
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    Third, OCC proposes to anchor risk factor volatilities to longer-
term trends by applying either the uniform scale factor or the 
applicable proposed new scale factor, to the greater of two volatility 
estimates: (i) An observed, historical average; or (ii) a forecasted 
volatility measure. This proposal would modify the current practice of 
applying the uniform scale factor solely to the forecasted volatility 
measure for applicable underliers. OCC states that in those cases where 
observed, historical average volatilities exceed forecasted volatility 
measures, OCC's revised methodology would better ensure that short-term 
or temporary decreases in forecasted volatility do not result in 
significant margin reductions, thereby improving risk management.
    Finally, OCC proposes to implement daily updates to risk factors 
used to construct the U.S. Treasury yield curve and value U.S. Treasury 
securities for collateral and margin purposes. According to OCC, daily 
updates to the U.S. Treasury yield curve would better ensure that the 
STANS margin calculations accurately reflect the current state of the 
U.S. Treasury market, particularly during periods of heightened 
volatility, which would lead to more accurate margin calculations.

III. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the stated 
purpose of the Payment, Clearing and Settlement Supervision Act is 
instructive.\6\ The stated purpose of the Payment, Clearing and 
Settlement Supervision Act 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.\7\
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    \6\ See 12 U.S.C. 5461(b).
    \7\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \8\ 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 \9\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \8\ 12 U.S.C. 5464(a)(2).
    \9\ 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'') and the Exchange Act.\10\ The Clearing 
Agency Standards became effective on January 2, 2013, and require 
registered clearing agencies 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. 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.\11\
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    \10\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
    \11\ 12 U.S.C. 5464(b).
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    The Commission finds the proposed change is consistent with the 
objectives and principles described in Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act, as described below.\12\
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    \12\ Id.
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Consistency With Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act

    The Commission finds that OCC's proposal is consistent with 
promoting robust risk management, promoting safety and soundness, 
reducing systemic risk, and supporting the stability of the broader 
financial system, and is therefore consistent with the objectives and 
principles described in Section 805(b) of the Payment, Clearing and 
Settlement Supervision Act.\13\
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    \13\ 12 U.S.C. 5464(b).
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    First, the Commission finds that the proposed change to the SPX 
time-series data period used in connection with the uniform scale 
factor is consistent with promoting robust risk management. As 
described above, OCC is changing the manner in which it calculates the 
uniform scale factor by limiting SPX time-series data to only those 
dates subsequent to the introduction of the SPX in 1957. According to 
OCC, by relying on the published index, instead of assumptions about 
the SPX's constituents prior to its publication, the proposed change 
would improve the quality of data used in the uniform scale factor 
calculation, which is critical to managing certain intra-month 
volatility risks through OCC's risk management system, STANS. The 
Commission finds that OCC's proposed reliance on published index data 
throughout the time-series data period rather than assumptions to 
calculate the uniform scale factor is an appropriate improvement to the 
process for performing intra-month volatility adjustments in STANS. The 
Commission therefore finds the proposed change is consistent with the 
objective of promoting robust risk management.
    Second, the Commission finds that OCC's proposed change to 
introduce four new scale factors for exchange-traded funds and other 
equity-based option underliers that correlate more closely with the 
indices used in the proposed scale factor calculations is consistent 
with promoting robust risk

[[Page 13038]]

management. According to OCC, the proposed change would more accurately 
approximate intra-month volatility risks in STANS calculations for 
applicable equity-based options products and thereby more accurately 
reflect the risks associated with such underliers in margin 
calculations. Correspondingly, margin calculations should more closely 
reflect potential losses in clearing members' portfolios containing 
products to which the new scale factors would be applied, in 
furtherance of promoting robust risk management.
    Third, the Commission finds that the proposed change to apply the 
uniform scale factor and each proposed scale factor to the greater of 
the historical and forecasted volatility measure for applicable 
instruments is consistent with promoting robust risk management. 
According to OCC, the proposed change to anchor volatilities in 
observed, historical averages mitigates procyclical reductions in 
margin requirements.\14\ In particular, the proposed methodology is 
intended to protect against circumstances in which a decrease in the 
forecasted volatilities of option underliers would result in 
commensurate reductions in associated margin requirements, though such 
forecasts may be inconsistent with historical average volatilities 
based on longer-term, observed pricing behaviors. The Commission finds 
that by mitigating procyclical decreases in margin requirements, OCC's 
proposal is consistent with promoting robust risk management.
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    \14\ The term ``procyclicality'' as it relates to margin 
requirements in this context is intended to describe positive 
correlation between margin requirements associated with an options 
portfolio and the volatilities of individual constituents Murphy et 
al., Staff Working Paper No. 597: A comparative analysis of tools to 
limit the procyclicality of initial margin requirements, Bank of 
England (April 2016), http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp597.pdf.
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    Lastly, the Commission finds that the proposed change to 
incorporate daily updates into time-series data used to construct the 
U.S. Treasury yield curve for collateral and margin purposes is 
consistent with promoting robust risk management. According to OCC, the 
proposed change is designed to better ensure that the STANS margin 
calculations accurately reflect the value of U.S. Treasuries posted as 
collateral, especially during periods of heightened volatility. This, 
in turn, would better ensure that clearing members post sufficient 
collateral in support of their options portfolios and remain within 
OCC's risk tolerance. More accurate valuation of U.S. Treasuries for 
collateral and margin purposes should improve OCC's ability to monitor 
and manage its risks and therefore is consistent with promoting robust 
risk management.
    For the reasons stated above, the Commission finds that OCC's 
proposal promotes robust risk management through improvements to the 
data, scale factors, and methodology used in STANS margin calculations. 
The Commission also finds that the proposal thereby promotes the safety 
and soundness of OCC and its members by better capturing volatility 
risks in margin requirements, which, in turn, should serve to reduce 
systemic risks and support the stability of the broader financial 
system. Accordingly, the Commission finds that the proposal is 
consistent with the stated objectives and principles of Section 805(b) 
of the Payment, Clearing and Settlement Supervision Act.\15\
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    \15\ 12 U.S.C. 5464(b).
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Consistency With Rules 17Ad-22(b)(1) and (b)(2) Under the Exchange Act

    The Commission finds that OCC's proposal is consistent with the 
Clearing Agency Standards, specifically Rules 17Ad-22(b)(1) and (b)(2) 
under the Exchange Act.\16\ Rule 17Ad-22(b)(1) under the Exchange Act 
requires OCC to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to, among other things, 
limit its exposures to potential losses from defaults by its 
participants under normal market conditions so that the operations of 
the clearing agency would not be disrupted and non-defaulting 
participants would not be exposed to losses that they cannot anticipate 
or control.\17\ Rule 17Ad-22(b)(2) under the Exchange Act requires OCC 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to, among other things, use margin 
requirements to limit its credit exposures to participants under normal 
market conditions and use risk-based models and parameters to set such 
margin requirements.\18\
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    \16\ 17 CFR 240.17Ad-22(b)(1) and (b)(2). For purposes of these 
provisions, OCC is a registered clearing agency that performs 
central counterparty services.
    \17\ 17 CFR 240.17Ad-22(b)(1).
    \18\ 17 CFR 240.17Ad-22(b)(2).
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    The Commission finds that OCC's proposal is consistent with Rules 
17Ad-22(b)(1) and (b)(2) under the Exchange Act. The proposal would 
better enable OCC to limit its potential losses from clearing-member 
defaults under normal market conditions by improving the data, scale 
factors, and methodology used to derive certain volatility and other 
estimates for purposes of margin calculations. By improving these 
estimates, the STANS margin requirements would better ensure that OCC's 
members post sufficient collateral in connection with their options 
positions, thereby protecting OCC against the potential losses from a 
clearing-member default. Furthermore, by limiting OCC's exposure to 
such losses, the proposal better ensures that OCC would continue 
operations without disruption and that non-defaulting clearing members 
would not be exposed to losses they cannot anticipate or control.
    The proposal also would improve the risk-based models and 
parameters that OCC uses to set margin requirements and limit its 
credit exposures to clearing members under normal market conditions. 
STANS, as discussed above, is a risk-based, forecasting tool that OCC 
currently uses to calculate margin requirements that would be 
sufficient to collateralize each clearing member's losses over a two-
day period under normal market conditions. The proposal incrementally 
enhances STANS by improving the data, scale factors, and methodology 
used to derive certain volatility and other estimates relevant to risk-
based margin calculations. The proposal would improve the quality of 
data used to estimate risk drivers in the STANS margin calculations, 
for example, by relying solely on published index data throughout the 
uniform scale factor time-series data period. In addition, the four new 
scale factors would more accurately reflect intra-month volatility 
risks associated with applicable option underliers in the STANS margin 
calculations. The proposal also would better ensure that the STANS 
margin requirements remain anchored to historical average volatilities, 
and would thereby mitigate pro-cyclical reductions in margin 
requirements, by applying the uniform scale factor and each proposed 
scale factor to the greater of an observed, historical average and a 
forecasted volatility measure. Finally, incorporating daily updates 
into time-series data used to construct the U.S. Treasury yield curve 
would improve valuation of U.S. Treasury collateral and thereby the 
accuracy of STANS margin calculations, because margin requirements 
account for expected changes in the value of posted U.S. Treasury 
collateral.
    For the reasons stated above, the Commission finds that OCC's 
proposal is consistent with the Clearing Agency Standards, specifically 
Rules 17Ad-22(b)(1) and (b)(2) under the Exchange Act.

[[Page 13039]]

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(G) of the 
Payment, Clearing and Settlement Supervision Act,\19\ that the 
Commission DOES NOT OBJECT to Advance Notice (SR-OCC-2017-801) and that 
OCC is AUTHORIZED to implement the proposed change.
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    \19\ 12 U.S.C. 5465(e)(1)(G).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-04498 Filed 3-7-17; 8:45 am]
BILLING CODE 8011-01-P

13036 Federal Register / Vol. 82, No. 44 / Wednesday, March 8, 2017 / Notices orderly markets and the removal of for systematically monitoring market methodology relies on a process that impediments to, and the perfection of a conditions and performing adjustments adjusts the individual volatility national market system because it is to its margin coverage when market measures of equity-based option narrowly tailored, may provide cost volatility increases beyond historically underliers (e.g., GE or IBM) by a savings to those Industry Members that observed levels. The Advance Notice multiplier derived from the volatility of do not capture time in milliseconds, was published for comment in the the Standard &Poor’s® 500 index allows such Industry Members Federal Register on February 7, 2017.3 (‘‘SPX’’). OCC refers to that multiplier as additional time to develop cost efficient The Commission has not received any the uniform scale factor. To account for ways to achieve clock synchronization comments on the Advance Notice to intra-month changes in volatility, the and will not adversely affect the date. This publication serves as notice uniform scale factor adjusts individual implementation of the consolidated of no objection to the Advance Notice. volatilities of applicable underliers by a audit trail. factor tied to the relationship between Accordingly, it is hereby ordered, I. Background the short-term and long term volatility pursuant to Rule 608(e) of the Exchange OCC protects itself against potential of the SPX. Specifically, the uniform Act,20 that the Participants are granted losses that could result from the default scale factor is used as a proxy to ‘‘scale a limited exemption extending the clock of a clearing member by requiring up’’ volatilities of equity-based option synchronization compliance date set margin to be posted in connection with underliers 4 when near-term volatility forth in Section 6.7(a)(ii) of CAT NMS each member’s positions. The amount of estimates fall below a certain ratio Plan from within four months after the margin calculated and collected from relative to long-term average volatility, effective date of CAT NMS Plan, or OCC’s clearing members, along with based on the volatility of the SPX. OCC March 15, 2017, to February 19, 2018 mutualized clearing-fund resources, is asserts that, by applying a scale factor in with respect to Industry Members with intended to make available to OCC this way, margin requirements better Business Clocks that do not capture sufficient financial resources for the account for intra-month volatility risks time in milliseconds as of the date of orderly transfer or liquidation of a for individual equity-based option this order. defaulting clearing member’s positions. underliers and thereby better ensure OCC’s proprietary risk management that clearing members maintain By the Commission. system, the System for Theoretical sufficient margin assets in connection Eduardo A. Aleman, with option positions based upon those Analysis and Numerical Simulations Assistant Secretary. (‘‘STANS’’), calculates each clearing underliers. [FR Doc. 2017–04479 Filed 3–7–17; 8:45 am] member’s margin requirement by II. Description of the Advance Notice BILLING CODE 8011–01–P utilizing Monte Carlo simulations to forecast price movements related to the OCC proposes a number of positions in each clearing member’s enhancements to its STANS margin SECURITIES AND EXCHANGE portfolio. The STANS margin methodology to more accurately COMMISSION requirement is intended to be sufficient compute its clearing member margin [Release No. 34–80143; File No. SR–OCC– to collateralize the member’s losses requirements. Specifically, OCC 2017–801] across its portfolio over a two-day proposes the following: (1) )To change period, under normal market the length of time-series data used to Self-Regulatory Organizations; The conditions. calculate the uniform scale factor; (2) to Options Clearing Corporation; Notice To determine margin requirements, introduce new equity index-based scale of No Objection To Advance Notice STANS utilizes time-series data, factors; (3) to anchor individual risk Filing Concerning the Options Clearing including pricing data on assets factor volatilities to longer-term Corporation’s Margin Coverage During underlying the options contracts that averages; and (4) to implement daily Times of Increased Volatility OCC clears, and performs calculations data updates of risk factors in OCC’s related to, among other things, the statistical models used to value U.S. March 2, 2017. Treasury securities for collateral and volatilities of these underliers. The The Options Clearing Corporation margin purposes. Each proposed change margin amount collected from each (‘‘OCC’’) filed on January 4, 2017 with is discussed in greater detail below. clearing member also accounts for the Securities and Exchange First, OCC proposes to change the expected changes in the value of Commission (‘‘Commission’’) advance time-series data period and thereby the collateral posted in connection with that notice SR–OCC–2017–801 (‘‘Advance data set used to calculate the uniform member’s portfolio. Notice’’) pursuant to Section 806(e)(1) of One of the primary risk drivers in the scale factor. One aspect of the uniform the Payment, Clearing, and Settlement STANS methodology relates to the scale factor calculation relies on pricing Supervision Act of 2010 (‘‘Payment, volatility of individual equity securities, information, or time-series data, relating Clearing and Settlement Supervision which is derived from pricing data to the individual components of the S&P Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under imported monthly into STANS. 500 index dating back to 1946, which the Securities Exchange Act of 1934 Between data feeds, the STANS margin pre-dates the 1957 introduction of SPX. (‘‘Exchange Act’’) to modify its process Because the time-series data pre-dates 3 See Securities Exchange Act Release No. 79915 the SPX’s publication, OCC’s current 20 17 CFR 242.608(e). (February 1, 2017), 82 FR 9613 (February 7, 2017) practice is to supplement the published 1 12 U.S.C. 5465(e)(1). The Financial Stability (File No. SR–OCC–2017–801). OCC also filed a SPX data with additional pricing Oversight Council designated OCC a systemically proposed rule change with the Commission information that relies upon mstockstill on DSK3G9T082PROD with NOTICES important financial market utility on July 18, 2012. pursuant to Section 19(b)(1) of the Exchange Act See Financial Stability Oversight Council 2012 and Rule 19b–4 thereunder, seeking approval of assumptions about what theoretically Annual Report, Appendix A, http:// changes to its rules necessary to implement the www.treasury.gov/initiatives/fsoc/Documents/ Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 4 The uniform scale factor applies to the volatility 2012%20Annual%20Report.pdf. Therefore, OCC is 240.19b–4, respectively. This proposed rule change measures for single-name and index underliers. It required to comply with the Payment, Clearing and was published in the Federal Register on January does not apply to exchange-traded funds, futures, Settlement Supervision Act and file advance 25, 2017. Securities Exchange Act Release No. or volatility-based underliers. For the latter types of notices with the Commission. 79818 (January 18, 2017), 82 FR 8455 (January 25, options, STANS uses a constant volatility measure 2 17 CFR 240.19b–4(n)(1)(i). 2017) (SR–OCC–2017–001). calculated from monthly data feeds. VerDate Sep<11>2014 17:34 Mar 07, 2017 Jkt 241001 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 E:\FR\FM\08MRN1.SGM 08MRN1

Federal Register / Vol. 82, No. 44 / Wednesday, March 8, 2017 / Notices 13037 could have been the index’s U.S. Treasury yield curve would better Clearing Agency Standards, and the composition prior to 1957. OCC ensure that the STANS margin objectives and principles of these risk proposes to discontinue that practice calculations accurately reflect the management standards as described in going forward, and instead rely on post- current state of the U.S. Treasury Section 805(b) of the Payment, Clearing 1957 information only. According to market, particularly during periods of and Settlement Supervision Act.11 OCC, this change would improve the heightened volatility, which would lead The Commission finds the proposed quality of data used in the uniform scale to more accurate margin calculations. change is consistent with the objectives factor calculation. and principles described in Section Second, OCC proposes to introduce III. Discussion and Commission 805(b) of the Payment, Clearing and four new scale factors for equity-based Findings Settlement Supervision Act, as options. As noted above, the uniform Although the Payment, Clearing and described below.12 scale factor is derived from SPX pricing Settlement Supervision Act does not specify a standard of review for an Consistency With Section 805(b) of the information and currently serves as advance notice, the stated purpose of Payment, Clearing and Settlement OCC’s sole volatility proxy applicable to the Payment, Clearing and Settlement Supervision Act equity-based option underliers. According to OCC, the new scale factors Supervision Act is instructive.6 The The Commission finds that OCC’s are based upon indices whose volatility stated purpose of the Payment, Clearing proposal is consistent with promoting characteristics more closely correlate and Settlement Supervision Act is to robust risk management, promoting with the volatility characteristics of the mitigate systemic risk in the financial safety and soundness, reducing systemic underliers to which they will be system and promote financial stability risk, and supporting the stability of the applied; thus the new scale factors will by, among other things, promoting broader financial system, and is serve as more appropriate volatility uniform risk management standards for therefore consistent with the objectives proxies for those products. More systemically important financial market and principles described in Section specifically, OCC proposes to introduce utilities and strengthening the liquidity 805(b) of the Payment, Clearing and new scale factors based upon the of systemically important financial Settlement Supervision Act.13 following indices: (1) The Russell 2000® market utilities.7 First, the Commission finds that the Index (12/29/1978); (2) the Dow Jones Section 805(a)(2) of the Payment, proposed change to the SPX time-series Industrial Average Index (9/23/1997); Clearing and Settlement Supervision data period used in connection with the (3) the NASDAQ–100 Index (2/4/1985); Act 8 authorizes the Commission to uniform scale factor is consistent with and (4) the S&P 100 Index (1/2/1976).5 prescribe risk management standards for promoting robust risk management. As Although the SPX-based uniform scale the payment, clearing, and settlement described above, OCC is changing the factor will continue to serve as the activities of designated clearing entities manner in which it calculates the default scale factor for most equity- and financial institutions engaged in uniform scale factor by limiting SPX based products, the new scale factors designated activities for which it is the time-series data to only those dates will apply to a number of index options supervisory agency or the appropriate subsequent to the introduction of the and options on exchange-traded funds financial regulator. Section 805(b) of the SPX in 1957. According to OCC, by and exchange-traded notes that more Payment, Clearing and Settlement relying on the published index, instead closely correlate to the indices used in Supervision Act 9 states that the of assumptions about the SPX’s the proposed scale factor calculations. objectives and principles for the risk constituents prior to its publication, the Third, OCC proposes to anchor risk management standards prescribed under proposed change would improve the factor volatilities to longer-term trends Section 805(a) shall be to: quality of data used in the uniform scale by applying either the uniform scale • Promote robust risk management; factor calculation, which is critical to factor or the applicable proposed new • promote safety and soundness; managing certain intra-month volatility • reduce systemic risks; and risks through OCC’s risk management scale factor, to the greater of two • support the stability of the broader volatility estimates: (i) An observed, system, STANS. The Commission finds financial system. that OCC’s proposed reliance on historical average; or (ii) a forecasted The Commission has adopted risk volatility measure. This proposal would published index data throughout the management standards under Section modify the current practice of applying time-series data period rather than 805(a)(2) of the Payment, Clearing and the uniform scale factor solely to the assumptions to calculate the uniform Settlement Supervision Act (‘‘Clearing forecasted volatility measure for scale factor is an appropriate Agency Standards’’) and the Exchange applicable underliers. OCC states that in improvement to the process for Act.10 The Clearing Agency Standards those cases where observed, historical performing intra-month volatility became effective on January 2, 2013, average volatilities exceed forecasted adjustments in STANS. The and require registered clearing agencies volatility measures, OCC’s revised Commission therefore finds the to establish, implement, maintain, and methodology would better ensure that proposed change is consistent with the enforce written policies and procedures short-term or temporary decreases in objective of promoting robust risk that are reasonably designed to meet forecasted volatility do not result in management. certain minimum requirements for their Second, the Commission finds that significant margin reductions, thereby operations and risk management improving risk management. OCC’s proposed change to introduce practices on an ongoing basis. As such, four new scale factors for exchange- Finally, OCC proposes to implement it is appropriate for the Commission to daily updates to risk factors used to traded funds and other equity-based review advance notices against these mstockstill on DSK3G9T082PROD with NOTICES construct the U.S. Treasury yield curve option underliers that correlate more and value U.S. Treasury securities for 6 See closely with the indices used in the 12 U.S.C. 5461(b). collateral and margin purposes. 7 Id. proposed scale factor calculations is According to OCC, daily updates to the 8 12 U.S.C. 5464(a)(2). consistent with promoting robust risk 9 12 U.S.C. 5464(b). 5 The dates in parentheticals are the dates from 10 17 CFR 240.17Ad–22. See Securities Exchange 11 12 U.S.C. 5464(b). 12 Id. which OCC has historical data on the specified Act Release No. 68080 (October 22, 2012), 77 FR index. 66220 (November 2, 2012) (S7–08–11). 13 12 U.S.C. 5464(b). 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13038 Federal Register / Vol. 82, No. 44 / Wednesday, March 8, 2017 / Notices management. According to OCC, the manage its risks and therefore is calculations. By improving these proposed change would more accurately consistent with promoting robust risk estimates, the STANS margin approximate intra-month volatility risks management. requirements would better ensure that in STANS calculations for applicable For the reasons stated above, the OCC’s members post sufficient collateral equity-based options products and Commission finds that OCC’s proposal in connection with their options thereby more accurately reflect the risks promotes robust risk management positions, thereby protecting OCC associated with such underliers in through improvements to the data, scale against the potential losses from a margin calculations. Correspondingly, factors, and methodology used in clearing-member default. Furthermore, margin calculations should more closely STANS margin calculations. The by limiting OCC’s exposure to such reflect potential losses in clearing Commission also finds that the proposal losses, the proposal better ensures that members’ portfolios containing products thereby promotes the safety and OCC would continue operations without to which the new scale factors would be soundness of OCC and its members by disruption and that non-defaulting applied, in furtherance of promoting better capturing volatility risks in clearing members would not be exposed robust risk management. margin requirements, which, in turn, to losses they cannot anticipate or Third, the Commission finds that the should serve to reduce systemic risks control. proposed change to apply the uniform and support the stability of the broader The proposal also would improve the scale factor and each proposed scale financial system. Accordingly, the risk-based models and parameters that factor to the greater of the historical and Commission finds that the proposal is OCC uses to set margin requirements forecasted volatility measure for consistent with the stated objectives and and limit its credit exposures to clearing applicable instruments is consistent principles of Section 805(b) of the members under normal market with promoting robust risk Payment, Clearing and Settlement conditions. STANS, as discussed above, management. According to OCC, the Supervision Act.15 is a risk-based, forecasting tool that OCC proposed change to anchor volatilities currently uses to calculate margin Consistency With Rules 17Ad–22(b)(1) in observed, historical averages requirements that would be sufficient to and (b)(2) Under the Exchange Act mitigates procyclical reductions in collateralize each clearing member’s margin requirements.14 In particular, The Commission finds that OCC’s proposal is consistent with the Clearing losses over a two-day period under the proposed methodology is intended normal market conditions. The proposal to protect against circumstances in Agency Standards, specifically Rules 17Ad–22(b)(1) and (b)(2) under the incrementally enhances STANS by which a decrease in the forecasted improving the data, scale factors, and volatilities of option underliers would Exchange Act.16 Rule 17Ad–22(b)(1) under the Exchange Act requires OCC to methodology used to derive certain result in commensurate reductions in establish, implement, maintain, and volatility and other estimates relevant to associated margin requirements, though enforce written policies and procedures risk-based margin calculations. The such forecasts may be inconsistent with reasonably designed to, among other proposal would improve the quality of historical average volatilities based on things, limit its exposures to potential data used to estimate risk drivers in the longer-term, observed pricing behaviors. losses from defaults by its participants STANS margin calculations, for The Commission finds that by under normal market conditions so that example, by relying solely on published mitigating procyclical decreases in the operations of the clearing agency index data throughout the uniform scale margin requirements, OCC’s proposal is would not be disrupted and non- factor time-series data period. In consistent with promoting robust risk management. defaulting participants would not be addition, the four new scale factors Lastly, the Commission finds that the exposed to losses that they cannot would more accurately reflect intra- proposed change to incorporate daily anticipate or control.17 Rule 17Ad– month volatility risks associated with updates into time-series data used to 22(b)(2) under the Exchange Act applicable option underliers in the construct the U.S. Treasury yield curve requires OCC to establish, implement, STANS margin calculations. The for collateral and margin purposes is maintain, and enforce written policies proposal also would better ensure that consistent with promoting robust risk and procedures reasonably designed to, the STANS margin requirements remain management. According to OCC, the among other things, use margin anchored to historical average proposed change is designed to better requirements to limit its credit volatilities, and would thereby mitigate ensure that the STANS margin exposures to participants under normal pro-cyclical reductions in margin calculations accurately reflect the value market conditions and use risk-based requirements, by applying the uniform of U.S. Treasuries posted as collateral, models and parameters to set such scale factor and each proposed scale especially during periods of heightened margin requirements.18 factor to the greater of an observed, volatility. This, in turn, would better The Commission finds that OCC’s historical average and a forecasted ensure that clearing members post proposal is consistent with Rules 17Ad– volatility measure. Finally, sufficient collateral in support of their 22(b)(1) and (b)(2) under the Exchange incorporating daily updates into time- options portfolios and remain within Act. The proposal would better enable series data used to construct the U.S. OCC’s risk tolerance. More accurate OCC to limit its potential losses from Treasury yield curve would improve valuation of U.S. Treasuries for clearing-member defaults under normal valuation of U.S. Treasury collateral and collateral and margin purposes should market conditions by improving the thereby the accuracy of STANS margin improve OCC’s ability to monitor and data, scale factors, and methodology calculations, because margin used to derive certain volatility and requirements account for expected other estimates for purposes of margin changes in the value of posted U.S. mstockstill on DSK3G9T082PROD with NOTICES 14 The term ‘‘procyclicality’’ as it relates to margin requirements in this context is intended to describe Treasury collateral. positive correlation between margin requirements associated with an options portfolio and the 15 12 U.S.C. 5464(b). For the reasons stated above, the 16 17 CFR 240.17Ad–22(b)(1) and (b)(2). For volatilities of individual constituents Murphy et al., Commission finds that OCC’s proposal purposes of these provisions, OCC is a registered Staff Working Paper No. 597: A comparative clearing agency that performs central counterparty is consistent with the Clearing Agency analysis of tools to limit the procyclicality of initial Standards, specifically Rules 17Ad– margin requirements, Bank of England (April 2016), services. http://www.bankofengland.co.uk/research/ 17 17 CFR 240.17Ad–22(b)(1). 22(b)(1) and (b)(2) under the Exchange Documents/workingpapers/2016/swp597.pdf. 18 17 CFR 240.17Ad–22(b)(2). Act. VerDate Sep<11>2014 17:34 Mar 07, 2017 Jkt 241001 PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 E:\FR\FM\08MRN1.SGM 08MRN1

Federal Register / Vol. 82, No. 44 / Wednesday, March 8, 2017 / Notices 13039 IV. Conclusion ADDRESSES: Written comments should Estimated Time per Response: 467 It is therefore noticed, pursuant to be identified as ‘‘Paperwork Reduction hours. Act Comments, Surface Transportation Frequency: On occasion. In calendar Section 806(e)(1)(G) of the Payment, Board: Information Collection years 2014–2016, respondents filed Clearing and Settlement Supervision Activities.’’ These comments should be approximately five complaints per year Act,19 that the Commission DOES NOT directed to the Office of Management with the Board. OBJECT to Advance Notice (SR–OCC– Total Burden Hours (annually 2017–801) and that OCC is and Budget, Office of Information and Regulatory Affairs, Attention: Chad including all respondents): 2,335 AUTHORIZED to implement the (estimated hours per complaint (467) × proposed change. Lallemand, Surface Transportation Board Desk Officer, by email at OIRA_ total number of complaints (5)). By the Commission. SUBMISSION@OMB.EOP.GOV; by fax at Total ‘‘Non-hour Burden’’ Cost: Eduardo A. Aleman, (202) 395–6974; or by mail to Room $7,310 (estimated non-hour burden cost Assistant Secretary. 10235, 725 17th Street NW., per complaint ($1,462) × total number of [FR Doc. 2017–04498 Filed 3–7–17; 8:45 am] Washington, DC 20503. Please also complaints (5)). direct a copy of comments to Chris Needs and Uses: Under the Board’s BILLING CODE 8011–01–P Oehrle, Surface Transportation Board, regulations, persons may file complaints 395 E Street SW., Washington, DC before the Board pursuant to 49 CFR 20423–0001, or to pra@stb.gov. part 1111 seeking redress for alleged SURFACE TRANSPORTATION BOARD violations of provisions of the Interstate FOR FURTHER INFORMATION CONTACT: For Commerce Act, as amended by the ICC 30-day Notice of Intent To Seek further information regarding this Termination Act of 1995, Public Law Extension of Approval: Information collection, contact Michael Higgins, 104–88, 109 Stat. 803 (1995). The Collection Activities (Complaints, Deputy Director, Office of Public required content of a complaint is Petitions for Declaratory Orders, and Assistance, Governmental Affairs, and outlined at 49 CFR 1111(a). In the last Petitions for Relief Not Otherwise Compliance at (202) 245–0284 or at few years, the most significant Specified) Michael.Higgins@stb.gov. [Assistance complaints filed at the Board allege that for the hearing impaired is available railroads are charging unreasonable Surface Transportation Board. AGENCY: through the Federal Information Relay rates or that they are engaging in Notice and request for ACTION: Service (FIRS) at 1–800–877–8339.] unreasonable practices in violation of 49 comments. SUPPLEMENTARY INFORMATION: For each U.S.C. 10701, 10704, or 11701. The collection, comments are requested collection by the Board of these SUMMARY: As part of its continuing effort concerning: (1) The accuracy of the complaints, and the agency’s action in to reduce paperwork burdens, and as Board’s burden estimates; (2) ways to conducting proceedings and ruling on required by the Paperwork Reduction enhance the quality, utility, and clarity the complaints, enables the Board to Act of 1995, 44 U.S.C. 3501–3521 (PRA), of the information collected; (3) ways to meet its statutory duty to regulate the the Surface Transportation Board (STB minimize the burden of the collection of rail industry. or Board) gives notice that it is information on the respondents, requesting from the Office of Collection Number 2 including the use of automated Management and Budget (OMB) Title: Petitions for declaratory orders. collection techniques or other forms of approval of an extension of the OMB Control Number: 2140–0031. information technology, when information collections required for (1) STB Form Number: None. appropriate; and (4) whether the complaints filed under 49 U.S.C. 10701– Type of Review: Extension with collection of information is necessary 10707, 11101–11103, 11701–11707 change. for the proper performance of the (rail), 14701–14707 (motor, water & Respondents: Affected shippers, functions of the Board, including intermediaries), and 15901–15906 railroads and communities that seek a whether the collection has practical (pipelines) and 49 CFR part 1111; (2) declaratory order from the Board to utility. Submitted comments will be petitions for declaratory orders under 5 terminate a controversy or remove summarized and included in the U.S.C. 554(e) and 49 U.S.C. 1321; and uncertainty. Board’s request for OMB approval. (3) catch-all petitions (for relief not Number of Respondents: otherwise specified) under 49 U.S.C. Description of Collections Approximately 15.2 1321 and 49 CFR part 1117. Under these Estimated Time per Response: 183 Collection Number 1 statutory and regulatory sections, the hours. Board provides procedures for persons Title: Complaints under 49 CFR part Frequency: On occasion. In calendar to make a broad range of claims and to 1111. years 2014–2016, respondents filed seek a broad range of remedies before OMB Control Number: 2140–0029. approximately 15 petitions for the Board. The information collections STB Form Number: None. declaratory orders per year with the relevant to these complaints and Type of Review: Extension with Board. petitions are described separately change. below. The Board previously published Respondents: Affected shippers, in calendar years 2014–2016. Staff believes this railroads and communities that seek more accurately reflects future filings. Accordingly, a notice about this collection in the its estimate of the number of respondents and Federal Register. 81 FR 86061 (Nov. 29, redress for alleged violations related to responses has changed from three, as set forth in its 2016). That notice allowed for a 60-day unreasonable rates, unreasonable 60-day notice, to five. mstockstill on DSK3G9T082PROD with NOTICES public review and comment period. No practices, service issues, and other 2 In this notice, the Board has updated its estimate comments were received. statutory claims. of the number of respondents and responses based Number of Respondents: on the number of petitions for declaratory orders DATES: Comments on this information filed with the Board in calendar years 2014–2016. collection should be submitted by April Approximately five.1 Staff believes this more accurately reflects future 7, 2017. filings. Accordingly, its estimate of the number of 1 In this notice, the Board has updated its estimate respondents has changed from 11, as set forth in the of the number of respondents and responses based 60-day filing, to 15, and the number of responses 19 12 U.S.C. 5465(e)(1)(G). on the number of complaints filed with the Board has changed from 12 to 15. VerDate Sep<11>2014 17:34 Mar 07, 2017 Jkt 241001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\08MRN1.SGM 08MRN1


Document Created: 2017-03-08 05:06:35
Document Modified: 2017-03-08 05:06:35
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation82 FR 13036 
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