82 FR 52079 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Related to The Options Clearing Corporation's Collateral Risk Management Policy
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 216 (November 9, 2017)
Federal Register Volume 82, Issue 216 (November 9, 2017)
| Page Range | 52079-52082 | |
| FR Document | 2017-24369 |
[Federal Register Volume 82, Number 216 (Thursday, November 9, 2017)] [Notices] [Pages 52079-52082] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-24369] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82009; File No. SR-OCC-2017-008] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Related to The Options Clearing Corporation's Collateral Risk Management Policy November 3, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on October 27, 2017, The Options Clearing Corporation (``OCC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by OCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change This proposed rule change by The Options Clearing Corporation (``OCC'') would formalize and update OCC's Collateral Risk Management Policy (``CRM Policy''). This policy would promote compliance with Rule 17Ad-22(e)(5), which generally requires a covered clearing agency to have policies and procedures reasonably designed to, among other things, limit the assets it accepts as collateral to those with low credit, liquidity, and market risks and subject such assets to appropriate haircuts and concentration limits that are reviewed for continued sufficiency not less than annually.\3\ The Collateral Risk Management Policy is included as confidential Exhibit 5 of the filing. --------------------------------------------------------------------------- \3\ 17 CFR 240.17Ad-22(e)(5). --------------------------------------------------------------------------- The proposed rule change does not require any changes to the text of OCC's By-Laws or Rules. All terms with initial capitalization that are not otherwise defined herein have the same meaning as set forth in the OCC By-Laws and Rules.\4\ --------------------------------------------------------------------------- \4\ OCC's By-Laws and Rules can be found on OCC's public Web site: http://optionsclearing.com/about/publications/bylaws.jsp. --------------------------------------------------------------------------- II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. (A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (1) Purpose Background On September 28, 2016, the Commission adopted amendments to Rule 17Ad-22 \5\ and added new Rule 17Ab2-2 \6\ pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, (``Act'') \7\ and the Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing and Settlement Supervision Act'') \8\ to establish enhanced standards for the operation and governance of those clearing agencies registered with the Commission that meet the definition of a ``covered clearing agency,'' as defined by Rule 17Ad-22(a)(5) \9\ (collectively, the new and amended rules are herein referred to as ``CCA'' rules). The CCA rules require that a covered clearing agency, among other things, establish, implement, maintain, and enforce written policies and procedures reasonably designed to: --------------------------------------------------------------------------- \5\ 17 CFR 240.17Ad-22. \6\ 17 CFR 240.17Ab2-2. \7\ 15 U.S.C. 78q-1. \8\ 12 U.S.C. 5461 et seq. \9\ 17 CFR 240.17Ad-22(a)(5). ``[l]imit the assets it accepts as collateral to those with low credit, liquidity, and market risks, and set and enforce appropriately conservative haircuts and concentration limits if the covered clearing agency requires [[Page 52080]] collateral to manage its or its participants' credit exposure; and require a review of the sufficiency of its collateral haircuts and concentration limits to be performed not less than annually.'' \10\ --------------------------------------------------------------------------- \10\ 17 CFR 240.17Ad-22(e)(5). OCC meets the definition of a covered clearing agency, and is therefore subject to the requirements of the CCA rules, including Rule 17Ad-22(e)(5).\11\ --------------------------------------------------------------------------- \11\ Id. --------------------------------------------------------------------------- Collateral Risk Management Policy OCC proposes to formalize and update its CRM Policy. The purpose of the CRM Policy is to describe OCC's framework for collateral acceptability, valuations and haircuts, and collateral maintenance. The CRM Policy, as proposed, is designed to promote compliance with the Rule 17Ad-22(e)(5) \12\ requirements that mandate that covered clearing agencies have written policies and procedures that are reasonably designed to limit collateral to assets with low credit, liquidity, and market risks, and that establish appropriately conservative haircuts and concentration limits that are reviewed no less than annually. OCC notes that the CRM Policy is part of a broader framework regarding collateral risk management, including OCC's By-Laws, Rules, and other policies, that are designed to ensure that OCC accepts appropriate collateral to remain resilient in times of market stress.\13\ --------------------------------------------------------------------------- \12\ Id. \13\ Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786, 70812 (October 13, 2016) (``CCA Adopting Release'') (noting that the requirements of Rule 17Ad-22(e)(5) are ``intended to ``help ensure that a covered clearing agency is resilient in times of market stress . . . .''). --------------------------------------------------------------------------- With regard to a covered clearing agency's policies and procedures that address collateral, the Commission noted in the release adopting the CCA rules that such policies and procedures generally should take into account whether the covered clearing agency has: (1) Limited the assets it accepts to those with low credit, liquidity, and market risks; (2) established prudent valuation practices and developed haircuts that are regularly tested and take into account stressed market conditions; (3), established stable and conservative haircuts to reduce the need for pro-cyclical adjustments; (4) avoided concentrated holdings of certain assets where such holdings would significantly impair the ability to liquidate the assets quickly and without significant adverse price affects; (5) mitigated risks associated with the use of cross-border collateral, as applicable, and ensured that the collateral can be used in a timely manner; and (6) uses a collateral management system that is well designed and operationally flexible.\14\ --------------------------------------------------------------------------- \14\ Id. at 70816. --------------------------------------------------------------------------- Certain descriptions in the CRM Policy are included to promote compliance with the Commission's guidance and Rule 17Ad-22(e)(5). For example, consistent with the guidance regarding cross-border collateral, the CRM Policy provides that OCC has the authority to reduce the haircut value of Canadian government securities if it observes increased credit risk, and that OCC applies an additional haircut to such securities to cover exchange rate risk. Consistent with the Commission's guidance that collateral risk management systems should remain operationally flexible, the CRM Policy also describes the authority of the Financial Risk Management department (``FRM'') to reject a collateral withdrawal request if OCC determines that a Clearing Member's reasonably anticipated settlement obligations exceed available liquidity resources. The descriptions below provide a general overview of the three substantive sections of OCC's CRM Policy. Collateral Acceptability The CRM Policy describes the categories of risk that are considered by OCC in determining which asset classes should be acceptable forms of collateral as margin assets and Clearing Fund contributions. OCC's assessment of an asset class generally includes an evaluation of market risk, credit risk, liquidity risk. This assessment is conducted by the Credit and Liquidity Risk Working Group (``CLRWG''), which is a cross functional group comprised of representatives from multiple departments as noted in the Credit and Liquidity Risk Working Group Procedure. The CRM Policy further provides that the CLRWG establishes criteria for each asset class considered an acceptable form of collateral that evaluates additional risks with respect to the asset class such as execution risk, custody risk, and operational risk. With respect to market risks, the CRM Policy provides that eligible assets classes are accepted after consideration of their liquidity, price transparency, price volatility, offset potential with contracts cleared by OCC, modeling implications and projected inventories. With respect to credit risk, the CRM Policy separately considers counterparty risk and sovereign credit risk. For example, to safeguard against counterparty risk, the CRM Policy provides that FRM evaluates the creditworthiness of counterparties, including custodial agents and settlement banks, against existing qualification standards and monitors the health of such counterparties on an ongoing basis through established processes, supported by a separate policy within OCC.\15\ With respect to sovereign credit risk,\16\ the CRM Policy provides that CLRWG assess such risks against existing minimum sovereign ratings and by evaluating, among other characteristics, credit, market, liquidity, and exchange rate risks. --------------------------------------------------------------------------- \15\ Specifically, evaluations of OCC's counterparties are supported by the Counterparty Credit Risk Management Policy. \16\ Sovereign credit risk refers primarily to the risk associated with accepting a foreign country's debt as collateral or the impact sovereign risk could have on the credit risk of OCC's counterparties. --------------------------------------------------------------------------- Pursuant to the CRM Policy, OCC mitigates liquidity risk \17\ by limiting acceptable collateral to asset classes with low liquidity risk, giving no value to a participant for its own (or its affiliate's) debt or equity securities\18\ and limiting the amount of a particular asset type that a participant may pledge.\19\ The CRM Policy also provides that OCC takes other risks, such as execution risk,\20\ custody risk,\21\ and operational risk,\22\ into consideration when managing collateral risk. --------------------------------------------------------------------------- \17\ Liquidity risk generally refers to the potential price impact that may be observed when selling a collateral position whose size surpasses the market's current depth. \18\ Giving no value to a participant's own securities or its affiliate's securities is a means of addressing wrong-way risk. See CCA Adopting Release, supra note 11, at n.317 (discussing wrong-way risk). Notwithstanding this prohibition, equity securities of participants can be used to hedge options positions on such equity securities. See OCC Rules 601 and 610. \19\ Limiting the amount of a particular asset type a participant may pledge is also a means of addressing concentration risk. Specifically, the CRM Policy provides that OCC mitigates concentration risk by limiting the aggregation or concentration of large positions relative to market depth for a security and, consistent with OCC's liquidation assumptions, restricts the value given to collateral assets beyond amounts that are determined to serve as a hedge to a Clearing Member's portfolio. \20\ Execution risk generally refers to the risk that a counterparty fails to deliver cash or securities when required. \21\ Custody risk refers to, for example, the risk that a custodian holding OCC collateral becomes insolvent. \22\ Operational risk generally refers to the risk that collateral cannot be delivered on a timely basis. --------------------------------------------------------------------------- Valuations and Haircuts The CRM Policy describes OCC's approach to valuing collateral and setting and applying haircuts. With respect to valuation, the CRM Policy provides that OCC's key considerations focus on its pricing process, the period of time between collateral revaluations [[Page 52081]] (which are at least daily), established haircuts to mitigate market risk, and the periodic re-evaluation of the adequacy of existing haircuts. OCC's pricing information, as described in the CRM Policy, feeds into OCC's processes for establishing margin levels or haircuts, daily mark-to-market valuation of collateral, and intraday valuation of collateral. Given the importance of pricing data to inform these processes, OCC maintains redundant information feeds from multiple sources to ensure accuracy and quality. The CRM Policy further summarizes OCC's two approaches for valuing collateral: Collateral in Margins (``CiM'') and haircuts.\23\ For collateral that is not managed using the CiM process, the CRM Policy provides that OCC subjects such collateral to percentage haircuts established at the time the collateral is accepted by OCC and that are monitored regularly to ensure the haircuts remain adequate. --------------------------------------------------------------------------- \23\ Under the CiM approach, the current market value of margin assets is included as a positive asset value in the calculation of a portfolio's net asset value within OCC's System for Theoretical Analysis and Numerical Simulations (``STANS''). OCC then offsets this positive asset value based on, among other things, the expected shortfall and stress test charges associated with an account, resulting in a net excess or net deficit. --------------------------------------------------------------------------- Collateral Management Process The CRM Policy also outlines the three parts of OCC's collateral management processes: (1) Systems and processing; (2) reconciliation; and (3) reporting. With respect to systems and processing, the CRM Policy provides, among other things, that OCC's collateral management system has controls intended to ensure that no Clearing Member goes into collateral deficit and that it is designed to report the excess/ deficit status for each account in real-time. OCC also stress tests the system annually to ensure that it can accommodate a large number of automated transactions. With respect to reconciliation, the CRM Policy provides that OCC performs daily balancing of collateral against activity and inventory data from custodial banks and depositories. The CRM Policy further provides that OCC regularly reviews collateral deposited pursuant to a letter of credit or depository receipt, and the escrow deposit banks, to ensure that acceptable and sufficient collateral is maintained. With respect to reporting, the CRM Policy provides that OCC systematically delivers end-of-day activity and inventory reports to Clearing Members and custody banks and that reports regarding intraday activity can also be obtained. Finally, the CRM Policy provides an overview of OCC's collateral re-investment options, collateral re-hypothecation and substitution ability, existing cross-margining agreements and margin offsets, which are detailed separately in OCC's Cash and Investment Management Policy. Governance and Annual Review The CRM Policy provides that the CLRWG reviews the policy's performance and adequacy on at least an annual basis, including with respect to collateral eligibility, concentration limits, collateral haircuts and monitoring processes. Recommendations for changes are presented to OCC's Management Committee and then the Risk Committee. The CRM Policy also specifies that collateral haircuts and concentration limits are reviewed on an annual basis by persons who are independent of OCC management and that adding a new asset class as acceptable collateral requires approval from OCC's Management Committee, Board of Directors and the Commission. (2) Statutory Basis Section 17A(b)(3)(F) of the Act \24\ requires, among other things, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions, and, in general, protect investors and the public interest. The CRM Policy sets forth the processes that OCC uses to limit collateral to assets with low credit, liquidity, and market risks, and to establish appropriately conservative haircuts and concentration limits. OCC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) because the CRM Policy is reasonably designed to protect investors and the public interest by setting forth the processes that OCC uses to limit the collateral assets that OCC accepts to appropriate, risk-adjusted assets that, in turn, promote the prompt and accurate clearance and settlement of securities transactions by supporting OCC's ability to use the collateral to meet settlement obligations, as necessary, even in times of market stress. --------------------------------------------------------------------------- \24\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- Rule 17Ad-22(e)(5) \25\ requires that OCC establish, implement, maintain and enforce written policies and procedures that are reasonably designed to ``[l]imit the assets it accepts as collateral to those with low credit, liquidity, and market risks.'' As described in more detail above in the subsection discussing Collateral Acceptability, the CRM Policy provides that in determining assets that are acceptable as collateral OCC evaluates market, credit and liquidity risk as well as additional risks, such as execution, custody and operational risk. Rule 17Ad-22(e)(5) \26\ also requires OCC to set and enforce appropriately conservative haircuts and concentration limits. In this regard, the CRM Policy describes that, with respect to collateral valuation, OCC's key considerations focus on its pricing process, the period between collateral revaluations (which are at least daily), established haircuts to mitigate market risk and the periodic re-evaluation of the adequacy of existing haircuts. Moreover, OCC mitigates concentration risk by limiting the aggregation or concentration of large positions relative to market depth for a security and, consistent with OCC's liquidation assumptions, restricts the value given to collateral assets beyond amounts that are determined to serve as a hedge to a Clearing Member's portfolio. Finally, Rule 17Ad-22(e)(5) \27\ provides that OCC must require a review of the sufficiency of its collateral haircuts and concentration limits to be performed not less than annually. The CRM Policy is consistent with this provision because it requires its performance and adequacy to be reviewed on at least an annual basis, including with regard to collateral eligibility, concentration limits, collateral haircuts and related monitoring processes. For these reasons, OCC believes that the proposed rule change is consistent with Rule 17Ad-22(e)(5).\28\ --------------------------------------------------------------------------- \25\ 17 CFR 240.17Ad-22(e)(5). \26\ Id. \27\ Id. \28\ Id. --------------------------------------------------------------------------- The proposed rule change is not inconsistent with the existing rules of OCC, including any other rules proposed to be amended. (B) Clearing Agency's Statement on Burden on Competition Section 17A(b)(3)(I) of the Act \29\ requires that the rules of a clearing agency not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. OCC does not believe that the proposed rule change would impact or impose any burden on competition.\30\ The proposed rule change sets forth the framework, as described in the CRM Policy, that OCC already uses pursuant to its approved By-Laws and Rules to accept collateral with low credit, liquidity, and market risks, and to set and enforce [[Page 52082]] appropriately conservative haircuts and concentration limits. The framework further requires that a review of the sufficiency of OCC's collateral haircuts and concentration limits be performed not less than annually. Under this framework, and as provided for in its By-Laws and Rules, all Clearing Members are subject to the same limitations on acceptable collateral as well as to the same haircuts and concentration limits. Consequently, no Clearing Member is provided a competitive advantage over any other Clearing Member. Further, the proposed rule change would not affect Clearing Member's access to OCC's services or impose any direct burdens on Clearing Members. Accordingly, the proposed rule change would not unfairly inhibit access to OCC's services or disadvantage or favor any particular user in relationship to another user. --------------------------------------------------------------------------- \29\ 15 U.S.C. 78q-1(b)(3)(I). \30\ Id. --------------------------------------------------------------------------- For the foregoing reasons, OCC believes that the proposed rule change is in the public interest, would be consistent with the requirements of the Act applicable to clearing agencies, and would not impact or impose a burden on competition. (C) Clearing Agency's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments on the proposed rule change were not and are not intended to be solicited with respect to the proposed rule change and none have been received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self- regulatory organization consents, the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-OCC-2017-008 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-OCC-2017-008. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC's Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_008.pdf. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-OCC- 2017-008 and should be submitted on or before November 30, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated Authority.\31\ Eduardo A. Aleman, Assistant Secretary. --------------------------------------------------------------------------- \31\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- [FR Doc. 2017-24369 Filed 11-8-17; 8:45 am] BILLING CODE 8011-01-P
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opportunity to make an oral Persons submitting comments are are reviewed for continued sufficiency
presentation.92 cautioned that we do not redact or edit not less than annually.3 The Collateral
Interested persons are invited to personal identifying information from Risk Management Policy is included as
submit written data, views, and comment submissions. You should confidential Exhibit 5 of the filing.
arguments regarding whether the submit only information that you wish The proposed rule change does not
proposed rule change, as modified by to make available publicly. All require any changes to the text of OCC’s
Amendment Nos. 1 and 2, should be submissions should refer to File No. By-Laws or Rules. All terms with initial
approved or disapproved by November SR–NASDAQ–2017–074 and should be capitalization that are not otherwise
30, 2017. Any person who wishes to file submitted by November 30, 2017. defined herein have the same meaning
a rebuttal to any other person’s Rebuttal comments should be submitted as set forth in the OCC By-Laws and
submission must file that rebuttal by by December 14, 2017. Rules.4
December 14, 2017. Comments may be For the Commission, by the Division of
submitted by any of the following II. Clearing Agency’s Statement of the
Trading and Markets, pursuant to delegated Purpose of, and Statutory Basis for, the
methods: authority.93 Proposed Rule Change
Electronic Comments Eduardo A. Aleman,
Assistant Secretary.
In its filing with the Commission,
• Use the Commission’s Internet OCC included statements concerning
comment form (http://www.sec.gov/ [FR Doc. 2017–24371 Filed 11–8–17; 8:45 am]
the purpose of and basis for the
rules/sro.shtml); or BILLING CODE 8011–01–P
proposed rule change and discussed any
• Send an email to rule-comments@ comments it received on the proposed
sec.gov. Please include File No. SR– rule change. The text of these statements
NASDAQ–2017–074 on the subject line. SECURITIES AND EXCHANGE
COMMISSION may be examined at the places specified
Paper Comments in Item IV below. OCC has prepared
[Release No. 34–82009; File No. SR–OCC– summaries, set forth in sections (A), (B),
• Send paper comments in triplicate 2017–008] and (C) below, of the most significant
to Secretary, Securities and Exchange aspects of these statements.
Commission, 100 F Street NE., Self-Regulatory Organizations; The
Washington, DC 20549–1090. Options Clearing Corporation; Notice (A) Clearing Agency’s Statement of the
All submissions should refer to File No. of Filing of Proposed Rule Change Purpose of, and Statutory Basis for, the
SR–NASDAQ–2017–074. The file Related to The Options Clearing Proposed Rule Change
number should be included on the Corporation’s Collateral Risk (1) Purpose
subject line if email is used. To help the Management Policy
Commission process and review your Background
November 3, 2017.
comments more efficiently, please use On September 28, 2016, the
Pursuant to Section 19(b)(1) of the
only one method. The Commission will Commission adopted amendments to
post all comments on the Commission’s Securities Exchange Act of 1934,1 and
Rule 17Ad–22 5 and added new Rule
Internet Web site (http://www.sec.gov/ Rule 19b–4 thereunder,2 notice is
17Ab2–2 6 pursuant to Section 17A of
rules/sro.shtml). Copies of the hereby given that on October 27, 2017,
The Options Clearing Corporation the Securities Exchange Act of 1934, as
submission, all subsequent amended, (‘‘Act’’) 7 and the Payment,
amendments, all written statements (‘‘OCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’) Clearing, and Settlement Supervision
with respect to the proposed rule Act of 2010 (‘‘Payment, Clearing and
change that are filed with the the proposed rule change as described
in Items I, II, and III below, which Items Settlement Supervision Act’’) 8 to
Commission, and all written establish enhanced standards for the
communications relating to the have been prepared by OCC. The
Commission is publishing this notice to operation and governance of those
proposed rule change between the clearing agencies registered with the
Commission and any person, other than solicit comments on the proposed rule
change from interested persons. Commission that meet the definition of
those that may be withheld from the a ‘‘covered clearing agency,’’ as defined
public in accordance with the I. Clearing Agency’s Statement of the by Rule 17Ad–22(a)(5) 9 (collectively,
provisions of 5 U.S.C. 552, will be Terms of Substance of the Proposed the new and amended rules are herein
available for Web site viewing and Rule Change referred to as ‘‘CCA’’ rules). The CCA
printing in the Commission’s Public This proposed rule change by The rules require that a covered clearing
Reference Room, 100 F Street NE., Options Clearing Corporation (‘‘OCC’’) agency, among other things, establish,
Washington, DC 20549, on official would formalize and update OCC’s implement, maintain, and enforce
business days between the hours of Collateral Risk Management Policy written policies and procedures
10:00 a.m. and 3:00 p.m. Copies of the (‘‘CRM Policy’’). This policy would reasonably designed to:
filing also will be available for promote compliance with Rule 17Ad– ‘‘[l]imit the assets it accepts as collateral to
inspection and copying at the principal 22(e)(5), which generally requires a those with low credit, liquidity, and market
office of the Exchange. All comments covered clearing agency to have policies risks, and set and enforce appropriately
received will be posted without change. and procedures reasonably designed to, conservative haircuts and concentration
among other things, limit the assets it limits if the covered clearing agency requires
92 Section 19(b)(2) of the Act, as amended by the
Securities Acts Amendments of 1975, Public Law accepts as collateral to those with low
sradovich on DSK3GMQ082PROD with NOTICES
3 17 CFR 240.17Ad–22(e)(5).
94–29 (June 4, 1975), grants to the Commission credit, liquidity, and market risks and 4 OCC’s By-Laws and Rules can be found on
flexibility to determine what type of proceeding— subject such assets to appropriate OCC’s public Web site: http://optionsclearing.com/
either oral or notice and opportunity for written haircuts and concentration limits that about/publications/bylaws.jsp.
comments—is appropriate for consideration of a 5 17 CFR 240.17Ad–22.
particular proposal by a self-regulatory 6 17 CFR 240.17Ab2–2.
93 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
organization. See Securities Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban 3(a)(57). 7 15 U.S.C. 78q–1.
1 15 U.S.C. 78s(b)(1). 8 12 U.S.C. 5461 et seq.
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975). 2 17 CFR 240.19b–4. 9 17 CFR 240.17Ad–22(a)(5).
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(which are at least daily), established Finally, the CRM Policy provides an provides that in determining assets that
haircuts to mitigate market risk, and the overview of OCC’s collateral re- are acceptable as collateral OCC
periodic re-evaluation of the adequacy investment options, collateral re- evaluates market, credit and liquidity
of existing haircuts. OCC’s pricing hypothecation and substitution ability, risk as well as additional risks, such as
information, as described in the CRM existing cross-margining agreements and execution, custody and operational risk.
Policy, feeds into OCC’s processes for margin offsets, which are detailed Rule 17Ad–22(e)(5) 26 also requires OCC
establishing margin levels or haircuts, separately in OCC’s Cash and to set and enforce appropriately
daily mark-to-market valuation of Investment Management Policy. conservative haircuts and concentration
collateral, and intraday valuation of limits. In this regard, the CRM Policy
Governance and Annual Review
collateral. Given the importance of describes that, with respect to collateral
pricing data to inform these processes, The CRM Policy provides that the valuation, OCC’s key considerations
OCC maintains redundant information CLRWG reviews the policy’s focus on its pricing process, the period
feeds from multiple sources to ensure performance and adequacy on at least between collateral revaluations (which
accuracy and quality. The CRM Policy an annual basis, including with respect are at least daily), established haircuts
further summarizes OCC’s two to collateral eligibility, concentration to mitigate market risk and the periodic
approaches for valuing collateral: limits, collateral haircuts and re-evaluation of the adequacy of existing
Collateral in Margins (‘‘CiM’’) and monitoring processes. haircuts. Moreover, OCC mitigates
haircuts.23 For collateral that is not Recommendations for changes are concentration risk by limiting the
managed using the CiM process, the presented to OCC’s Management aggregation or concentration of large
CRM Policy provides that OCC subjects Committee and then the Risk positions relative to market depth for a
such collateral to percentage haircuts Committee. The CRM Policy also security and, consistent with OCC’s
established at the time the collateral is specifies that collateral haircuts and liquidation assumptions, restricts the
accepted by OCC and that are monitored concentration limits are reviewed on an value given to collateral assets beyond
regularly to ensure the haircuts remain annual basis by persons who are amounts that are determined to serve as
adequate. independent of OCC management and a hedge to a Clearing Member’s
that adding a new asset class as portfolio. Finally, Rule 17Ad–22(e)(5) 27
Collateral Management Process acceptable collateral requires approval provides that OCC must require a
The CRM Policy also outlines the from OCC’s Management Committee, review of the sufficiency of its collateral
three parts of OCC’s collateral Board of Directors and the Commission. haircuts and concentration limits to be
management processes: (1) Systems and (2) Statutory Basis performed not less than annually. The
processing; (2) reconciliation; and (3) CRM Policy is consistent with this
Section 17A(b)(3)(F) of the Act 24
reporting. With respect to systems and provision because it requires its
requires, among other things, that the
processing, the CRM Policy provides, performance and adequacy to be
rules of a clearing agency be designed to
among other things, that OCC’s reviewed on at least an annual basis,
promote the prompt and accurate
collateral management system has including with regard to collateral
clearance and settlement of securities
controls intended to ensure that no eligibility, concentration limits,
transactions, and, in general, protect
Clearing Member goes into collateral collateral haircuts and related
investors and the public interest. The
deficit and that it is designed to report monitoring processes. For these reasons,
CRM Policy sets forth the processes that
the excess/deficit status for each OCC believes that the proposed rule
OCC uses to limit collateral to assets
account in real-time. OCC also stress change is consistent with Rule 17Ad–
with low credit, liquidity, and market
tests the system annually to ensure that 22(e)(5).28
risks, and to establish appropriately The proposed rule change is not
it can accommodate a large number of
conservative haircuts and concentration inconsistent with the existing rules of
automated transactions. With respect to
limits. OCC believes that the proposed OCC, including any other rules
reconciliation, the CRM Policy provides
rule change is consistent with Section proposed to be amended.
that OCC performs daily balancing of
17A(b)(3)(F) because the CRM Policy is
collateral against activity and inventory (B) Clearing Agency’s Statement on
reasonably designed to protect investors
data from custodial banks and Burden on Competition
and the public interest by setting forth
depositories. The CRM Policy further
the processes that OCC uses to limit the Section 17A(b)(3)(I) of the Act 29
provides that OCC regularly reviews
collateral assets that OCC accepts to requires that the rules of a clearing
collateral deposited pursuant to a letter
appropriate, risk-adjusted assets that, in agency not impose any burden on
of credit or depository receipt, and the
turn, promote the prompt and accurate competition not necessary or
escrow deposit banks, to ensure that
clearance and settlement of securities appropriate in furtherance of the
acceptable and sufficient collateral is
transactions by supporting OCC’s ability purposes of the Act. OCC does not
maintained. With respect to reporting,
to use the collateral to meet settlement believe that the proposed rule change
the CRM Policy provides that OCC
obligations, as necessary, even in times would impact or impose any burden on
systematically delivers end-of-day
of market stress. competition.30 The proposed rule
activity and inventory reports to
Rule 17Ad–22(e)(5) 25 requires that change sets forth the framework, as
Clearing Members and custody banks
OCC establish, implement, maintain and described in the CRM Policy, that OCC
and that reports regarding intraday
enforce written policies and procedures already uses pursuant to its approved
activity can also be obtained.
that are reasonably designed to ‘‘[l]imit By-Laws and Rules to accept collateral
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23 Under the CiM approach, the current market
the assets it accepts as collateral to those with low credit, liquidity, and market
value of margin assets is included as a positive asset with low credit, liquidity, and market risks, and to set and enforce
value in the calculation of a portfolio’s net asset risks.’’ As described in more detail
value within OCC’s System for Theoretical Analysis above in the subsection discussing 26 Id.
and Numerical Simulations (‘‘STANS’’). OCC then
offsets this positive asset value based on, among
Collateral Acceptability, the CRM Policy 27 Id.
28 Id.
other things, the expected shortfall and stress test
24 15 U.S.C. 78q–1(b)(3)(F). 29 15 U.S.C. 78q–1(b)(3)(I).
charges associated with an account, resulting in a
net excess or net deficit. 25 17 CFR 240.17Ad–22(e)(5). 30 Id.
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![52082 Federal Register / Vol. 82, No. 216 / Thursday, November 9, 2017 / Notices
appropriately conservative haircuts and Electronic Comments SECURITIES AND EXCHANGE
concentration limits. The framework COMMISSION
further requires that a review of the • Use the Commission’s Internet
comment form (http://www.sec.gov/ [Release No. 34–82012; File No. SR–Phlx–
sufficiency of OCC’s collateral haircuts 2017–93]
and concentration limits be performed rules/sro.shtml); or
not less than annually. Under this • Send an email to rule-comments@ Self-Regulatory Organizations; Nasdaq
framework, and as provided for in its sec.gov. Please include File Number SR– PHLX LLC; Notice of Filing and
By-Laws and Rules, all Clearing OCC–2017–008 on the subject line. Immediate Effectiveness of Proposed
Members are subject to the same Rule Change To Amend Rule
limitations on acceptable collateral as Paper Comments
1080(p)(2) To Enhance Anti-
well as to the same haircuts and • Send paper comments in triplicate Internalization Functionality
concentration limits. Consequently, no to Secretary, Securities and Exchange
Clearing Member is provided a November 3, 2017.
Commission, 100 F Street, NE., Pursuant to Section 19(b)(1) of the
competitive advantage over any other Washington, DC 20549–1090.
Clearing Member. Further, the proposed Securities Exchange Act of 1934
rule change would not affect Clearing All submissions should refer to File (‘‘Act’’),1 and Rule 19b–4 thereunder,2
Member’s access to OCC’s services or Number SR–OCC–2017–008. This file notice is hereby given that on November
impose any direct burdens on Clearing number should be included on the 2, 2017, Nasdaq PHLX LLC (‘‘Phlx’’ or
Members. Accordingly, the proposed subject line if email is used. To help the ‘‘Exchange’’) filed with the Securities
rule change would not unfairly inhibit Commission process and review your and Exchange Commission
access to OCC’s services or disadvantage comments more efficiently, please use (‘‘Commission’’) the proposed rule
or favor any particular user in only one method. The Commission will change as described in Items I, II, and
relationship to another user. post all comments on the Commission’s III, below, which Items have been
Internet Web site (http://www.sec.gov/ prepared by the Exchange. The
For the foregoing reasons, OCC Commission is publishing this notice to
believes that the proposed rule change rules/sro.shtml). Copies of the
submission, all subsequent solicit comments on the proposed rule
is in the public interest, would be change from interested persons.
consistent with the requirements of the amendments, all written statements
Act applicable to clearing agencies, and with respect to the proposed rule I. Self-Regulatory Organization’s
would not impact or impose a burden change that are filed with the Statement of the Terms of Substance of
on competition. Commission, and all written the Proposed Rule Change
communications relating to the The Exchange proposes to amend
(C) Clearing Agency’s Statement on proposed rule change between the
Comments on the Proposed Rule Rule 1080(p)(2) to enhance anti-
Commission and any person, other than internalization functionality.
Change Received From Members, those that may be withheld from the The text of the proposed rule change
Participants or Others public in accordance with the is available on the Exchange’s Web site
Written comments on the proposed provisions of 5 U.S.C. 552, will be at http://nasdaqphlx.cchwallstreet.
rule change were not and are not available for Web site viewing and com/, at the principal office of the
intended to be solicited with respect to printing in the Commission’s Public Exchange, and at the Commission’s
the proposed rule change and none have Reference Room, 100 F Street, NE., Public Reference Room.
been received. Washington, DC 20549, on official
business days between the hours of II. Self-Regulatory Organization’s
III. Date of Effectiveness of the 10:00 a.m. and 3:00 p.m. Copies of such Statement of the Purpose of, and
Proposed Rule Change and Timing for filing also will be available for Statutory Basis for, the Proposed Rule
Commission Action inspection and copying at the principal Change
office of OCC and on OCC’s Web site at In its filing with the Commission, the
Within 45 days of the date of
http://www.theocc.com/components/ Exchange included statements
publication of this notice in the Federal
docs/legal/rules_and_bylaws/sr_occ_17_ concerning the purpose of and basis for
Register or within such longer period
008.pdf. All comments received will be the proposed rule change and discussed
up to 90 days (i) as the Commission may
posted without change. Persons any comments it received on the
designate if it finds such longer period
submitting comments are cautioned that proposed rule change. The text of these
to be appropriate and publishes its
we do not redact or edit personal statements may be examined at the
reasons for so finding or (ii) as to which
identifying information from comment places specified in Item IV below. The
the self- regulatory organization
submissions. You should submit only Exchange has prepared summaries, set
consents, the Commission will:
information that you wish to make forth in sections A, B, and C below, of
(A) by order approve or disapprove available publicly. All submissions the most significant aspects of such
the proposed rule change, or should refer to File Number SR–OCC– statements.
(B) institute proceedings to determine 2017–008 and should be submitted on A. Self-Regulatory Organization’s
whether the proposed rule change or before November 30, 2017. Statement of the Purpose of, and
should be disapproved.
For the Commission, by the Division of Statutory Basis for, the Proposed Rule
IV. Solicitation of Comments Trading and Markets, pursuant to delegated Change
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Authority.31
Interested persons are invited to 1. Purpose
Eduardo A. Aleman,
submit written data, views and The purpose of the proposed rule
arguments concerning the foregoing, Assistant Secretary.
change is to enhance the anti-
including whether the proposed rule [FR Doc. 2017–24369 Filed 11–8–17; 8:45 am]
internalization (‘‘AIQ’’) functionality
change is consistent with the Act. BILLING CODE 8011–01–P
Comments may be submitted by any of 1 15 U.S.C. 78s(b)(1).
the following methods: 31 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.
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Document Created: 2018-10-25 10:30:09
Document Modified: 2018-10-25 10:30:09
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| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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