83 FR 55918 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 1, Related to The Options Clearing Corporation's Margin Methodology for Incorporating Variations in Implied Volatility
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 217 (November 8, 2018)
Federal Register Volume 83, Issue 217 (November 8, 2018)
| Page Range | 55918-55922 | |
| FR Document | 2018-24400 |
[Federal Register Volume 83, Number 217 (Thursday, November 8, 2018)] [Notices] [Pages 55918-55922] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-24400] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-84524; File No. SR-OCC-2018-014] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 1, Related to The Options Clearing Corporation's Margin Methodology for Incorporating Variations in Implied Volatility November 2, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on October 22, 2018, The Options Clearing Corporation (``OCC'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by OCC. On October 30, 2018, OCC filed Partial Amendment No. 1 to the proposed rule change.\3\ 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. \3\ In Partial Amendment No. 1, OCC corrected errors in Exhibits 1A and 5 without changing the substance of the proposed rule change. --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change is filed in connection with proposed changes to enhance OCC's model for incorporating variations in implied volatility within OCC's margin methodology (``Implied Volatility Model''), the System for Theoretical Analysis and Numerical Simulations (``STANS'').\4\ The proposed changes to OCC's Margins Methodology document are contained in confidential Exhibit 5 of the filing. Material proposed to be added is marked by underlining and material proposed to be deleted is marked by strikethrough text. The proposed changes are described in detail in Item 3 below. The proposed rule change does not require any changes to the text of OCC's By-Laws or Rules. The proposed rule change is available on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp. 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.\5\ --------------------------------------------------------------------------- \4\ OCC also has filed an advance notice with the Commission in connection with the proposed changes. See SR-OCC-2018-804. \5\ OCC's By-Laws and Rules can be found on OCC's public website: 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 STANS Overview STANS is OCC's proprietary risk management system for calculating Clearing Member margin requirements.\6\ The STANS methodology utilizes large-scale Monte Carlo simulations to forecast price and volatility movements in determining a Clearing Member's margin requirement.\7\ STANS margin requirements are calculated at the portfolio level of Clearing Member accounts with positions in marginable securities and consists of an estimate of two primary components: A base component and a stress test add-on component. The base component is an estimate of a 99% expected shortfall \8\ over a two-day time horizon. The concentration/dependence stress test charge is obtained by considering increases in the expected margin shortfall for an account that would occur due to (i) market movements that are especially large and/or in which certain risk factors would exhibit perfect or zero correlations rather than correlations otherwise estimated using historical data or (ii) extreme and adverse idiosyncratic movements for individual risk factors to which the account is particularly exposed. The STANS methodology is used to measure the exposure of portfolios of options and futures cleared by OCC and cash instruments in margin collateral.\9\ --------------------------------------------------------------------------- \6\ See Securities Exchange Act Release No. 53322 (February 15, 2006), 71 FR 9403 (February 23, 2006) (SR-OCC-2004-20). A detailed description of the STANS methodology is available at http://optionsclearing.com/risk-management/margins/. \7\ See OCC Rule 601. \8\ The expected shortfall component is established as the estimated average of potential losses higher than the 99% value at risk threshold. The term ``value at risk'' or ``VaR'' refers to a statistical technique that, generally speaking, is used in risk management to measure the potential risk of loss for a given set of assets over a particular time horizon. \9\ OCC notes that, pursuant to OCC Rule 601(e)(1), OCC also calculates initial margin requirements for segregated futures accounts using the Standard Portfolio Analysis of Risk Margin Calculation System (``SPAN''). No changes are proposed to OCC's use of SPAN because the proposed changes do not concern futures. See Securities Exchange Act Release No. 72331 (June 5, 2014), 79 FR 33607 (June 11, 2014) (SR-OCC-2014-13). --------------------------------------------------------------------------- The econometric models underlying STANS currently incorporate a number of risk factors. A ``risk factor'' within OCC's margin system is defined as a product or attribute whose historical data is used to estimate and simulate the risk for an associated product. The majority of risk factors utilized in the [[Page 55919]] STANS methodology are the returns on individual equity securities; however, a number of other risk factors may be considered, including, among other things, returns on implied volatility risk factors.\10\ --------------------------------------------------------------------------- \10\ In December 2015, the Commission approved a proposed rule change and issued a Notice of No Objection to an advance notice filing by OCC to its modify margin methodology by more broadly incorporating variations in implied volatility within STANS. See Securities Exchange Act Release No. 76781 (December 28, 2015), 81 FR 135 (January 4, 2016) (SR-OCC-2015-016) and Securities Exchange Act Release No. 76548 (December 3, 2015), 80 FR 76602 (December 9, 2015) (SR-OCC-2015-804). As discussed further below, implied volatility risk factors in STANS are a set of chosen volatility pivot points per product, depending on the tenor of the option. --------------------------------------------------------------------------- Current Implied Volatility Model in STANS Generally speaking, the implied volatility of an option is a measure of the expected future volatility of the option's underlying security at expiration, which is reflected in the current option premium in the market. Using the Black-Scholes options pricing model, the implied volatility is the standard deviation of the underlying asset price necessary to arrive at the market price of an option of a given strike, time to maturity, underlying asset price and the current risk-free rate. In effect, the implied volatility is responsible for that portion of the premium that cannot be explained by the then- current intrinsic value of the option (i.e., the difference between the price of the underlying and the exercise price of the option), discounted to reflect its time value. OCC considers variations in implied volatility within STANS to ensure that the anticipated cost of liquidating options positions in an account recognizes the possibility that implied volatility could change during the two-business day liquidation time horizon and lead to corresponding changes in the market prices of the options. OCC models the variations in implied volatility used to re-price options within STANS for substantially all option contracts \11\ available to be cleared by OCC that have a residual tenor \12\ of less than three years (``Shorter Tenor Options'').\13\ To address variations in implied volatility, OCC models a volatility surface \14\ for Shorter Tenor Options by incorporating into the econometric models underlying STANS certain risk factors (i.e., implied volatility pivot points) based on a range of tenors and option deltas.\15\ Currently, these implied volatility pivot points consist of three tenors of one month, three months and one year, and three deltas of 0.25, 0.5, and 0.75, resulting in nine implied volatility risk factors. These pivot points are chosen such that their combination allows the model to capture changes in level, skew, convexity and term structure of the implied volatility surface. OCC uses a GARCH model \16\ to forecast the volatility for each implied volatility risk factor at the nine pivot points.\17\ For each Shorter Tenor Option in the account of a Clearing Member, changes in its implied volatility are simulated using forecasts obtained from daily implied volatility market data according to the corresponding pivot point and the price of the option is computed to determine the amount of profit or loss in the account under the particular STANS price simulation. Additionally, OCC uses simulated closing prices for the assets underlying the options in the account of a Clearing Member that are scheduled to expire within the liquidation time horizon of two business days to compute the options' intrinsic value and uses those values to help calculate the profit or loss in the account.\18\ --------------------------------------------------------------------------- \11\ OCC's Implied Volatility Model excludes: (i) Binary options, (ii) options on commodity futures, (iii) options on U.S. Treasury securities, and (iv) Asians and Cliquets. These relatively new products were introduced as the implied volatility margin methodology changes were in the process of being completed by OCC, and OCC had de minimus open interest in those options. OCC therefore did not believe there was a substantive risk if those products were excluded from the implied volatility model. See id. \12\ The ``tenor'' of an option is the amount of time remaining to its expiration. \13\ OCC also incorporates variations in implied volatility as risk factors for certain options with residual tenors of at least three years (``Longer Tenor Options''); however, the proposed changes described herein would not apply to OCC's model for Longer Tenor Options. See Securities Exchange Act Release Nos. 68434 (December 14, 2012), 77 FR 57602 (December 19, 2012) (SR-OCC-2012- 14); 70709 (October 18, 2013), 78 FR 63267 (October 23, 2013) (SR- OCC-2013-16). \14\ The term ``volatility surface'' refers to a three- dimensional graphed surface that represents the implied volatility for possible tenors of the option and the implied volatility of the option over those tenors for the possible levels of ``moneyness'' of the option. The term ``moneyness'' refers to the relationship between the current market price of the underlying interest and the exercise price. \15\ The ``delta'' of an option represents the sensitivity of the option price with respect to the price of the underlying security. \16\ The acronym ``GARCH'' refers to an econometric model that can be used to estimate volatility based on historical data. See generally Tim Bollerslev, ``Generalized Autoregressive Conditional Heteroskedasticity,'' Journal of Econometrics, 31(3), 307-327 (1986). \17\ STANS relies on 10,000 price simulation scenarios that are based generally on a historical data period of 500 business days, which are updated daily to keep model results from becoming stale. \18\ For such Shorter Tenor Options that are scheduled to expire on the open of the market rather than the close, OCC uses the relevant opening price for the underlying assets. --------------------------------------------------------------------------- OCC performed a number of analyses of its current Implied Volatility Model and to support development of the proposed model changes, including backtesting and impact analysis of the proposed model enhancements as well as comparison of OCC's current model performance against certain industry benchmarks.\19\ OCC's analysis demonstrated that one attribute of the current model is that the volatility changes forecasted by the GARCH model are extremely sensitive to sudden spikes in volatility, which can at times result in over reactive margin requirements that OCC believes are unreasonable and procyclical.\20\ --------------------------------------------------------------------------- \19\ OCC has provided results of these analyses to the Commission in confidential Exhibit 3 of the filing. \20\ A quality that is positively correlated with the overall state of the market is deemed to be ``procyclical.'' For example, procyclicality may be evidenced by increasing margin requirements in times of stressed market conditions and low margin requirements when markets are calm. Hence, anti-procyclical features in a model are measures intended to prevent risk-based models from fluctuating too drastically in response to changing market conditions. --------------------------------------------------------------------------- For example, on February 5, 2018, the market experienced extreme levels of volatility, with the Cboe Volatility Index (``VIX'') \21\ moving from 17% up to 37%, representing a relative move of 116% (which is the largest relative daily jump in the history of the index). Under OCC's current model, OCC observed that the GARCH forecast SPX volatility for at-the-money implied volatility for a one-month tenor was approximately 4 times larger than the comparable market index, the Cboe VVIX Index, which is a volatility of volatility measure in that it represents the expected volatility of the 30-day forward price of the VIX. As a result, aggregated STANS margins jumped more than 80% overnight due to the GARCH model and margins for certain individual Clearing Members increased by a factor of 10.\22\ --------------------------------------------------------------------------- \21\ The VIX is an index designed to measure the 30-day expected volatility of the Standard & Poor's 500 index (``SPX''). \22\ For example, under the current model the total margin requirement calculated for one particular Clearing Member jumped from $120 million on February 2, 2018, to $1.78 billion on February 5, 2018, representing a 14 times increase in the requirement. --------------------------------------------------------------------------- In addition, volatility tends to be mean reverting; that is, volatility will quickly return to its long-run mean or average from an elevated level, so it is unlikely that volatility would continue to make big jumps immediately following a drastic increase. For example, based on the VIX history from 1990-2018, VIX levels jumped above 35 (about the level observed on February 5, [[Page 55920]] 2018) for approximately 293 days (i.e., 4% of the sample period). From the level of 35 or higher, the range of daily change on the VIX index was between 27% and -35%. However, the largest daily changes on one- month at-the-money SPX implied volatility forecasted by OCC's current GARCH model on February 5, 2018, were far in excess of those historical realized amounts, which points to extreme procyclicality issues that need to be addressed in the current model.\23\ --------------------------------------------------------------------------- \23\ For example, OCC's current model resulted in a maximum variation of 1100% in the one-month at-the-money SPX implied volatility pivot when compared with a maximum 35% move in the VIX for VIX levels greater than 30. Additionally, the model-generated number is significantly higher than 116%, which is the largest realized historical move in the VIX that occurred on February 5, 2018. --------------------------------------------------------------------------- OCC also performed backtesting of the current model and proposed model enhancements to evaluate and compare the performance of each model from a margin coverage perspective. OCC's backtesting demonstrated that exceedance counts \24\ and overall coverage levels over the backtesting period using the proposed model enhancements were substantially similar to the results obtained from the current production model. As a result, OCC believes the current model tends to be overly conservative/reactive, and the proposed model is more appropriately commensurate with the risks presented by changes in implied volatility. --------------------------------------------------------------------------- \24\ Exceedance counts here refer to instances where the actual loss on portfolio over the liquidation period of two business days exceeds the margin amounts generated by the model. --------------------------------------------------------------------------- OCC believes that the sudden, extreme and unreasonable increases in margin requirements that may be experienced under its current Implied Volatility Model may stress certain Clearing Members' ability to obtain sufficient liquidity to meet these significantly increased margin requirements, particularly in periods of sudden, extreme volatility. OCC therefore is proposing changes to its Implied Volatility Model to limit procyclicality and produce margin requirements that OCC believes are more reasonable and are also commensurate with the risks presented by its cleared options products. Proposed Changes OCC proposes to modify its Implied Volatility Model by introducing an exponentially weighted moving average \25\ for the daily forecasted volatility for implied volatility risk factors calculated using the GARCH model. Specifically, when forecasting the volatility for each implied volatility risk factor at each of the nine pivot points, OCC would use an exponentially weighted moving average of forecasted volatilities over a specified look-back period rather than using raw daily forecasted volatilities. The exponentially weighted moving average would involve the selection of a look-back period over which the data would be averaged and a decay factor (or weighting factor), which is a positive number between zero and one, that represents the weighting factor for the most recent data point.\26\ The look-back period and decay factor would be model parameters subject to monthly review,\27\ along with other model parameters that are reviewed by OCC's Model Risk Working Group (``MRWG'') \28\ in accordance with OCC's internal procedure for margin model parameter review and sensitivity analysis, and these parameters would be subject to change upon approval of the MRWG. --------------------------------------------------------------------------- \25\ An exponentially weighted moving average is a statistical method that averages data in a way that gives more weight to the most recent observations using an exponential scheme. \26\ The lower the number the more weight is attributed to the more recent data (e.g., if the value is set to one, the exponentially weighted moving average becomes a simple average). \27\ OCC initially would use a look-back period of 22 days and an initial decay factor of 0.94 for the exponentially weighted moving average. OCC believes the 22-day look-back is an appropriate initial parameter setting as it would allow for close to monthly updates of the GARCH parameters used in the model. The decay factor value of 0.94 was selected based on the factor initially proposed by JP Morgan's RiskMetrics methodology (see JPMorgan/Reuters, 1996. ``RiskMetrics--Technical Document'', Fourth edition). \28\ The MRWG is responsible for assisting OCC's Management Committee in overseeing and governing OCC's model-related risk issues and includes representatives from OCC's Financial Risk Management department, Quantitative Risk Management department, Model Validation Group, and Enterprise Risk Management department. --------------------------------------------------------------------------- The proposed change is intended to reduce the oversensitivity of the current Implied Volatility Model to large, sudden shocks in market volatility and therefore result in margin requirements that are more stable and that remain commensurate with the risks presented during periods of sudden, extreme volatility.\29\ The proposed rule change is expected to produce margin requirements that are very similar to those generated using OCC's existing model during quiet, less volatile market periods; however, during more volatile periods, the proposed changes would result in a more measured initial response to increases in the volatility of volatility with margin requirements that may remain elevated for a longer period of time after the shock subsides than experienced under OCC's current model. The proposed changes are intended to reduce procyclicality in OCC's margin methodology across volatile market periods while continuing to capture changes in implied volatility and produce margin requirements that are commensurate with the risks presented by OCC's cleared options products. The proposed changes therefore would reduce the risk that a sudden, extreme increase in margin requirements may stress Clearing Members' ability to obtain liquidity to meet such increased requirements, particularly in periods of extreme volatility. --------------------------------------------------------------------------- \29\ As noted above, OCC has performed analysis of the impact of the proposed changes, and OCC's backtesting of the proposed model demonstrates comparable exceedance counts and coverage levels to the current model during the most recent volatile period. --------------------------------------------------------------------------- Implementation Timeframe OCC expects to implement the proposed changes within thirty (30) days after the date that OCC receives all necessary regulatory approvals for the proposed changes. OCC will announce the implementation date of the proposed change by an Information Memorandum posted to its public website at least 2 weeks prior to implementation. (2) Statutory Basis OCC believes that the proposed rule change is consistent with Section 17A of the Act \30\ and the rules and regulations thereunder applicable to OCC. Section 17A(b)(3)(F) of Act \31\ requires, in part, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions, and in general, to protect investors and the public interest. As described above, the volatility changes forecasted by OCC's current Implied Volatility Model are extremely sensitive to large, sudden spikes in volatility, which can at times result in over reactive margin requirements that OCC believes are unreasonable and procyclical (for the reasons set forth above). Such sudden, unreasonable increases in margin requirements may stress certain Clearing Members' ability to obtain liquidity to meet those requirements, particularly in periods of extreme volatility, and could result in a Clearing Member being delayed in meeting, or ultimately failing to meet, its daily settlement obligations to OCC. OCC notes that the proposed rule change is expected to produce margin requirements that are very similar to those generated using OCC's existing model during quiet, less volatile market periods. The proposed changes would, however, result in a [[Page 55921]] more measured initial response to increases in the volatility of volatility with margin requirements that may remain elevated for a longer period after the shock subsides than experienced under OCC's current model. The proposed changes are designed to reduce the likelihood that OCC's Implied Volatility Model would produce extreme, over reactive margin requirements that could strain the ability of certain Clearing Members to meet their daily margin requirements at OCC by reducing procyclicality in OCC's margin methodology and ensuring more stable and appropriate changes in margin requirements across volatile market periods while continuing to capture changes in implied volatility and produce margin requirements that are commensurate with the risks presented. As a result, OCC believes the proposed rule change is designed to promote the prompt and accurate clearance and settlement of securities transactions, and, in general, to protect investors and the public interest in accordance with Section 17A(b)(3)(F) of the Act.\32\ --------------------------------------------------------------------------- \30\ 15 U.S.C. 78q-1. \31\ 15 U.S.C. 78q-1(b)(3)(F). \32\ Id. --------------------------------------------------------------------------- Rules 17Ad-22(e)(6)(i) and (v) \33\ require a covered clearing agency that provides central counterparty services to establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that (1) considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market and (2) uses an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products. As noted above, OCC's current model for implied volatility demonstrates extreme sensitivity to sudden spikes in volatility, which can at times result in over reactive margin requirements that OCC believes are unreasonable and procyclical. The proposed changes are designed to reduce the oversensitivity of the model and produce margin requirements that are commensurate with the risks presented during periods of sudden, extreme volatility. The proposed model enhancements are expected to produce margin requirements that are very similar to those generated using OCC's existing model during quiet, less volatile market periods; however, the proposed changes would result in a more measured initial response to increases in the volatility of volatility with margin requirements that may remain elevated for a longer period of time after the shock subsides than experienced under OCC's current model. The proposed change would therefore reduce procyclicality in OCC's margin methodology and ensure more stable changes in margin requirements across volatile market periods while continuing to capture changes in implied volatility and produce margin requirements that are commensurate with the risks presented by OCC's cleared options. As a result, OCC believes that the proposed changes are reasonably designed to consider, and produce margin levels commensurate with, the risk presented by the implied volatility of OCC's cleared options and uses an appropriate method for measuring credit exposure that accounts for this product risk factor (i.e., implied volatility) in a manner consistent with Rules 17Ad-22(e)(6)(i) and (v).\34\ --------------------------------------------------------------------------- \33\ 17 CFR 240.17Ad-2(e)(6)(i) and (v). \34\ Id. --------------------------------------------------------------------------- The proposed rule changes are 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) requires that the rules of a clearing agency do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of Act.\35\ OCC does not believe the proposed rule change would impose a burden on competition. The proposed rule change is expected to produce margin requirements that are very similar to those generated using OCC's existing model during quiet, less volatile market periods. The proposed changes would, however, result in a more measured initial response to increases in the volatility of volatility with margin requirements that may remain elevated for a longer period after the shock subsides than experienced under OCC's current model. As a result, the proposed model may impact different accounts to a greater or lesser degree depending on the composition of positions in each account. For example, a portfolio containing products that demonstrate higher volatility exposures may see more significant reductions in margin requirements than portfolios containing less volatile products during periods of increased volatility. However, those portfolios seeing larger initial reductions in margin requirements would also tend to experience margin levels that remain elevated for a longer period than would otherwise be experienced under the current model. As a result, OCC does not believe that the proposed rule change would unfairly inhibit access to OCC's services or disadvantage or favor any particular user in relationship to another user. Accordingly, OCC believes that the proposed rule change would not impose any burden or impact on competition. --------------------------------------------------------------------------- \35\ 15 U.S.C. 78q-1(b)(3)(I). --------------------------------------------------------------------------- (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-2018-014 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-2018-014. 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 website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements [[Page 55922]] 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 website 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 website at https://www.theocc.com/about/publications/bylaws.jsp. 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-2018-014 and should be submitted on or before November 29, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\36\ --------------------------------------------------------------------------- \36\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-24400 Filed 11-7-18; 8:45 am] BILLING CODE 8011-01-P
![55918 Federal Register / Vol. 83, No. 217 / Thursday, November 8, 2018 / Notices
2018, the Commission issued a notice Options Clearing Corporation (‘‘OCC’’) (A) Clearing Agency’s Statement of the
reopening this docket to consider the filed with the Securities and Exchange Purpose of, and Statutory Basis for, the
Amendment, appointing a Public Commission (‘‘SEC’’ or ‘‘Commission’’) Proposed Rule Change
Representative, and providing interested the proposed rule change as described (1) Purpose
persons with an opportunity to in Items I, II, and III below, which Items
comment.3 have been prepared by OCC. On October Background
The Commission set the deadline for 30, 2018, OCC filed Partial Amendment STANS Overview
comments as November 6, 2018. Notice No. 1 to the proposed rule change.3 The
Initiating Dockets at 2. However, the STANS is OCC’s proprietary risk
Commission is publishing this notice to management system for calculating
Existing Agreement expires November solicit comments on the proposed rule
8, 2018,4 and the Amendment extending Clearing Member margin requirements.6
change from interested persons. The STANS methodology utilizes large-
the agreement, if approved, would not
take effect until two days after the scale Monte Carlo simulations to
I. Clearing Agency’s Statement of the
forecast price and volatility movements
Commission completes its review. Terms of Substance of the Proposed
in determining a Clearing Member’s
Notice, Attachment A at 1. Under the Rule Change margin requirement.7 STANS margin
current schedule, the soonest the
The proposed rule change is filed in requirements are calculated at the
Commission could issue a decision on
connection with proposed changes to portfolio level of Clearing Member
the Amendment is November 7, 2018,
enhance OCC’s model for incorporating accounts with positions in marginable
which would cause the Existing
securities and consists of an estimate of
Agreement to expire before the variations in implied volatility within
two primary components: A base
Amendment could take effect. OCC’s margin methodology (‘‘Implied
component and a stress test add-on
To permit the Commission time to Volatility Model’’), the System for component. The base component is an
review the comments and issue an order Theoretical Analysis and Numerical estimate of a 99% expected shortfall 8
on the Amendment at least two days Simulations (‘‘STANS’’).4 The proposed over a two-day time horizon. The
before the Existing Agreement expires, changes to OCC’s Margins Methodology concentration/dependence stress test
the deadline for comments is revised to document are contained in confidential charge is obtained by considering
November 5, 2018. Exhibit 5 of the filing. Material increases in the expected margin
It is ordered: proposed to be added is marked by shortfall for an account that would
1. The deadline to submit comments
underlining and material proposed to be occur due to (i) market movements that
is revised to November 5, 2018.
deleted is marked by strikethrough text. are especially large and/or in which
2. The Secretary shall arrange for
publication of this order in the Federal The proposed changes are described in certain risk factors would exhibit perfect
detail in Item 3 below. The proposed or zero correlations rather than
Register.
rule change does not require any correlations otherwise estimated using
By the Commission. historical data or (ii) extreme and
changes to the text of OCC’s By-Laws or
Stacy L. Ruble, Rules. The proposed rule change is adverse idiosyncratic movements for
Secretary. available on OCC’s website at https:// individual risk factors to which the
[FR Doc. 2018–24392 Filed 11–7–18; 8:45 am] www.theocc.com/about/publications/ account is particularly exposed. The
BILLING CODE 7710–FW–P bylaws.jsp. All terms with initial STANS methodology is used to measure
capitalization that are not otherwise the exposure of portfolios of options and
futures cleared by OCC and cash
defined herein have the same meaning
SECURITIES AND EXCHANGE instruments in margin collateral.9
as set forth in the OCC By-Laws and The econometric models underlying
COMMISSION Rules.5 STANS currently incorporate a number
[Release No. 34–84524; File No. SR–OCC– II. Clearing Agency’s Statement of the of risk factors. A ‘‘risk factor’’ within
2018–014] OCC’s margin system is defined as a
Purpose of, and Statutory Basis for, the
Proposed Rule Change product or attribute whose historical
Self-Regulatory Organizations; The
data is used to estimate and simulate the
Options Clearing Corporation; Notice
In its filing with the Commission, risk for an associated product. The
of Filing of Proposed Rule Change, as
OCC included statements concerning majority of risk factors utilized in the
Modified by Partial Amendment No. 1,
Related to The Options Clearing the purpose of and basis for the
6 See Securities Exchange Act Release No. 53322
Corporation’s Margin Methodology for proposed rule change and discussed any
(February 15, 2006), 71 FR 9403 (February 23, 2006)
Incorporating Variations in Implied comments it received on the proposed (SR–OCC–2004–20). A detailed description of the
Volatility rule change. The text of these statements STANS methodology is available at http://
may be examined at the places specified optionsclearing.com/risk-management/margins/.
7 See OCC Rule 601.
November 2, 2018. in Item IV below. OCC has prepared
8 The expected shortfall component is established
Pursuant to Section 19(b)(1) of the summaries, set forth in sections (A), (B), as the estimated average of potential losses higher
Securities Exchange Act of 1934 and (C) below, of the most significant than the 99% value at risk threshold. The term
(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule aspects of these statements. ‘‘value at risk’’ or ‘‘VaR’’ refers to a statistical
19b–4 thereunder,2 notice is hereby technique that, generally speaking, is used in risk
given that on October 22, 2018, The management to measure the potential risk of loss for
3 In Partial Amendment No. 1, OCC corrected a given set of assets over a particular time horizon.
daltland on DSKBBV9HB2PROD with NOTICES
errors in Exhibits 1A and 5 without changing the 9 OCC notes that, pursuant to OCC Rule 601(e)(1),
3 Notice Initiating Docket(s) for Recent Postal
substance of the proposed rule change. OCC also calculates initial margin requirements for
Service Negotiated Service Agreement Filings, segregated futures accounts using the Standard
4 OCC also has filed an advance notice with the
October 30, 2018 (Notice Initiating Dockets). Portfolio Analysis of Risk Margin Calculation
4 USPS Notice of Extension of Priority Mail Commission in connection with the proposed
System (‘‘SPAN’’). No changes are proposed to
Express & Priority Mail Contract 18, July 27, 2018, changes. See SR–OCC–2018–804. OCC’s use of SPAN because the proposed changes
at 1. 5 OCC’s By-Laws and Rules can be found on
do not concern futures. See Securities Exchange Act
1 15 U.S.C. 78s(b)(1). OCC’s public website: http://optionsclearing.com/ Release No. 72331 (June 5, 2014), 79 FR 33607 (June
2 17 CFR 240.19b–4. about/publications/bylaws.jsp. 11, 2014) (SR–OCC–2014–13).
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![55922 Federal Register / Vol. 83, No. 217 / Thursday, November 8, 2018 / Notices
with respect to the proposed rule with the Securities and Exchange companies issuers with less than $100
change that are filed with the Commission (‘‘Commission’’) the million in annual revenues if they also
Commission, and all written proposed rule change as described in have either no public float or a public
communications relating to the Items I, II, and III below, which Items float that is less than $700 million. The
proposed rule change between the have been prepared by the Exchange. amendments became effective on
Commission and any person, other than The Commission is publishing this September 10, 2018. The Exchange
those that may be withheld from the notice to solicit comments on the estimates that a consequence of the SEC
public in accordance with the proposed rule change from interested rule changes is that a significantly larger
provisions of 5 U.S.C. 552, will be persons. number of its listed companies will
available for website viewing and qualify for smaller reporting company
I. Self-Regulatory Organization’s
printing in the Commission’s Public status than was previously the case.
Statement of the Terms of Substance of Section 805(c)(1) of the Company
Reference Room, 100 F Street NE,
the Proposed Rule Change Guide requires a heightened standard of
Washington, DC 20549, on official
business days between the hours of The Exchange proposes to amend independence for compensation
10:00 a.m. and 3:00 p.m. Copies of such Section 805(c)(5) of the NYSE American committee members.8 Section 805(c)(4)
filing also will be available for Company Guide (the ‘‘Company Guide’’) requires the compensation committee to
inspection and copying at the principal to change the threshold for listed undertake an independence analysis
office of OCC and on OCC’s website at companies to benefit from the when hiring a compensation consultant.
https://www.theocc.com/about/ exemptions from the Exchange’s Section 801(h) of the Company Guide
publications/bylaws.jsp. compensation committee requirements provides that smaller reporting
All comments received will be posted applicable to smaller reporting companies are exempt from these
without change. Persons submitting companies so that all companies that heightened independence requirements.
comments are cautioned that we do not qualify for smaller reporting company Section 805(c)(5) of the Company Guide
redact or edit personal identifying status under the revised SEC definition includes a provision describing the
information from comment submissions. will qualify for those exemptions. The period within which a company must
You should submit only information proposed rule change is available on the comply with Sections 805(c)(1) and
that you wish to make available Exchange’s website at www.nyse.com, at 805(c)(4) after it ceases to be smaller
publicly. the principal office of the Exchange, and reporting company.9 This provision
All submissions should refer to File at the Commission’s Public Reference
Number SR–OCC–2018–014 and should Room. 8 In addition to the director independence
be submitted on or before November 29, requirements of Section 803A, the board must
II. Self-Regulatory Organization’s affirmatively determine that all of the members of
2018. the Compensation Committee or, in the case of a
Statement of the Purpose of, and
For the Commission, by the Division of company that does not have a Compensation
Statutory Basis for, the Proposed Rule Committee, all of the independent directors, are
Trading and Markets, pursuant to delegated Change independent under Section 805(c)(1). In
authority.36
In its filing with the Commission, the affirmatively determining the independence of any
Eduardo A. Aleman, director who will serve on the Compensation
Assistant Secretary. self-regulatory organization included Committee, the Board must consider all factors
statements concerning the purpose of, specifically relevant to determining whether a
[FR Doc. 2018–24400 Filed 11–7–18; 8:45 am] director has a relationship to the listed company
and basis for, the proposed rule change
BILLING CODE 8011–01–P which is material to that director’s ability to be
and discussed any comments it received independent from management in connection with
on the proposed rule change. The text the duties of a Compensation Committee member,
SECURITIES AND EXCHANGE of those statements may be examined at including, but not limited to: (A) The source of
the places specified in Item IV below. compensation of such director, including any
COMMISSION consulting, advisory or other compensatory fee paid
The Exchange has prepared summaries, by the listed company to such director; and (B)
[Release No. 34–84527; File No. SR– set forth in sections A, B, and C below, whether such director is affiliated with the listed
NYSEAMER–2018–47] of the most significant parts of such company, a subsidiary of the listed company or an
statements. affiliate of a subsidiary of the listed company.
Self-Regulatory Organizations; NYSE 9 Under the applicable SEC rules, a company tests
American LLC; Notice of Filing and A. Self-Regulatory Organization’s its status as a smaller reporting company on an
Immediate Effectiveness of Proposed Statement of the Purpose of, and the annual basis at the end of its most recently
completed second fiscal quarter (the ‘‘Smaller
Rule Change To Amend Section Statutory Basis for, the Proposed Rule Reporting Company Determination Date’’). A
805(c)(5) of the Guide to Change the Change smaller reporting company ceases to be a smaller
Threshold for Qualifying as a Smaller reporting company as of the beginning of the fiscal
1. Purpose year following the Smaller Reporting Company
Reporting Company To Qualify for
The SEC recently adopted 4 Determination Date. The compensation committee
Certain Exemptions From the of a company that has ceased to be a smaller
Compensation Committee amendments to the definition of reporting company is required to comply with
Requirements ‘‘smaller reporting company’’ set forth Section 805(c)(4)) as of six months from the date it
in Item 10(f)(1) of Regulation S–K 5, ceases to be a smaller reporting company and must
November 2, 2018. have:
Rule 12b–2 under the Act 6 and Rule 405
Pursuant to Section 19(b)(1) 1 of the • One member of its compensation committee
under the Securities Act of 1933.7 The that meets the independence standard of Section
Securities Exchange Act of 1934 amendments raise the smaller reporting 805(c)(1) within six months of that date;
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3 company cap from less than $75 million • a majority of directors on its compensation
notice is hereby given that on October
daltland on DSKBBV9HB2PROD with NOTICES
in public float to less than $250 million committee meeting those requirements within nine
23, 2018, NYSE American LLC (‘‘NYSE months of that date; and
and also include as smaller reporting
American’’ or the ‘‘Exchange’’) filed • a compensation committee comprised solely of
members that meet those requirements within
4 Release Nos. 33–10513 and 34–83550 (June 28,
twelve months of that date.
36 17 CFR 200.30–3(a)(12). 2018); 83 FR 31992 (July 10, 2018). Any such company that does not have a
1 15 U.S.C. 78s(b)(1). 5 17 CFR 229.10(F)(1).
compensation committee must comply with this
2 15 U.S.C. 78a. 6 17 CFR 240.12b–2.
transition requirement with respect to all of its
3 17 CFR 240.19b–4. 7 17 CFR 230.405. independent directors as a group.
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Document Created: 2018-11-08 06:22:57
Document Modified: 2018-11-08 06:22:57
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 55918 |
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