[Federal Register Volume 75, Number 125 (Wednesday, June 30, 2010)]
[Notices]
[Pages 37864-37866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15892]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62371; File No. SR-OCC-2010-04]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Revise Its By-Laws and
Rules To Establish a Clearing Fund Amount Intended To Support Losses
Under a Defined Set of Default Scenarios
June 24, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that
on March 16, 2010, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change and on June 6, 2010, filed an amendment to the proposed
rule change. The proposed rule change, as amended, is described in
[[Page 37865]]
Items I, II, and III below, which Items have been substantially
prepared by OCC. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The purpose of this proposed rule change is to revise OCC's By-Laws
and Rules to establish a clearing fund amount intended to support
losses under a defined set of default scenarios.
II. Self-Regulatory Organization'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) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This proposed rule change would revise OCC's By-Laws and Rules to
establish a clearing fund amount required to support losses under a
defined set of default scenarios. Currently, the amount of clearing
fund is calculated monthly and is based on a fixed percentage of the
average total daily margin requirements during the previous month.\3\
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\3\ Under the current formula, if 6% does not result in a
clearing fund amount of at least one billion dollars, then OCC
collects a higher percentage of the previous month's average daily
margin requirement that will result in a fund level of at least one
billion dollars. However, in no event is the percentage permitted to
exceed 7%.
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Under the proposed formula for determining the size of the clearing
fund, the level of the fund would be equal to the larger of the amount
of the charge to the fund that would result from (i) a default by the
single ``clearing member group'' the default of which would be likely
to result in the largest draw against the clearing fund or (ii) an
event involving the near-simultaneous default of two randomly-selected
``clearing member groups''.\4\ Initially, the confidence levels
employed by OCC in calculating the charge likely to result from a
default by OCC's largest ``clearing member group'' and the default of
two randomly-selected ``clearing member groups'' would be 99% and 99.9%
respectively. OCC would have discretion to employ different confidence
levels in these calculations but could not employ confidence levels of
less than 99%.\5\ The size of the clearing fund would continue to be
recalculated monthly based on average daily calculations for the
previous month. In no event would the size of the total clearing fund
be permitted to be less than one billion dollars.\6\
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\4\ The term ``clearing member group'' would be defined to mean
a clearing member and any member affiliates of such clearing member
(proposed new definition in Article I of OCC's By-Laws.).
\5\ Proposed Interpretations & Policies .02 to Rule 1001.
\6\ Proposed Interpretations & Policies .01 to Rule 1001.
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In considering whether to revise the clearing fund sizing formula,
OCC compared the size of the clearing fund that would have resulted
from application of the revised formula to the actual size of the
clearing fund for each month from February 2008 through September
2009.\7\ This analysis revealed that the size of the clearing fund
under the revised formula would have been on average 10% larger than
under the current formula. In September and October 2008, two months of
extreme volatility in the U.S. securities markets, the revised formula
would have resulted in a clearing fund size approximately 31% and 27%
greater than under the current formula. The average monthly change in
the size of the clearing fund and the standard deviation of clearing
fund size from month-to-month under the two formulas were broadly
similar.\8\
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\7\ The data used for this analysis was obtained prior to
implementation of the changes approved in SR-OCC-2007-20.
Accordingly, the data does not account for the effects those changes
had on OCC's clearing fund size calculation. SR-OCC-2007-20 allowed
certain securities to be analyzed as a single portfolio under OCC's
risk management methodology, the System for Theoretical Analysis and
Numerical Simulations (``STANS''), and consequently allowed OCC to
more accurately measure risk in Clearing Members accounts and more
precisely set margin requirements to reflect such risk.
\8\ The comparative data described in this paragraph was
obtained using confidence levels of 99% and above. OCC estimates
that using only a 99% confidence level would have lowered the total
size of the clearing fund calculated using the proposed methodology
by an average of approximately one half of a percent.
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OCC believes the proposed new formula for calculating clearing fund
is a better predictor of losses that would be likely to result from the
default scenarios described above and would establish an adequate
clearing fund to cover losses without OCC having to require clearing
members to replenish the clearing fund. The existing formula for
determining the amount of clearing fund is intended to establish an
amount reasonably designed to cover losses resulting from one or more
clearing member defaults. OCC believes the formula adequately serves
that purpose. Nevertheless, OCC believes the proposed formula is a
better predictor of the actual losses likely to result from such
defaults. This is because the existing formula only indirectly accounts
for potential losses by setting the amount of the clearing fund as a
percentage of the previous month's average daily margin requirements.
In contrast, the proposed formula would directly account for various
types of default scenarios. Therefore, in OCC's view, the proposed
formula would be more likely to result in adequate clearing fund levels
if such scenarios occur and would more closely align the size of the
clearing fund with its intended purpose of absorbing losses from
clearing member defaults and avoid disruption of the clearance process
even during extreme market conditions. Article VIII, Section 6 of OCC's
By-Laws, which obligates clearing members to satisfy deficiencies in
their clearing fund deposits resulting from pro-rata charges or
otherwise,\9\ would remain unchanged.
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\9\ This is subject to a cap equal to 100% of a clearing
member's then-required deposit if it promptly withdraws from
membership and closes out or transfers its open positions.
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The specific amendments proposed to OCC's By-Laws and Rules to
facilitate the proposed changes to its clearing fund calculation, can
be found at http://www.optionsclearing.com/about/publications/bylaws.jsp. If approved by the Commission, OCC would implement the
revised formula for determining the size of its clearing fund after
sixty days notice to clearing members.
2. Statutory Basis
OCC believes the proposed rule changes are consistent with the
requirements of Section 17A of the Act \10\ and the rules and
regulations thereunder because the proposed rule changes would
facilitate prompt and accurate clearance and settlement of securities
transactions by creating a more direct correlation between the clearing
fund size and estimated losses from a defined set of default scenarios.
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\10\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose any
burden on competition.
[[Page 37866]]
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. OCC will notify the Commission of any written
comments received by OCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date 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 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 Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
Send an e-mail to [email protected]. Please include
File Number SR-OCC-2010-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Elizabeth
M. Murphy, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2010-04. This file
number should be included on the subject line if e-mail 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 Section, 100 F Street,
NE., Washington, DC 20549-1090, on official business days between the
hours of 10 am and 3 pm. Copies of such filings will also be available
for inspection and copying at the principal office of the OCC and on
OCC's Web site at http://www.optionsclearing.com/about/publications/bylaws.jsp. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-OCC-
2010-04 and should be submitted on or before July 21, 2010.
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\11\ 17 CFR 200.30-3(a)(12).
For the Commission by the Division of Trading and Markets,
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pursuant to delegated authority.\11\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15892 Filed 6-29-10; 8:45 am]
BILLING CODE 8010-01-P