[Federal Register Volume 83, Number 130 (Friday, July 6, 2018)]
[Notices]
[Pages 31594-31614]
[FR Doc No: 2018-14459]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83561; File No. SR-OCC-2018-803]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice, as Modified by Amendment No. 1,
Concerning Proposed Changes to The Options Clearing Corporation's
Stress Testing and Clearing Fund Methodology

June 29, 2018.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'' or ``Act''),\3\ notice is hereby given that on
May 30, 2018, the Options Clearing Corporation (``OCC'') filed with the
Securities and Exchange Commission (``Commission'') an advance notice
as described in Items I, II and III below, which Items have been
prepared by OCC. On June 7, 2018, OCC filed Amendment No. 1 to the
advance notice.\4\ The Commission is publishing this notice to solicit
comments on the advance notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ In Amendment No. 1, OCC corrected formatting errors in
Exhibits 5A and 5B without changing the substance of the advance
notice.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This advance notice is filed in connection with proposed changes to
OCC's By-Laws and Rules, the formalization of a substantially new
Clearing Fund Methodology Policy (``Policy''), and the adoption of a
document describing OCC's new Clearing Fund and stress testing
methodology (``Methodology Description''). The proposed changes are
primarily designed to enhance OCC's overall resiliency, particularly
with respect to the level of OCC's pre-funded financial resources.
Specifically, the proposed changes would:
    (1) Reorganize, restate, and consolidate the provisions of OCC's
By-Laws and Rules relating to the Clearing Fund into a newly revised
Chapter X of OCC's Rules;
    (2) modify the coverage level of OCC's Clearing Fund sizing
requirement to protect OCC against losses stemming from the default of
the two Clearing Member Groups that would potentially cause the largest
aggregate credit exposure for OCC in extreme but plausible market
conditions (i.e., adopt a ``Cover 2 Standard'' for sizing the Clearing
Fund);
    (3) adopt a new risk tolerance for OCC to cover a 1-in-50 year
hypothetical market event at a 99.5% confidence level over a two-year
look-back period;
    (4) adopt a new Clearing Fund and stress testing methodology, which
would be underpinned by a new scenario-based one-factor risk model
stress testing approach, as detailed in the newly proposed Policy and
Methodology Description;
    (5) document governance, monitoring, and review processes related
to Clearing Fund and stress testing;
    (6) provide for certain anti-procyclical limitations on the
reduction in Clearing Fund size from month to month;
    (7) increase the minimum Clearing Fund contribution requirement for
Clearing Members to $500,000;
    (8) modify OCC's allocation weighting methodology for Clearing Fund
contributions;
    (9) reduce from five to two business days the timeframe within
which Clearing Members are required to fund Clearing Fund deficits due
to monthly or intra-month resizing or due to Rule amendments;

    (10) provide additional clarity in OCC's Rules regarding certain
anti-procyclicality measures in OCC's margin model; and
    (11) make a number of other non-substantive clarifying, conforming,
and organizational changes to OCC's By-Laws, Rules, Collateral Risk
Management Policy, Default Management Policy, and filed procedures,
including retiring OCC's existing Clearing Fund Intra-Month Re-sizing
Procedure, Financial Resources Monitoring and Call Procedure (``FRMC
Procedure''), and Monthly Clearing Fund Sizing Procedure, as these
procedures would no longer be relevant to OCC's proposed Clearing Fund
and stress testing methodology and would be replaced by the proposed
Rules, Policy, and Methodology Description described herein.
    The proposed amendments to OCC's By-Laws and Rules can be found in
Exhibits 5A and 5B, respectively. Material proposed to be added to
OCC's By-Laws and Rules as currently in effect is marked by
underlining, and material proposed to be deleted is marked in
strikethrough text.\5\ As proposed, existing Chapter X would be deleted
and replaced with new Chapter X in its entirety, as set forth in
Exhibit 5B.
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    \5\ OCC recently proposed changes to Article VIII of its By-Laws
in connection with advance notice and proposed rule change filings
related to enhanced and new tools for recovery scenarios. See
Securities Exchange Act Release No. 82351 (December 19, 2017), 82 FR
61107 (December 26, 2017) (SR-OCC-2017-020) and Securities Exchange
Act Release No. 82513 (January 17, 2018). 83 FR 3244 (January 23,
2018) (SR-OCC-2017-809). The proposed changes currently pending
Commission review in SR-OCC-2017-020 and SR-OCC-2017-809 are
indicated in Exhibit 5B with double underlined and double
strikethrough text.
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    The proposed Policy and Methodology Description have been submitted
in Exhibits 5C and 5D, respectively, and have been submitted without
marking to facilitate review and readability of the documents as they
are being submitted in their entirety as new rule text.\6\
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    \6\ Id. Proposed changes currently pending Commission review in
SR-OCC-2017-020 and SR-OCC-2017-809 are indicated in Exhibit 5C with
double underlined and double strikethrough text.
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    The Clearing Fund Intra-Month Re-sizing Procedure, FRMC Procedure,
and Monthly Clearing Fund Sizing Procedure can be found in Exhibits 5E,
5F and 5G, respectively, with the deletion (or retirement) of these
procedures indicated by strikethrough text.
    The proposed changes to OCC's Collateral Risk Management Policy and
Default Management Policy can be found in Exhibits 5H and 5I,
respectively. Material proposed to be added to the policies as
currently in effect is marked by underlining, and material proposed to
be deleted is marked in strikethrough text.
    All terms with initial capitalization not defined herein have the
same meaning as set forth in OCC's By-Laws and Rules.\7\
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    \7\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice

    In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the advance notice and
discussed any comments it received on the advance notice. 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 and B below,
of the most significant aspects of these statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received. OCC
will notify the Commission of any written comments received by OCC.

(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act

Description of the Proposed Change
Overview of OCC's Existing Clearing Fund Methodology
    OCC currently sizes its Clearing Fund at an amount sufficient to
protect OCC against losses under simulated default scenarios that
include (1) an idiosyncratic default scenario that includes the default
of the single Clearing Member Group whose default would be likely to
result in the largest draw against the Clearing Fund at a 99%
confidence level and (2) a minor systemic event default scenario
involving the near-simultaneous default of two randomly-selected
Clearing Member Groups calculated at a 99.9% confidence level (``Cover
1 Standard'').\8\ OCC then uses the daily peak of such draw estimates
to determine the monthly size of the Clearing Fund, which is
established at the greater of (i) a ``base amount'' equal to the peak
five-day rolling average of the Clearing Fund Draws \9\ observed over
the preceding three calendar months, plus a prudential margin of safety
equal to $1.8 billion, or (ii) 110% of OCC's committed credit
facilities. Upon each monthly determination of the Clearing Fund's
size, each Clearing Member is required to contribute an amount equal to
the sum of: (i) The $150,000 minimum membership requirement, and (ii)
an amount equal to the weighted average of the Clearing Member's
proportionate share of open interest, volume, and total risk
charges.\10\ Any deficits resulting from a difference between a
Clearing Member's required Clearing Fund contribution and the amount
that such member currently has on deposit are due within five business
days of the resizing.\11\
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    \8\ See Rule 1001(a).
    \9\ The term ``Clearing Fund Draw'' refers to an estimated
stress loss exposure in excess of margin requirements.
    \10\ See Rule 1001(b).
    \11\ See Rule 1003.
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    Supplemental to the monthly Clearing Fund sizing process, OCC's
Financial Risk Management department (``FRM'') assesses on a daily
basis the sufficiency of the Clearing Fund by monitoring Clearing Fund
Draw estimates in order to identify exposures that may require
collection of additional margin from a Clearing Member Group or an
intra-month resizing of the Clearing Fund in accordance with OCC's FRMC
Procedure.\12\ In instances where an estimate of a particular Clearing
Member Group's Clearing Fund Draw (referred to herein as an
``idiosyncratic'' estimate) exceeds 75% of the amount currently in the
Clearing Fund (i.e., the current Clearing Fund requirement less any
deficits), OCC issues a margin call against the Clearing Member
Group(s) generating such draw(s) for an amount equal to the difference
between such estimated draw amount and the base amount of the Clearing
Fund.\13\ The margin call per-Clearing Member may be limited to an
amount equal to the lesser of $500 million or 100% of such Clearing
Member's net capital, subject to OCC management discretion. All margin

calls issued must be satisfied by each applicable Clearing Member
within one hour of having been notified and remain in place until
deficits associated with the next monthly Clearing Fund sizing are
collected.\14\
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    \12\ See Securities Exchange Act Release No. 74980 (May 15,
2015), 80 FR 29364 (May 21, 2015) (SR-OCC-2015-009). See also
Securities Exchange Act Release No. 74981 (May 15, 2015), 80 FR
29367 (May 21, 2015) (SR-OCC-2014-811).
    \13\ In the case where an estimated draw is associated with
multiple Clearing Members within a single Clearing Member Group, the
margin call is allocated among the individual Clearing Members in
the Clearing Member Group based on each Clearing Member's
proportionate share of the ``total risk'' for such Clearing Member
Group, as that term is defined in current Rule 1001(b). See Rule
1001(b). Accordingly, the term ``total risk'' in this context means
the margin requirement with respect to all accounts of the Clearing
Member Group exclusive of the net asset value of the positions in
such accounts aggregated across all such accounts.
    \14\ See supra note 11.
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    In more extreme circumstances, where OCC observes an idiosyncratic
Clearing Fund Draw estimate (after factoring in margin calls issued)
exceeding 90% of the Clearing Fund, OCC increases the size of the
Clearing Fund by a minimum amount equal to the greater of (i) $1
billion, or (ii) 125% of the difference between the projected draw
(reduced by margin calls issued) and the Clearing Fund in effect. Each
Clearing Member not subject to OCC's minimum $150,000 Clearing Fund
requirement (e.g., a Futures-Only Affiliated Clearing Member) receives
a proportionate share of the Clearing Fund increase equal to its
proportionate share of the variable portion of the Clearing Fund for
the current month (i.e., the Clearing Member's proportionate share of
the Clearing Fund amount as determined pursuant to current Rule
1001(b)(y)). Any deficits associated with the increase to the Clearing
Fund must be satisfied within five business days of the resizing.
    OCC has identified a number of limitations to its current
methodology, which is unable to incorporate historical stress test
scenarios and which can result in disproportionate changes to the
Clearing Fund size in response to even transitory changes in
volatility. As a result, OCC is proposing to replace its current
Clearing Fund sizing methodology with a new methodology that would
allow OCC to size and assess the sufficiency of its Clearing Fund with
a wider range of historical and hypothetical scenarios.
Proposed Changes to OCC's Clearing Fund and Stress Testing Rules and
Methodology
    OCC is proposing a number of enhancements intended to strengthen
its overall resiliency, particularly with respect to OCC's Pre-Funded
Financial Resources,\15\ including, but not limited to, the following:
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    \15\ The proposed Policy would define OCC's ``Pre-Funded
Financial Resources'' to mean margin of the defaulted Clearing
Member and the required Clearing Fund less any deficits, exclusive
of OCC's assessment powers.
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    (1) Reorganize, restate, and consolidate the provisions of OCC's
By-Laws and Rules relating to the Clearing Fund into a newly revised
Chapter X of OCC's Rules;
    (2) modify the coverage level of OCC's Clearing Fund sizing
requirement to ensure that the size of the Clearing Fund is sufficient
to protect OCC against losses stemming from the default of the two
Clearing Member Groups that would potentially cause the largest
aggregate credit exposure for OCC in extreme but plausible market
conditions (i.e., adopt a ``Cover 2 Standard'' for sizing the Clearing
Fund);
    (3) adopt a new risk tolerance for OCC to cover a 1-in-50 year
hypothetical market event at a 99.5% confidence level over a two-year
look-back period;
    (4) adopt a new Clearing Fund and stress testing methodology, which
would be underpinned by a new scenario-based one-factor risk model
stress testing approach, as detailed in the newly proposed Policy and
Methodology Description; \16\
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    \16\ OCC has separately submitted to the Commission its
Comprehensive Stress Testing and Clearing Fund Methodology document
and Dynamic VIX Calibration Process paper, which are included in
this filing as Exhibits 3A and 3B, and for which OCC has requested
confidential treatment. These Exhibits are being provided as
supplemental information to the filing and would not constitute part
of OCC's rules, which have been provided in Exhibit 5.
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    (5) document governance, monitoring, and review processes related
to Clearing Fund and stress testing;
    (6) provide for certain anti-procyclical \17\ limitations on the
reduction in Clearing Fund size from month to month;
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    \17\ 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 or Clearing
Fund requirements in times of stressed market conditions and low
margin or Clearing Fund requirements when markets are calm. Hence,
anti-procyclical features in a model are measures intended to
prevent risk-base models from fluctuating too drastically in
response to changing market conditions.
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    (7) increase the minimum Clearing Fund contribution requirement for
Clearing Members to $500,000;
    (8) modify OCC's allocation weighting methodology for Clearing Fund
contributions;
    (9) reduce from five to two business days the timeframe within
which Clearing Members are required to fund Clearing Fund deficits due
to monthly or intra-month resizing or due to Rule amendments;
    (10) provide additional clarity in OCC's Rules regarding certain
anti-procyclicality measures in OCC's margin model; and
    (11) make a number of other non-substantive clarifying, conforming,
and organizational changes to OCC's By-Laws, Rules, and filed
procedures.
1. Reorganization and Consolidation of Clearing Fund By-Laws and Rules
    The primary provisions that address OCC's Clearing Fund are
currently located in Article VIII of the By-Laws and Chapter X of the
Rules. Because the proposed changes to the Clearing Fund would
substantially amend the relevant By-Law and Rule provisions, OCC
believes that this is an appropriate opportunity to consolidate the
primary provisions that address the Clearing Fund into Chapter X of the
Rules. As a result, the content of Article VIII of the By-Laws would be
consolidated into Chapter X of the Rules, subject to the proposed
amendments described herein.\18\ In place of this, Article VIII of the
By-Laws would contain a general statement that OCC shall maintain a
Clearing Fund, as provided in and subject to the terms of Chapter X of
the Rules, and the size of the Clearing Fund shall at all times be
subject to minimum sizing requirements and generally be calculated on a
monthly basis by OCC; however, the size of the Clearing Fund may be
adjusted more frequently than monthly under certain conditions
specified in proposed Rule 1001. OCC believes that consolidating all of
the Clearing Fund-related provisions of its By-Laws and Rules into one
place would provide more clarity around, and enhance the readability
of, OCC's Clearing Fund requirements.
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    \18\ While Article VIII of the By-Laws would effectively be
reserved for future use, a statement would be added to indicate that
OCC maintains the Clearing Fund as provided in and subject to the
Rules provided in Chapter X.
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    OCC notes that, while the content of Article VIII is being moved
out of the By-Laws and into the Rules, subject to the proposed changes
described herein, OCC is not proposing to change the existing
governance requirements with respect to amending the provisions
currently contained in Article VIII. Article XI, Section 2 of the By-
Laws provides that the Board of Directors may amend the Rules by a
majority vote, while Article XI, Section 1 of the By-Laws provides that
amendments to the By-Laws require an affirmative vote of two-thirds of
the directors then in office, but not less than a majority of the
number of directors fixed by the By-Laws. To ensure that the latter,
heightened governance standard continues to apply to the Clearing Fund
provisions that will be moved from Article VIII of the By-Laws to
Chapter X of the Rules, OCC is proposing to amend Article XI, Section 2
of the By-Laws to apply the heightened approval requirements to the
provisions of Chapter X of the Rules that would be

carried over from the By-Laws. Specifically, OCC would amend Article XI
of the By-Laws to stipulate that while the Rules may be amended at any
time by the Board of Directors, any amendment of the introduction to
newly proposed Chapter X of the Rules, Rule 1002, Rule 1006, Rule 1009
and Rule 1010 (the substance of which is primarily derived from Article
VIII of the By-Laws) shall require the affirmative vote of two-thirds
of the directors then in office (but not less than a majority of the
number of directors fixed by the By-Laws). Moreover, Article XI of the
By-Laws would be amended to provide that the first sentence of proposed
Rule 1006(e) may not be amended by action of the Board of Directors
without the approval of the holders of all of the outstanding Common
Stock of the OCC entitled to vote thereon. Proposed Rule 1006(e) is
derived from existing Article VIII, Section 5(d) of the By-Laws, which
is currently subject to this stockholder consent requirement under
Article XI, Section 1 of the By-Laws. A detailed discussion of other
organizational changes can be found in Section 10 below.
    As noted above, and further described below, OCC also proposes to
adopt a new Policy and Methodology Description to supplement its
proposed Rules and provide further details around OCC's Clearing Fund
and stress testing methodology and the related governance framework.
2. Adoption of a Cover 2 Standard for OCC's Clearing Fund
    Under existing Rule 1001(a) and consistent with applicable Exchange
Act requirements,\19\ OCC currently maintains a Cover 1 Standard with
respect to the size of its Clearing Fund. The current methodology uses
a sizing approach whereby OCC estimates draws against the Clearing Fund
under a simulated idiosyncratic default scenario (representing
simulated losses of a single Clearing Member Group) and a minor
systemic default scenario (representing all pairings of two Clearing
Member Groups, with each pair of distinct Clearing Member Groups being
deemed equally likely).
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    \19\ See 17 CFR 240.17Ad-22(b)(3) and (e)(4)(iii).
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    OCC is proposing to amend its Rules and adopt a new Policy and
Methodology Description to implement a Cover 2 Standard with respect to
sizing the Clearing Fund. As a result, new Rule 1001(a), which replaces
existing Rule 1001(a), would provide, in part, that the size of the
Clearing Fund shall be established on a monthly basis at an amount
determined by OCC to be sufficient to protect it against losses
stemming from the default of the two Clearing Member Groups that would
potentially cause the largest aggregate credit exposure for OCC under
stress test scenarios that represent extreme but plausible market
conditions (subject to certain minimum sizing requirements) (such
stress tests being ``Sizing Stress Tests'').\20\ The proposed Sizing
Stress Tests would be supplemented by additional historical or
hypothetical stress test scenarios (``Sufficiency Stress Tests'') and,
in the event Sufficiency Stress Tests call for a larger Clearing Fund
size, the Clearing Fund shall be re-sized based on such Sufficiency
Stress Tests (as described in more detail in Section 4.e below).
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    \20\ The calculated size of the Clearing Fund may also be
determined more frequently than monthly under certain conditions, as
specified within proposed Rule 1001(c).
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    The adoption of a Cover 2 Standard for the Clearing Fund would
continue to satisfy OCC's existing obligations under the Exchange Act
\21\ and also would be consistent with international standards and best
practices for central counterparties (``CCPs'').\22\ OCC believes that
moving to an industry best practice Cover 2 Standard would increase
OCC's resiliency and enable it to better withstand the default of
multiple Clearing Members. OCC's proposed approach of adopting a Cover
2 Standard is reiterated in the proposed Policy and Methodology
Description, and the stress tests referred to in new Rule 1001(a) are
described in more detail in Section 4 below.\23\
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    \21\ See supra note 18.
    \22\ See Committee on Payment and Settlement Systems and
Technical Committee of the International Organization of Securities
Commissions, Principles for financial market infrastructures (Apr.
16, 2012), available at http://www.bis.org/publ/cpss101a.pdf.
    \23\ Under the proposed Clearing Fund methodology, OCC would no
longer maintain the prudential margin of safety, as currently
provided for in existing Rule 1001(a). As described further herein,
OCC's proposed risk tolerance would be set at a 1-in-50 year market
event; however, OCC would size its Clearing Fund to cover a more
conservative 1-in-80 year event, creating a buffer beyond its risk
tolerance. As a result, OCC believes the prudential margin of safety
would no longer be necessary.
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3. New Risk Tolerance for OCC's Pre-Funded Financial Resources
    OCC proposes to adopt a new risk tolerance with respect to credit
risk that its Clearing Fund, along with OCC's other Pre-Funded
Financial Resources,\24\ should be sufficient to cover a wide range of
foreseeable stress scenarios that include, but are not limited to, the
default of the two Clearing Member Groups that would potentially cause
the largest aggregate credit exposure in extreme but plausible market
conditions. In developing a risk tolerance with regard to the sizing of
the Clearing Fund, OCC believes that a 1-in-50 year hypothetical market
event \25\ represents the outer range of extreme but plausible
scenarios for OCC's cleared products. Accordingly, OCC proposes to
adopt a new risk tolerance with respect to sizing its Pre-Funded
Financial Resources that would cover a 1-in-50 year hypothetical market
event on a Cover 2 Standard at a 99.5% confidence level over a two-year
look-back period. The hypothetical scenarios used to establish the
proposed risk tolerance would be based on the statistical fit of the
historical returns for the ``risk drivers'' of equity products (or
``risk factors'') for a 1-in-50 year decline and rally in the Standard
& Poor's S&P 500 Index (``SPX'').\26\ OCC would then set the size of
its Clearing Fund on a monthly basis at an amount sufficient to cover
this risk tolerance, as described in more detail in Section 4.d below.
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    \24\ Under the proposed Policy, ``Pre-Funded Financial
Resources'' would be defined as the margin of the defaulted Clearing
Member and the required Clearing Fund less any deficits. OCC would
not include assessment powers as a Pre-Funded Financial Resource.
    \25\ OCC notes that a 1-in-50 year hypothetical market event
corresponds to a 99.9921% confidence interval under OCC's chosen
distribution of 2-day logarithmic S&P 500 index returns. The
construction of Hypothetical stress test scenarios, including the 1-
in-50 year market event used for OCC's risk tolerance, is discussed
in Section 4 below.
    \26\ ``Risk factors'' refer broadly to all of the individual
underlying securities (such as Google, IBM and Standard & Poor's
Depositary Receipts (``SPDR''), S&P 500 Exchange Traded Funds
(``SPY''), etc.) listed on a market. The ``risk drivers'' are a
selected set of securities or market indices (e.g., the SPX or the
Cboe Volatility Index (``VIX'')) that are used to represent the main
sources or drivers for the price changes of the risk factors. The
use and application of risk factors and risk drivers in OCC's
proposed methodology are discussed further in Section 4 below.
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4. Adoption of New Clearing Fund and Stress Testing Methodology
    OCC proposes to adopt a new methodology for sizing and monitoring
its Clearing Fund and overall Pre-Funded Financial Resources, which
primarily would be detailed in the proposed Policy and the Methodology
Description. OCC believes that its proposed methodology would enable it
to measure its credit exposure and to size its Pre-Funded Financial
Resources at a level sufficient to cover potential losses under extreme
but plausible market conditions.
    Under the requirements of the proposed Policy, OCC would base its
determination of the Clearing Fund size on the results of stress tests
conducted daily using standard predetermined

parameters and assumptions. These daily stress tests would consider a
range of relevant stress scenarios and possible price changes in
liquidation periods, including but not limited to: (1) Relevant peak
historic price volatilities; (2) shifts in other market factors
including, as appropriate, price determinants and yield curves; and (3)
the default of one or multiple Clearing Members. OCC also would conduct
reverse stress tests for informational purposes aimed at identifying
extreme default scenarios and extreme market conditions for which the
OCC's financial resources would be insufficient.
    As further described in the proposed Methodology Description, the
stress scenarios used in the proposed methodology would consist of two
types of scenarios: ``Historical Scenarios'' and ``Hypothetical
Scenarios.'' Historical Scenarios would replicate historical events in
current market conditions, which include the set of currently existing
securities, their prices and volatility levels. These scenarios provide
OCC with information regarding pre-defined reference points determined
to be relevant benchmarks for assessing OCC's exposure to Clearing
Members and the adequacy of its financial resources. Hypothetical
Scenarios would represent events in which market conditions change in
ways that have not yet been observed. The Hypothetical Scenarios would
be derived using statistical methods (e.g., draws from estimated
multivariate distributions) or created based on expert judgment (e.g.,
a 15% decline in market prices and 50% in volatility). These scenarios
would give OCC the ability to change the distribution and level of
stress in ways necessary to produce an effective forward-looking stress
testing methodology. OCC would use these pre-determined stress
scenarios in stress tests, conducted on a daily basis, to determine
OCC's risk exposure to each Clearing Member Group by simulating the
profits and losses of the positions in their respective account
portfolios under each such stress scenario.
    The proposed Methodology Description would also describe OCC's
proposed approach for constructing stress test portfolios. For purposes
of the proposed methodology, OCC would construct portfolios based on
``liquidation positions,'' which are designed to more closely reflect
how positions would be internalized (or netted) as part of OCC's
default management process. The liquidation position set is created
through an internalization process where long and short positions in
the same contract series are closed out within an account type at the
Clearing Member level. This replicates the process OCC would perform in
the case of a Clearing Member default when offsetting positions are
internalized before liquidating the remainder of the defaulter's
portfolio. For simplicity purposes, OCC developed its current set of
liquidation positions by internalizing within an account type at the
Clearing Member level but does not incorporate potential
internalization that can occur across account types. As a result,
liquidation positions only reflect a portion of the potential exposure-
reducing benefits associated with internalization and may lead to more
conservative estimates of exposure.
    As described further below, the proposed Policy and Methodology
Description would include stress tests designed to: (1) Determine the
size of the Clearing Fund (i.e., Sizing Stress Tests run using OCC's
inventory of ``Sizing Scenarios''), (2) assess OCC's Clearing Fund size
with respect to its risk tolerance and any other scenarios determined
by the Risk Committee (i.e., Adequacy Stress Tests run using OCC's
inventory of ``Adequacy Scenarios''), (3) measure the exposure of the
Clearing Fund to the portfolios of individual Clearing Member Groups
and determine whether any such exposure is sufficiently large as to
necessitate OCC calling for additional margin resources from that
individual Clearing Member Group (or Groups) or from Clearing Members
generally through an intra-month resizing of the Clearing Fund (i.e.,
Sufficiency Stress Tests run using OCC's inventory of ``Sufficiency
Scenarios''), and (4) monitor and assess OCC's total financial
resources under a variety of market conditions (i.e., Informational
Stress Tests run using OCC's inventory of ``Informational Scenarios'').
    OCC's proposed stress testing model, the construction of
Hypothetical and Historical Scenarios, and the variety of stress tests
thereunder are described in more detail below.
a. Proposed Stress Testing Model
(i). Risk Drivers and Stress Scenarios
    As detailed in the proposed Methodology Description, the proposed
stress testing methodology is a scenario-based risk factor model with
the following principal elements. First, a set of risk drivers are
selected based on the portfolio exposures of all Clearing Member Groups
in the aggregate. Second, each individual underlying security contained
in the portfolio of a Clearing Member Group (each a ``risk factor'') is
mapped to a risk driver, and the sensitivity or ``beta'' of the
security with respect to the corresponding risk driver is estimated
(i.e., the sensitivity of the price of the security relative to the
price of the risk driver). Third, a set of stress scenarios is
generated by assigning a stress shock to each of the risk drivers, with
the shocks of an individual underlying security or risk factor
determined by the shock of its risk driver and its sensitivity (or
beta) to the risk driver. Fourth, for each of the stress scenarios, the
risk exposure or shortfall of each portfolio of a Clearing Member is
calculated and aggregated at the Clearing Member Group level.
    Under the proposed stress testing methodology, each individual
underlying security in the Clearing Members' portfolios is represented
by a risk factor (such as Google, IBM, Standard & Poor's Depositary
Receipts (``SPDR''), S&P 500 Exchange Traded Funds (``SPY''), etc.).
The number of risk factors is typically in the thousands. Because the
vast amount of OCC's products are equity based, the risk drivers
comprise a small set of underlying securities or market indices (e.g.,
Cboe S&P 500 Index (``SPX''), or the VIX) that are used to represent
the main sources or drivers for the price changes of the risk factors.
Other relevant risk drivers are included to cover U.S. and Canadian
Government Security collateral positions, as well as commodity based
exchange-traded funds (``ETFs'') and futures products. The risk drivers
are selected based on the characteristics of the risk factors in the
Clearing Members' portfolios.
    After the risk drivers are selected, each risk factor would be
mapped to one risk driver. This mapping allows OCC to simulate
movements for a large number of risk factors by the movements of a
smaller number of risk drivers. In general, the mapping depends on the
type of risk factor. For example, equity price risk factors generally
are mapped to SPX and volatility risk factors to VIX. Government bond
risk factors generally would be mapped to either U.S. Dollar (``USD'')
Treasury yields or Canadian Dollar (``CAD'') government bond yields
depending on the currency. The Treasury ETFs generally would be mapped
to one of the Treasury bond ETFs. The commodity products generally
would be mapped to one of the representative ETFs of the corresponding
commodity class. All other risk factors initially would be mapped by
default to SPX.
    Under the proposed Methodology Description, risk drivers and the
corresponding shocks would be reviewed regularly by OCC's Stress

Testing Working Group (``STWG''), a cross-departmental team including
senior officers from FRM, Quantitative Risk Management (``QRM''), Model
Validation Group (``MVG''), and Enterprise Risk Management. The
addition of a new risk driver or change in an existing risk driver
would most likely be driven by a change in OCC's product exposure or by
other changes in the market. Changes to risk drivers would be reviewed
and approved by the STWG. QRM would recalibrate scenario shocks at
least annually. In addition, on a quarterly basis (or more frequently
if QRM or STWG determines that updates are necessary to capture
significant market events in a timely fashion), QRM would recalibrate
the risk driver shocks and report those results to the STWG who would
review and approve any updates to the risk driver shocks.
    To simulate a stressed market scenario, OCC would construct two
kinds of scenarios, namely Hypothetical Scenarios (including
statistically derived scenarios) and Historical Scenarios. Hypothetical
Scenarios constructed using statistical methods would be based on
various quantiles of the fitted distribution of the log returns of the
main risk driver (e.g., SPX). Historical Scenarios on the other hand
would be created using historic price moves for the risk factors on a
given date where the scenario is defined. Additional details on the
proposed stress testing model by asset class are discussed below.
(i). Equity Risk Drivers and Shocks
    Under the proposed methodology, price shocks used for equity
instruments in the statistically-derived Hypothetical Scenarios would
be based on the quantiles of fitted statistical distributions of the 2-
day returns of the risk driver (e.g., a 1-in-80 year event SPX down
shock). For example, as noted above, OCC uses the SPX as a risk driver
for equity price moves. OCC would construct the majority of its
Hypothetical Scenarios by fitting an appropriate statistical
distribution to SPX returns. OCC would construct a historical dataset
of SPX 2-day log returns dating back to 1957,\27\ to characterize its
fat-tailed \28\ and asymmetric distribution. In order to reduce pro-
cyclicality in Clearing Fund sizing and also to represent betas in a
stressed market, OCC would shock risk factors using (1) a historical
beta and (2) a beta equal to 1. The portfolio level profit and loss
would be calculated with both betas separately for each Hypothetical
Scenario, and OCC would use the calculation yielding the worst of the
two outcomes in the subsequent Clearing Fund sizing.
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    \27\ OCC would extend this dataset from March 1957 to the
present if OCC determines that price shocks need to be re-
calibrated. As a general matter, OCC has established this look-back
period primarily on the basis of the quality of available data. The
SPX, in its current form, dates back to 1957, and OCC therefore uses
all of the index's data since that date. Furthermore, based on OCC's
analysis of various observation windows dating back to the Great
Depression, OCC has observed that the price shocks vary with the
different periods used in the calibration. OCC's decision to use the
entire history of the SPX is based on its desire to minimize the
effects associated with a pre-defined observation window, and to
avoid the subjective determination of higher or lower periods of
volatility or the sudden exclusion of dates that fall outside of a
fixed look back period. As noted above, QRM would recalibrate the
risk driver shocks on a quarterly basis and report those results to
the STWG who would review and approve any updates to the risk driver
shocks.
    \28\ A data set with a ``fat tail'' is one in which extreme
price returns have a higher probability of occurrence than would be
the case in a normal distribution.
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    The proposed Methodology Description would describe in detail OCC's
proposed methodology for calculating price shocks for equity
instruments, including leveraged products and any underlying baskets.
(ii). Volatility Shock Model
    As noted above, under the proposed methodology, OCC would use the
VIX as the key risk driver for volatility shocks in its proposed stress
testing model. The VIX is a measure of the one-month implied volatility
\29\ of the SPX, which represents the market's expectation of stock
market volatility over the next 30-day period. For risk factors with
SPX as their risk driver, implied volatility shocks would be modeled
from SPX implied volatility shocks and the price beta of the risk
factor.\30\ For non-SPX driven risk factors, the implied volatility
shock would be based on historical volatility beta regressed directly
against the VIX. Accordingly, the proposed Methodology Description
would describe in detail OCC's proposed methodology for calibrating VIX
shocks, including those risk factors with SPX as the key risk driver,
those risk factors with a non-SPX risk driver, and implied volatilities
of any underlying baskets.
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    \29\ Generally speaking, the implied volatility of an option is
a measure of the expected future volatility of the value of the
option's annualized standard deviation of the price of the
underlying security, index, or future at exercise, 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 given 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 (i.e., the difference between the price of the
underlying and the exercise price of the option) of the option,
discounted to reflect its time value.
    \30\ For defined Historical Scenarios, the implied volatility
shock leverages a beta based on the ratio of the risk factor price
shock to the SPX price shock.
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(iii). Price Shock Models for Other Instruments
    OCC's proposed Methodology Description also would describe OCC's
proposed approach to modeling price shocks for fixed income instruments
and futures products. Specifically, the Methodology Description would
discuss OCC's proposed approach for modeling foreign exchange currency
shocks and yield curve shocks, which are used to shock U.S. Treasury
bonds and Canadian government bonds held as collateral. The Methodology
Description would also cover price and volatility shocks for commodity/
energy products. The price shock model for commodity/energy products is
the same as that for equity class drivers and the volatility shock
model used for options on commodities is the same as that for non-SPX
driven risk factors.
b. Stress Testing Scenario Construction
    OCC proposes to construct Hypothetical and Historical scenarios
using two different methodologies: A statistical methodology and a
historical/defined shock methodology. Each of these approaches is
discussed in further detail below.
(i). Hypothetical Scenarios
    Under the proposed methodology, price shocks determined in the
statistically-derived Hypothetical Scenarios would be based on the
quantiles of fitted statistical distributions of the 2-day log returns
of the risk driver. For example, Adequacy Scenarios would be based on
the generated statistical down and up shocks for the SPX from a 1-in-50
year market event. On the other hand, Sizing Scenarios would be based
on the generated statistical down and up shocks for the SPX from a 1-
in-80 year market event. Specifically, OCC would use four Hypothetical
Scenarios to guide the sizing of the Clearing Fund: (1) A 1-in-80 year
market rally using a historical beta; (2) a 1-in-80 year market rally
using a beta equal to 1; (3) a 1-in-80 year market decline using a
historical beta; and (4) a 1-in-80 year market decline using a beta
equal to 1.
    Not all Statistical Scenarios would be generated using fitted
distributions, however. For example, the Statistical Scenarios for
interest rates are based on the ``Principal Component Analysis''
methods (a commonly used statistical method to analyze the movements of

yield curves of Treasury bonds), while the Statistical Scenarios for
commodity ETFs would be based on the empirical price changes.
    The proposed Methodology Description would describe how OCC would
calibrate price and volatility shocks for equities, fixed income
products, and commodity/energy products in its Hypothetical Scenarios.
(ii). Historical Scenarios
    OCC would construct Historical Scenarios using historically
accurate price moves for risk factors on a given date, provided the
underlying securities were available on the date for which the scenario
is defined. Historical Scenarios, which are based on significant market
events, would allow OCC to analyze how current portfolios would perform
if a historical event were to occur again. Because not all of the
securities or risk factors in current portfolios existed on past
scenario dates, OCC has developed methodologies to approximate the past
price and volatility movements of such risk factors. Under the proposed
methodology, a technique known as ``Survival Method Pricing'' would be
used to backfill missing historical shocks. In the backfill technique,
the observable 2-day returns of all risk factors would be averaged by
industry sectors, and these sector averages would then be used to
backfill the missing price returns of the securities (for example,
Facebook stock would use the technology sector average under a 2008
Historical Scenario).\31\
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    \31\ With respect to volatility risk driver shocks, the exact
volatility scenarios for a historical event may often be overridden
by VIX shocks generated using OCC's dynamic VIX calibration process
because: (1) The historical volatility data is not available; and
(2) even when the data is available, the sizes of the exact
historical moves are too low to generate any realistic losses.
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c. Clearing Fund Sizing and Stress Testing
    Under the proposed methodology, OCC would perform daily stress
testing using a wide range of scenarios, both Hypothetical and
Historical, designed to serve multiple purposes. Specifically, OCC's
proposed stress testing inventory would contain scenarios designed to:
(1) Determine whether the financial resources collected from all
Clearing Members collectively are adequate to cover OCC's risk
tolerance; (2) establish the monthly size of the Clearing Fund; (3)
measure the exposure of the Clearing Fund to the portfolios of
individual Clearing Member Groups, and determine whether any such
exposure is sufficiently large as to necessitate OCC calling for
additional resources so that OCC continues to maintain sufficient
financial resources to guard against potential losses under a wide
range of stress scenarios, including extreme but plausible market
conditions; and (4) monitor and assess the size of OCC's Pre-Funded
Financial Resources against a wide range of stress scenarios that may
include extreme but implausible and reverse stress testing scenarios.
Each of these categories of stress tests is discussed in further detail
below.
(i). Adequacy Stress Tests
    Under the proposed Policy and Methodology Description, on a daily
basis, OCC would perform a set of Adequacy Stress Tests designed to
determine whether the financial resources collected from all Clearing
Members collectively are adequate to cover OCC's risk tolerance (and
other specified scenarios as may be approved by the Risk Committee)
(i.e., Adequacy Scenarios). The performance of these Adequacy Stress
Tests would allow OCC to assess the size of its Clearing Fund against
its risk tolerance; however, Adequacy Stress Tests would not drive
calls for additional financial resources. Adequacy Scenarios would
include, at a minimum, scenarios reflecting OCC's proposed risk
tolerance, which corresponds to a Clearing Fund size that would cover a
1-in-50 year market event on a Cover 2 Standard. Adequacy Stress Tests
should demonstrate that OCC maintains sufficient Pre-Funded Financial
resources to cover all Adequacy Scenarios at a 99.5% coverage level
over a two-year look back period.
(ii). Sizing Stress Tests
    Under the proposed Policy and Methodology Description, FRM would
determine the monthly Clearing Fund size based on the results of Sizing
Stress Tests conducted daily using standard predetermined parameters
and assumptions. Specifically, OCC would use Sizing Stress Tests to
project the Clearing Fund size necessary for OCC to maintain sufficient
Pre-Funded Financial Resources to cover losses arising from the default
of the two Clearing Member Groups that would potentially cause the
largest aggregate credit exposure to OCC as a result of a 1-in-80 year
hypothetical market event, which OCC believes would provide sufficient
coverage of OCC's 1-in-50 year event risk tolerance (and any other
Adequacy Scenarios as may be approved by the Risk Committee) and to
guard against intra-month scenario volatility and procyclicality.\32\
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    \32\ In addition, OCC proposes conforming changes to delete
Interpretation and Policy .02 of Rule 1001, which concerns the
minimum confidence level used to size the Clearing Fund, as the
confidence level used to size the Clearing Fund would now be
addressed in the Policy and Methodology Description.
---------------------------------------------------------------------------

    Under existing Rule 1001(a), OCC's Clearing Fund size determination
is based on the peak five-day rolling average of its Clearing Fund
sizing calculations observed over the preceding three calendar months
plus a prudential margin of safety. As described in the proposed Policy
and Methodology Description, OCC would continue to determine the
Clearing Fund size for a given month by using a peak five-day rolling
average of the Sizing Stress Test results over the prior three months
but, as noted above, would no longer require a prudential margin of
safety.\33\ OCC believes that sizing the Clearing Fund at a more
conservative 1-in-80 year market event scenario (over the proposed 1-
in-50 year risk tolerance) would help to reduce volatility in its
Clearing Fund sizing methodology and ensure that OCC continues to
maintain sufficient resources in the event of large peaks and volatile
markets, thereby providing a similar anti-procyclical buffer to the
current prudential margin of safety.
---------------------------------------------------------------------------

    \33\ See supra note 22.
---------------------------------------------------------------------------

    In addition, under the proposed Policy, the minimum size of the
Clearing Fund would continue to be set in accordance with OCC's minimum
liquidity resources to equal 110% of OCC's committed liquidity
facilities plus OCC's Cash Clearing Fund Requirement. However, if a
temporary increase to the Cash Clearing Fund Requirement is made
pursuant to OCC's Rules, the Executive Chairman, Chief Administrative
Officer, or Chief Operating Officer would be authorized to determine
whether such an increase should result in an increase in the minimum
size of the Clearing Fund (which is tied to, in part, OCC's Cash
Clearing Fund Requirement).
    OCC also proposes to introduce some anti-procyclical measures for
its monthly sizing process, which are discussed in Section 6 below.
(iii). Sufficiency Stress Tests
    On a daily basis, OCC would run a set of Sufficiency Stress Tests
to measure the exposure of the Clearing Fund to the portfolios of
individual Clearing Member Groups and determine whether any such
exposure is sufficiently large as to necessitate OCC calling for
additional resources (1) from that

individual Clearing Member Group (or Groups) in the form of margin or
(2) from Clearing Members generally through an intra-month resizing of
the Clearing Fund. OCC initially expects to implement a set of
historically-based Sufficiency Scenarios that would include, among
others, the worst two-day price moves, up and down, during the 2008
financial crisis, which constitute the two most extreme two-day price
moves observed in the entire history of SPX with the exception of the
1987 market crash, to be covered on a Cover 2 basis. OCC also would
include as a Sufficiency Scenario a historical October 1987 market
crash event to be covered on a Cover 1 basis.
    Under the proposed Sufficiency Stress Tests, the largest Clearing
Fund Draw from each Sufficiency Scenario shall be compared against the
Clearing Fund size on a daily basis to assess whether OCC maintains
sufficient financial resources to cover the stress scenario. If a
Sufficiency Stress Test indicates that a Clearing Fund Draw would
breach certain established thresholds, OCC would initiate (depending on
the threshold breached) the process of (1) conducting additional
monitoring, (2) collecting additional margin from the specific Clearing
Member Group (or Groups) causing the breach, or (3) in extreme cases,
resizing the Clearing Fund. Such thresholds have been designed to
ensure that OCC's Pre-Funded Financial Resources would remain
sufficient to cover losses that may be incurred by its largest one or
two Clearing Member Groups, depending on the scenario in question. Each
proposed threshold is set forth below, and included with each threshold
are mitigating actions that OCC would take in the event of a breach of
the threshold.
(1). Enhanced Monitoring
    Under the proposed Policy, in the event that Sufficiency Stress
Tests identify a Clearing Fund Draw for one or two Clearing Member
Groups that causes the largest aggregate credit exposure to OCC to
exceed 65% of the current Clearing Fund requirement less deficits, but
that does not breach a Sufficiency Stress Test Threshold (as defined
below), FRM would promptly conduct enhanced monitoring and notify the
relevant Clearing Member Group (or Groups) that they are approaching a
margin call threshold in accordance with internal OCC procedures.\34\
---------------------------------------------------------------------------

    \34\ OCC notes that it performs a similar enhanced monitoring
process under its current FRMC Procedure when Idiosyncratic Clearing
Fund Draws exceed 65% of the Clearing Fund currently in effect.
---------------------------------------------------------------------------

(2). Sufficiency Stress Test Threshold 1--Intra-Day Margin Calls
    OCC proposes to amend Rule 609 to provide that, in addition to its
existing authority to require intra-day margin deposits, OCC may
require additional margin deposits if a Sufficiency Stress Test
identifies a breach that exceeds 75% of the current Clearing Fund
requirement less deficits (the ``75% threshold'' or ``Sufficiency
Stress Test Threshold 1''). The proposed change is designed to ensure
that OCC continues to maintain sufficient Pre-Funded Financial
Resources to cover its largest one or two Clearing Member Group
exposures under a wide range of stress scenarios, including extreme but
plausible scenarios, where one of the proposed Sufficiency Stress Test
scenarios identifies a potential breach in OCC's Clearing Fund size. In
the event of a breach of the 75% threshold, OCC would initially
collateralize this potential stress exposure by collecting margin from
the Clearing Member Group(s) driving the breach.
    Pursuant to the proposed Policy and Methodology Description, if a
Sufficiency Stress Test identifies a Clearing Fund Draw for any one or
two Clearing Member Groups that exceeds Sufficiency Stress Test
Threshold 1, OCC would be authorized to issue a margin call against the
Clearing Member Group(s) and/or Clearing Member(s) causing the breach
in accordance with Rule 609. In the case of Cover 1 Sufficiency
Scenarios (e.g., the historical Cover 1 1987 scenario), the amount of
the margin call for a Clearing Member Group would be equal to the
excess of such Clearing Member Group's projected Clearing Fund Draw
over the 75% threshold. In the case of Cover 2 Sufficiency Scenarios
(e.g., a historical Cover 2 2008 market event scenario) the total
amount of the margin call shall be equal to the excess of the Cover 2
Clearing Fund Draw over the 75% threshold.\35\ In the event a Clearing
Member Group's Clearing Fund Draws exceed the 75% threshold in more
than one Sufficiency Scenario, the Clearing Member Group would be
subject to the largest margin call resulting from scenarios. Margin
calls would be allocated to Clearing Members and related accounts
within the Clearing Member Group in accordance with OCC procedures.\36\
---------------------------------------------------------------------------

    \35\ In the event only one Clearing Member Group's Clearing Fund
Draw exceeds 50% of Sufficiency Stress Test Threshold 1, that
Clearing Member Group would pay the entire call. In the event both
Clearing Member Groups' Clearing Fund Draws exceed 50% of
Sufficiency Stress Test Threshold 1, both Clearing Member Groups
would pay an amount equal to the excess of their respective Clearing
Fund Draw over 50% of the Sufficiency Stress Test threshold.
    \36\ OCC notes that under the current FRMC Procedure, in the
event that FRM observes a scenario where the Idiosyncratic Clearing
Fund Draw exceeds 75% of the Clearing Fund, an intra-day margin call
would be issued against the Clearing Member or Clearing Member Group
that caused such a draw, with the amount of the margin call being
the difference between the projected draw and the ``base amount.''
See supra note 11 and accompanying text.
---------------------------------------------------------------------------

    All margin calls would be required to be approved by a Vice
President (or higher) of FRM and would remain in effect until the
collection of additional funds associated with the next monthly
resizing of the Clearing Fund, after which the margin call would be (1)
released or (2) recalculated based on the current Clearing Fund
Draw.\37\ If the margin call imposed on an individual Clearing Member
exceeds $500 million, OCC's Stress Testing and Liquidity Risk
Management group (``STLRM'') would provide written notification to the
Executive Chairman and Chief Executive Officer, President and Chief
Operating Officer, and Chief Administrative Officer (collectively
referred to as the ``Office of the Chief Executive Officer'' or
``OCEO'').\38\ If the

margin call imposed on an individual Clearing Member would exceed 100%
an individual Clearing Member's net capital, the issue would be
escalated to the OCEO, and each of the Executive Chairman, Chief
Administrative Officer, and Chief Operating Officer would have the
authority to determine whether OCC should continue calling for
additional margin in excess of this amount. OCC believes that this
notification and escalation process would enable OCC to appropriately
require those Clearing Members that bring elevated risk exposures to
OCC to bear the costs of those risks in the form of margin charges
while also allowing OCC to take into consideration a particular
Clearing Member's ability to meet the call based on its financial
condition, and the amount of collateral it has available to pledge when
certain pre-identified thresholds have been exceeded.
---------------------------------------------------------------------------

    \37\ OCC notes that, under the current FRMC Procedure, for the
days prior to the collection of any Clearing Fund payments due that
result from the re-sizing of the Clearing Fund on the first business
day of the month, both the base Clearing Fund requirement and the
Clearing Fund in effect are further reduced by any outstanding
deficits. The proposed changes would clarify that upon the
collection of funds to satisfy such deficits, any margin calls would
be (1) released or (2) recalculated based on the current Clearing
Fund Draw.
    \38\ OCC notes that, under its current FRMC Procedure, margin
calls may be subject to a per-Clearing Member cap equal to the
lesser of $500 million or 100% of such Clearing Member's net
capital; however, OCC's management retains discretion under the FRMC
Procedure to call for additional margin beyond those amounts with
certain reporting requirements when these caps are exceeded. Under
the proposed Policy, these thresholds would no longer be
characterized as ``caps'' and there would no longer be a requirement
for reporting to OCC's Management Committee and Risk Committee as
the $500 million threshold would no longer function as a cap and the
100% of net capital threshold would now require escalation to the
OCEO for approval of further margin calls. OCC believes the proposed
changes to the reporting and approval process are appropriate given
that (1) OCC management (typically an officer of OCEO) currently has
discretion to waive any margin call caps, (2) under the proposal,
these thresholds would no longer be characterized as caps and
therefore there would be an assumption that OCC would call for
margin in excess of these thresholds, (3) since the adoption of
OCC's current FRMC Procedure, OCC has gained comfort in its Clearing
Members' ability to meet and maintain margin calls in excess of
these thresholds and (4) OCEO would retain the ability to notify or
escalate an issue to the Risk Committee if they determine such
actions are necessary.
---------------------------------------------------------------------------

(3). Sufficiency Stress Test Threshold 2--Intra-Month Clearing Fund
Resizing
    Under proposed Rule 1001(c) (and as described in the proposed
Policy and Methodology Description), if a Sufficiency Stress Test were
to identify a Clearing Fund Draw for any one or two Clearing Member
Groups that exceed 90% of the current Clearing Fund size (after
subtracting any monies deposited as a result of a margin call in
accordance with a breach of Sufficiency Stress Test Threshold 1), OCC
would effect an intra-month resizing of the Clearing Fund to ensure
that OCC continues to maintain sufficient Pre-Funded Financial
Resources to cover its exposures under a wide range of stress
scenarios, including extreme but plausible market conditions. The
amount of such an increase would be the greater of: (1) $1 Billion or
(2) 125% of the difference between the projected draw under the
Sufficiency Stress Test (less any monies deposited pursuant to a margin
call resulting from a breach of Sufficiency Stress Test Threshold 1)
and the current Clearing Fund size. Each Clearing Member's
proportionate share of the increase would be based on its proportionate
share of the Clearing Fund as determined pursuant to proposed Rule
1003(a), with the exception of those Clearing Members subject to the
minimum contribution amount. OCC's Executive Chairman, Chief
Administrative Officer or Chief Operating Officer would be responsible
for reviewing and approving any intra-month increase to the size of the
Clearing Fund based on a breach of Sufficiency Stress Test Threshold 2
prior to implementation, and any such intra-month increase due to a
breach of Sufficiency Stress Test Threshold 2 would remain in effect
for any sizing calculations performed during the three month period
subsequent to the intra-month increase to ensure that OCC continues to
maintain sufficient financial resources to cover its credit exposures
during that time.
    In addition to intra-month resizing based on Sufficiency Stress
Testing, OCC proposes to include additional authority in proposed Rule
1001(d) to provide the Risk Committee, or each of the Executive
Chairman, Chief Administrative Officer, or Chief Operating Officer,
upon notice to the Risk Committee, with the authority to increase the
size of the Clearing Fund at any time for the protection of OCC,
Clearing Members or the general public. Any determination by the
Executive Chairman, Chief Administrative Officer, or Chief Operating
Officer to implement a temporary increase in Clearing Fund size would
(1) be based upon then-existing facts and circumstances, (2) be in
furtherance of the integrity of OCC and the stability of the financial
system, and (3) take into consideration the legitimate interests of
Clearing Members and market participants. Under the proposed Policy,
any temporary increase in Clearing Fund size would be reviewed by the
Risk Committee at its next regularly scheduled meeting, or as soon as
otherwise practical, and, if such temporary increase is still in effect
at the time of that meeting, the Risk Committee would determine whether
(1) the increase in Clearing Fund size is no longer required or (2) the
Clearing Fund sizing methodology should be modified to ensure that OCC
continues to maintain sufficient Pre-Funded Financial Resources to
cover its established risk tolerance.\39\
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    \39\ In the event that the Risk Committee would determine to
permanently increase or change the methodology used to size the
Clearing Fund, OCC would initiate any regulatory approval process
required to effect such a change in Clearing Fund size. However, OCC
would not decrease the size of its Clearing Fund while the
regulatory approvals for such permanent increase are being obtained
to ensure that OCC continues to maintain sufficient financial
resources during that time.
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(iv) Informational Stress Tests
    Under the proposed Policy and Methodology Description, OCC would
run a variety of stress tests for informational purposes (i.e.,
Informational Stress Tests) to monitor and assess the size of OCC's
Pre-Funded Financial Resources against other stress scenarios. The
Informational Stress Tests could be comprised of a number of Historical
and Hypothetical scenarios, which may include extreme but implausible
scenarios and reverse stress test scenarios (i.e., ``Informational
Scenarios''). Informational Scenarios would not directly drive the size
of the Clearing Fund or calls for additional margin; however, they
would be an important risk monitoring tool that OCC would use to
evaluate the appropriateness of its Adequacy, Sizing, and Sufficiency
Scenarios and perform risk escalations and evaluations.
    OCC would continually evaluate its inventory of Informational
Scenarios and could add additional Informational Scenarios, as needed,
to ensure that it understands the limits of its Pre-Funded Financial
Resources. Scenarios may later be reclassified as a different scenario
type with the approval of OCC's Risk Committee. For instance, a new
scenario would typically be introduced as an Informational Scenario,
but later may be elevated to a Sizing or Sufficiency Scenario.
5. Clearing Fund and Stress Testing Governance, Monitoring and Review
    The proposed Policy would establish governance, monitoring and
review requirements for OCC's Clearing Fund and stress testing
methodology. On a daily basis, STLRM would monitor the results of all
of the Adequacy and Sufficiency Stress Tests, including whether the
Adequacy Stress Test demonstrates that OCC maintains Pre-Funded
Financial Resources above OCC's Adequacy Scenarios, in accordance with
internal OCC procedures. Under the proposed Policy, STLRM or the
Executive Vice President of FRM (``EVP-FRM'') would immediately
escalate any material issues identified with respect to the adequacy of
OCC's financial resources to the STWG (provided that STWG review is
practical under the circumstances) and the Management Committee to
determine if it would be appropriate to recommend a change to the
Hypothetical Scenarios used to size the Clearing Fund in accordance
with applicable OCC procedures.
    Under the proposed Policy, on a monthly basis, STLRM would prepare
reports that provide details and trend analysis of daily stress tests
with respect to the Clearing Fund, including the results of daily
Adequacy Stress Tests, Sizing Stress Tests and Sufficiency Stress Tests
and review the adequacy of OCC's financial resources in accordance with
internal procedures. On a monthly basis, STWG would perform a
comprehensive analysis of these stress testing results, as well as
information related to the scenarios, models, parameters, and
assumptions impacting the sizing of the Clearing Fund. Pursuant to this
review, STWG would consider, and may recommend at its

discretion, modifications to OCC's stress test scenario inventory and
models for financial resources (including the creation and/or
retirement of stress test scenarios, the reclassification of stress
test scenarios, and/or modifications to the stress test scenarios'
underlying parameters and assumptions), as well as related Policies and
Procedures, to ensure their appropriateness for determining OCC's
required level of financial resources in light of current and evolving
market conditions, and as pursuant to the related Procedures
established for this purpose. The reviews would be conducted more
frequently than monthly when the products cleared or markets served
display high volatility or become less liquid; the size or
concentration of positions held by OCC's participants increases
significantly; or as otherwise appropriate. The Policy would require
that OCC maintain procedures for determining whether, and in what
circumstances, such intra-month reviews shall be conducted, and would
indicate the persons responsible for making the determination.
    Pursuant to the proposed Policy, STLRM would report the results of
stress tests and its monthly analysis to OCC's Management Committee and
Risk Committee on at least a monthly basis and would maintain
procedures for determining whether, and in what circumstances, the
results of stress tests must be reported to the Management Committee or
the Risk Committee more frequently than monthly, and would indicate the
persons responsible for making the determination. In the performance of
monthly review of stress testing results and analysis and considering
whether escalation is appropriate, due consideration would be given to
the intended purpose of the proposed Policy to: (1) Assess the adequacy
of, and adjust as necessary, OCC's total amount of financial resources;
(2) support compliance with the minimum financial resources
requirements under applicable regulations; and (3) evaluate the
adequacy of, and recommend adjustments to OCC's margin methodology,
margin parameters, models used to generate margin or guaranty fund
requirements, and any other relevant aspects of OCC's credit risk
management.
    Under the proposed Policy, OCC's Model Validation Group would be
required to perform a model validation of OCC's Clearing Fund model on
an annual basis, and the Risk Committee would be responsible for
reviewing the model validation report. The Risk Committee would also be
required to review and approve the Policy on an annual basis.
    Under the proposed Policy, stress test inventories would be
maintained by STLRM, and the STWG would be required to review and
approve or recommend changes to stress test inventories recommended by
STLRM staff in accordance with STWG procedures. The STWG would meet at
least monthly and approve or recommend approval of changes to the
inventory in accordance with the stress test procedures. The approval
authority for such changes would be as follows:
     Informational Stress Tests--The STWG may approve the
creation or retirement of Informational Stress Tests; and
     Sizing, Sufficiency, and Adequacy Stress Tests--The STWG
may recommend approval to the Management Committee (however, if timing
considerations make such recommendation to the Management Committee
impracticable, then STWG would make its recommendation to the OCEO) and
the Risk Committee the creation or retirement of Adequacy, Sizing, or
Sufficiency Stress Tests.
    Pursuant to the proposed Policy, any request for an exception to
the Policy must be made in writing to a member of the OCEO, who would
then be responsible for reviewing the exception request and providing a
decision in writing to the person requesting the exception. All
requests for exceptions and their dispositions would be reported to the
Board or Risk Committee no later than its next regularly scheduled
meeting, in a format approved by the Chair of the Board or Risk
Committee. Finally, the Policy would require that violations of the
Policy be reported to the Policy owner and OCC's Chief Compliance
Officer.
6. Limitations on Reduction in Monthly Clearing Fund Size
    OCC also proposes to adopt rules imposing certain anti-procyclical
measures for its monthly Clearing Fund sizing process. Under proposed
Rule 1001(a), the size of the Clearing Fund would not be permitted to
decrease more than 5% from month-to-month to avoid pro-cyclicality.
This limitation, which is also reflected in the proposed Policy and
Methodology Description, is designed to promote stability and to
prevent the Clearing Fund from decreasing rapidly when a previous peak
falls out of the look-back period.
    In addition, if the results of a daily Sufficiency Stress Test over
the final five business days preceding the monthly Clearing Fund sizing
exceed 90% of the projected Clearing Fund size for the upcoming month,
the Clearing Fund size must be set such that the peak Sufficiency
Stress Test draw is no greater than 90% of the Clearing Fund size. The
proposed change is designed to reduce the likelihood that the Clearing
Fund would be set at a size such that a Clearing Member Group with
stress test exposures that are trending upward at the end of the sizing
period would exceed the threshold for an intra-month resize immediately
following the decline.
7. Clearing Fund Contribution Allocations

a. Proposed Changes to Initial Contributions

    Pursuant to existing Article VIII, Section 2 of the By-Laws, the
minimum initial Clearing Fund contribution of each newly admitted
Clearing Member is set at an amount equal to at least $150,000, which
is also equal to OCC's minimum ``fixed'' contribution amount (discussed
in detail below). Under proposed Rule 1002(d), which is based on
existing Article VIII, Section 2(a), OCC would increase the initial
Clearing Fund contribution amount to $500,000. OCC's existing minimum
contribution requirements have been in place since June 5, 2000,\40\
and as a result, OCC undertook an analysis to determine the
appropriateness of this amount given the passage of time. As part of
this analysis, OCC considered a number of factors such as the potential
impact on Clearing Members that are at the minimum or otherwise below
or just over the newly proposed $500,000 requirement, the impact to
those members in dollar and percentage terms as well as compared to
their net capital, evolving market conditions, evolution in the size of
the Clearing Fund, minimum contribution requirements of other CCPs, and
heightened regulatory obligations on OCC given its status as a
systemically important financial market utility. For example, OCC notes
that the minimum initial (and fixed) contribution requirement has
remained static over time while the Clearing Fund has grown from
approximately $2

billion in 2000 to several multiples of that, both currently and under
the proposed changes described herein. Additionally, OCC reviewed the
contribution requirements of other CCPs and noted that they were well
in excess of OCC's current minimum contribution requirement (and in
several cases, would be in excess of the newly proposed minimum
amount).\41\ OCC also performed an analysis of Clearing Members that
had a Clearing Fund contribution requirement larger than the current
minimum requirement of $150,000 but less than or equal to the proposed
requirement of $500,000.\42\ OCC also reviewed the impact of this
change and discussed it with potentially impacted Clearing Members
firm, the majority of which did not express concerns over the proposed
increase. As a result of this analysis, OCC determined $500,000 would
be the appropriate initial and minimum Clearing Fund contribution
amount required to maintain membership at OCC. Consistent with existing
authority, OCC's Risk Committee would also be able to fix a different
initial contribution amount with regard to any new Clearing Member at
the time its application is approved. In either case, the initial
contribution amount would remain in effect for not more than three
months after the admission of the relevant Clearing Member. After that
time, or at an earlier time as may be determined by the Risk Committee,
the Clearing Member's contribution amount would instead be determined
using the allocated contribution method in proposed Rule 1003. OCC also
proposes to clarify in new Rule 1002(d) that initial contribution
requirements would at all times remain subject to the minimum ``fixed
amount'' of $500,000 under proposed Rule 1003 and to adjustments by OCC
under Rule 1004.
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    \40\ On June 5, 2000, the Commission approved a proposed rule
change by OCC to merge the equity and non-equity elements of its
Clearing Fund into a combined Clearing Fund with a minimum
contribution requirement of $150,000. See Securities Exchange Act
Release No. 42897 (June 5, 2000), 65 FR 36750 (June 9, 2000) (SR-
OCC-99-9). OCC notes that, as a practical matter, the $150,000
minimum contribution amount dates back prior to June 2000 for the
majority of its Clearing Members as most members already contributed
to both the equity and non-equity elements of the Clearing Fund and
were subject to a $75,000 minimum contribution for each element
prior to the June 2000 rule change.
    \41\ For example, at the time of OCC's analysis, ICE Clear US
had a minimum contribution requirement of $2,000,000 and CME had
minimum contribution requirements of $500,000 for exchange listed
futures and options and $2.5 million for OTC products covered in its
Base Guaranty Fund.
    \42\ Based on this analysis, OCC determined that there are
currently eleven Clearing Members either subject to the minimum
Clearing Fund contribution requirement of $150,000 or below the
proposed $500,000 requirement that would be impacted by the
proposal.
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b. Proposed Changes to Contribution Allocation Methodology
    Current Rule 1001(b) provides, in part, that each Clearing Member's
monthly contribution requirement is based on a sum of $150,000 (which
is a fixed amount, equal to the current initial contribution amount)
plus such Clearing Member's proportionate share of the amount necessary
for OCC to maintain the total Clearing Fund size required under Rule
1001(a) (which is a variable amount). OCC proposes to adopt new Rule
1003(a), which would increase the minimum ``fixed'' contribution amount
to $500,000, consistent with the proposed increase in the minimum
initial contribution described above. Specifically, proposed Rule
1003(a) would provide that each Clearing Member's contribution to the
Clearing Fund shall equal the sum of (x) $500,000 (a higher ``fixed
amount,'' equal to the proposed initial contribution amount described
above) and (y) such Clearing Member's proportionate share of an amount
sufficient to cause the amount of the Clearing Fund (after taking into
account each Clearing Member's fixed amount) to be equal to the
Clearing Fund size determined pursuant to proposed Rule 1001(a) (the
``variable amount''). The proposed change was determined under the same
analysis and justification discussed above regarding the proposed
change in the minimum initial contribution amount (i.e., OCC analyzed
the potential impact on Clearing Members that are at the minimum fixed
contribution amount or otherwise below or just over the newly proposed
$500,000 requirement, the impact to those members in dollar and
percentage terms as well as compared to their net capital, evolving
market conditions, evolution in the size of the Clearing Fund, minimum
contribution requirements of other CCPs, and heightened regulatory
expectations on OCC given its status as a systemically important
financial market utility). Collectively, proposed Rules 1002(d) and
Rule 1003(a) would effectively provide for a new minimum Clearing Fund
contribution amount of $500,000 per Clearing Member.\43\
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    \43\ OCC notes that the current exception for Futures-Only
Affiliated Clearing Members in By-Law Article VIII, Section 2 and
Rule 1001(f) would be retained under proposed Rules 1002(d) and
1002(f).
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    OCC also proposes to clarify in proposed Rule 1004, in line with
its current operational practice, that OCC may adjust an individual
Clearing Member's Clearing Fund contributions due to mergers,
consolidations, position transfers, business expansions, membership
approval, or other similar events in order to ensure that Clearing Fund
allocations are appropriately aligned with the change in risks
associated with such events (e.g., the increased risk a Clearing Member
may present after taking on positions of another Clearing Member
through a merger or position transfer).
8. Allocation Weighting Methodology
    Under existing Rule 1001(b), Clearing Fund contributions are
allocated among Clearing Members based on a weighted average of each
Clearing Member's proportionate share of total risk,\44\ open interest,
and volume in all accounts (including paired X-M accounts) according to
the following weighting allocation methodology: 35% total risk, 50%
open interest, and 15% volume. OCC proposes to modify its allocation
methodology in new Rule 1003 to more closely align Clearing Members'
Clearing Fund contribution requirements with the level of risk they
bring to OCC. Specifically, OCC proposes that Clearing Fund
contribution requirements would be based on an allocation methodology
of 70% total risk, 15% volume and 15% open interest.\45\ OCC also
proposes to modify the volume component of the weighting allocation
methodology to provide that OCC would use cleared volume, as opposed to
executed volume, to base the allocation on where the position is
ultimately cleared.\46\
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    \44\ As noted above, ``total risk'' in this context means the
margin requirement with respect to all accounts of the Clearing
Member Group exclusive of the net asset value of the positions in
such accounts aggregated across all such accounts.
    \45\ Under the proposed Policy, this new allocation approach
would be phased in over a three month period following
implementation of the proposed changes herein by gradually shifting
35% of the weighting to total risk from open interest by 10% in the
first month, 10% in the second month, and 15% in the third month.
Accordingly, OCC proposes conforming changes to delete
Interpretation and Policy .03 of Rule 1001, which concerns the
phase-in of the former allocation methodology, and would no longer
be required.
    \46\ For both volume and open interest, OCC would adjust stock
loan shares by a factor of 100 to normalize them with the size of a
standard option contract. Interpretation and Policy .04 of existing
Rule 1001, which concerns the calculation used to determine cleared
contract equivalent units for stock loan and borrow positions, would
be relocated to Interpretation and Policy .01 of proposed Rule 1003
without change.
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    In addition, OCC proposes to adopt new Interpretation and Policy
.02 of Rule 1003, which would be based without material amendment on
the clauses in paragraphs (d) and (e) of current Rule 1001 that address
how OTC options are included within the fraction used to compute a
Clearing Member's proportionate share of open interest and volume,
respectively. The numerator and denominator in each case would continue
to include OTC option contracts within the number of open cleared
contracts of a Clearing Member, with that number of OTC option
contracts being adjusted to

ensure that it is approximately equal to the number of options
contracts, other than OTC option contracts, that would cover the same
notional value or units of the same underlying interest. OCC believes
that placing this aspect of the computation in an Interpretation and
Policy would enhance the readability of Rule 1003(b).
    OCC's contribution allocation and associated weighting methodology
also would be generally described in the proposed Policy and
Methodology Description documents.
9. Reduction in Time To Fund Deficits
    OCC proposes to adopt new Rule 1005(a), which would address the
time within which a Clearing Member would generally be required to
satisfy a deficit in its required Clearing Fund contribution to reduce
the timeframe during which OCC potentially would be operating with less
than its required amount of Pre-Funded Financial Resources. As a
general rule, whenever a report made available by OCC as described in
proposed Rule 1007 shows a deficit, the applicable Clearing Member(s)
would be required to satisfy the deficit in a form approved by OCC no
later than one hour after being notified by OCC of such deficit.
Examples of deficits that would need to be satisfied by this deadline
include those caused by a decrease in the value of a Clearing Member's
contribution or by an adjusted contribution pursuant to proposed Rule
1004. The one-hour deadline would be subject to the application of
alternative timing requirements specified in Chapter X, such as in the
case of deficits arising due to regular monthly sizing or an intra-
month resizing (as addressed in proposed Rule 1005(b)), and deficits
arising due to amendments of OCC's Rules (as addressed in proposed Rule
1002(e)). Proposed Rule 1004 would also provide OCC with discretion to
agree to alternative written terms regarding the satisfaction of a
deficit that would otherwise be governed by the requirements described
above.
    Proposed Rule 1005(b), which is based on existing Rule 1003 with
certain modifications, would address deficits arising due to regular
monthly sizing of the Clearing Fund under proposed Rule 1001(a), as
well as due to intra-month sizing adjustments under proposed Rule
1001(c). The proposed provision would reduce the amount of time within
which a Clearing Member must satisfy a deficit shown on a report made
available by OCC under Rule 1007 from five business days of the date on
which the report is made available to two business days of such date.
OCC believes that this change is appropriate because it would expedite
adjustment of Clearing Fund contributions to the appropriate size as
determined by OCC and allow OCC to respond more quickly in rapidly
changing or emergency market conditions.
    Proposed Rule 1002(e) would address the circumstance in which a
Clearing Member's contribution is increased as a result of an amendment
of OCC's Rules. The proposed provision is based on existing By-Law
Article VIII, Section 2(b), modified, however, to require that such an
increased contribution be satisfied within two business days of the
Clearing Member receiving notice of the amendment, rather than within
five business days of such notice (as is required under current By-Law
Article VII, Section 2(b)). For the reasons noted above, OCC believes
that this change is appropriate because it would expedite both the
effectiveness of the increased contribution requirement (and,
indirectly, the size of the Clearing Fund) and the actual funding of
Clearing Member contributions related thereto. Consistent with OCC's
current requirement, a Clearing Member would not be obligated to make
such an increased contribution, however, if, before the effective date
of the relevant amendment, it notifies OCC in writing that it is
terminating its status as a Clearing Member and closes out or transfers
all of its open long and short positions. In addition, newly proposed
Interpretation and Policy .02 of Rule 1002 would clarify that the
authority of a Clearing Member to terminate its status as such under
Rule 1006(h) regarding assessments by OCC is separate and distinct from
the analogous authority under Rule 1002(e) concerning membership
terminations in connection with an increase in Clearing Fund
contributions due to a change in OCC's Rules.
    In addition, and consistent with existing operational practice, new
Rule 1005(c) would establish that, upon the failure of a Clearing
Member for any reason to timely satisfy a deficit regarding its
required Clearing Fund contribution, OCC would be authorized to
withdraw an amount equal to such deficit from the Clearing Member's
bank account maintained in respect of an OCC firm account. The proposed
rule change is designed to ensure that OCC is able to obtain funds owed
from its Clearing Members to satisfy a Clearing Fund deficit in a
timely fashion so that OCC can continue to meet its overall financial
resource requirements as stipulated under its rules and by applicable
regulatory requirements. Any such withdrawn amount would thereafter be
treated as a cash contribution to the Clearing Fund. The provision
would also clarify that, if OCC is unable to withdraw an amount equal
to the deficit, the Clearing Member's failure to satisfy such deficit
in accordance with OCC's Rules may subject such Clearing Member to
disciplinary action or suspension, including under Chapters XI and XII
of OCC's Rules.
    OCC also proposes to specify in proposed Rules 1005(b) and 1002(e)
that Clearing Members shall have until 9:00 a.m. Central Time on the
second business day after the issuance of the Clearing Fund Status
Report to meet their required Clearing Fund contribution if such
contribution increases as a result of monthly Clearing Fund sizing or
an intra-month resizing of the Clearing Fund. The proposed change would
more closely align with the settlement time for the collection of other
deficits (e.g., the required time for making good any deficiency
generally under existing Article VIII, Section 6 of the By-Laws or for
satisfying any margin deficits under Rule 605). The proposed change
would also be reflected in the proposed Policy.
    Finally, OCC proposes to relocate the substance of current Rule
1002 (regarding Clearing Fund reports) to proposed Rule 1007, with
modifications that allow OCC to provide more real-time transparency to
Clearing Members by mandating more frequent reporting, as well as
certain modifications to address the intra-month resizing of the
Clearing Fund. Current Rule 1002 provides that OCC must make available
to each Clearing Member, within ten days after the close of each
calendar month, a report that lists the current amount and form of such
Clearing Member's contribution, the amount of the contribution required
of such Clearing Member for the current calendar month, and any surplus
over and above the amount required for the current calendar month.
Under proposed Rule 1007, OCC would make available each business day
certain reports listing the current amount and form of each Clearing
Member's contribution to the Clearing Fund, the current amount of the
contribution required of such Clearing Member (including the Clearing
Member's required cash contribution to the Clearing Fund, as discussed
in more detail in Section 10 below) and any deficit in the Clearing
Member's contribution or surplus over and above the required amount, as
applicable. OCC would also issue a report whenever the calculated size
of the Clearing Fund has changed, whether as the result of regular

monthly sizing of the Clearing Fund or otherwise.
10. Anti-Procyclicality Measures in OCC's Margin Methodology
    OCC proposes to amend current Rule 601(c), regarding margin
requirements for accounts other than customers' accounts and firm non-
lien accounts, to clarify in OCC's Rules that OCC's existing
methodology for calculating margin requirements incorporates measures
designed to ensure that margin requirements are not lower than those
that would be calculated using volatility estimated over a historical
look-back period of at least ten years. The proposed change reflects an
existing practice in OCC's margin methodology and is intended only to
provide more clarity and transparency regarding this anti-
procyclicality measure in OCC's Rules.
11. Other Clarifying, Conforming, and Organizational Changes
    OCC also proposes a number of other clarifying, conforming, and
organizational changes to its By-Laws, Rules, Collateral Risk
Management Policy, Default Management Policy, and Clearing Fund-related
procedures in connection with the proposed enhancements to its Pre-
Funded Financial Resources and the relocation of OCC's Clearing Fund-
related By-Laws into Chapter X of the Rules. Specifically, proposed
Rules 1006(a)-(c) would address both the purpose of the Clearing Fund
and the seven conditions under which the Clearing Fund generally may be
used by OCC to make good certain losses that it suffers. The proposed
Rule is based on a consolidation of existing Article VIII, Section 1(a)
(concerning the maintenance and purpose of the Clearing Fund) and
Section 5(a)-(c) (concerning the application of the Clearing Fund) with
minor modifications. Accordingly, under proposed Rule 1006, and
consistent with existing authority, OCC would maintain, and be
permitted to use, the Clearing Fund to make good losses relating to:
(1) The failure of a Clearing Member to discharge an obligation on or
arising from any confirmed trade accepted by OCC; (2) the failure of
any Clearing Member or the Canadian Depository for Securities to
perform its obligations under or arising from any exercised or assigned
option contract or matured future or any other contract or obligation
issued, undertaken, or guaranteed by OCC or in respect of which OCC is
otherwise liable; \47\ (3) the failure of any Clearing Member in
respect of its stock loan or borrow positions to perform its
obligations to OCC; (4) any liquidation of a Clearing Member's open
positions; (5) any protective transactions effected for OCC's own
account under Chapter XI of the Rules regarding the suspension of a
Clearing Member; (6) the failure of any Clearing Member to make any
required payment or render any required performance; or (7) the failure
of any bank or securities or commodities clearing organization to
perform obligations to OCC under certain conditions as set forth in
proposed Rule 1006(c).\48\
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    \47\ OCC notes that proposed Rule 1006(a) would contain a minor
modification to clarify that matured futures contracts are included
within the scope of other contracts or obligations issued,
undertaken, or guaranteed by OCC or in respect of which OCC is
otherwise liable.
    \48\ Existing Interpretation and Policy .01 and .02 of Article
VIII, Section 5 concerning the share of any deficiency to be borne
by each Clearing Member as a result of a charge against the Clearing
Fund would be consolidated and relocated to new Interpretation and
Policy .01 of Rule 1006 with only minor, non-substantive conforming
changes and cross-references to new Interpretation and Policy .01 of
Rule 1006 would be added to proposed Rules 1006(b) and (c) to
provide additional clarity in OCC's rules.
---------------------------------------------------------------------------

    Proposed Rule 1006(g) would address payments to and from Cross-
Guaranty Parties \49\ in respect of Common Members.\50\ This provision
is based on current Article VIII, Sections 5(f) and 5(g) of OCC's By-
Laws, which would be transferred to Rule 1006(g) without material
changes. OCC would, therefore, continue to use a suspended Clearing
Member's Clearing Fund contribution, after appropriately applying other
funds in the accounts of the Clearing Member, to make a required
payment to a Cross-Guaranty Party pursuant to a Limited Cross-Guaranty
Agreement in respect of such Clearing Member. Proposed Rule 1006(g)
would clarify, however, that OCC would credit funds to the Clearing
Fund that it receives in respect of a suspended Clearing Member from a
Cross-Guaranty Party pursuant to a Limited Cross-Guaranty Agreement,
where OCC must still make a charge on a proportionate basis against
other Clearing Members' required contributions to the Clearing Fund
even after application of such funds, or where OCC has already made a
charge on a proportionate basis against other Clearing Members'
required contributions to the Clearing Fund.
---------------------------------------------------------------------------

    \49\ A Cross-Guaranty Party is a party, other than OCC, to a
Limited Cross Guaranty Agreement, which is an agreement between OCC
and one or more other clearing corporations and/or clearing
organizations relating to the cross-guaranty by OCC and the other
party or parties of certain obligations of a suspended Common Member
to the parties to the agreement. See Article I, Section 1.C.(35) of
the By-Laws (defining Cross-Guaranty Party) and Section 1.L.(4)
(defining Limited Cross-Guaranty Agreement).
    \50\ A Common Member is ``a Clearing Member that is concurrently
a member or participant of a Cross-Guaranty Party.'' See Article I,
Section 1.C.(27) of the By-Laws.
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    Proposed Interpretation and Policy .02-.04 to Rule 1006 would also
address certain aspects of payments to and from Cross-Guaranty Parties
in respect of Common Members. All of these proposed provisions are
based without material amendment on existing Interpretations and
Policies to Article VIII, Section 5 of OCC's By-Laws, as described
below.
    Proposed Interpretation and Policy .02 to Rule 1006 is based
without material amendment on existing Interpretation and Policy .03 to
Article VIII, Section 5 of OCC's By-Laws. Under the proposed
Interpretation and Policy, if OCC has a deficiency after it applies all
the available funds of a suspended Common Member but cannot determine
whether, when, or in what amount it will be entitled under a Limited
Cross-Guaranty Agreement to receive funds from a Cross-Guaranty Party,
OCC may make a charge against other Clearing Members' contributions for
the deficiency in accordance with Rule 1006(b). If OCC receives funds
from a Cross-Guaranty Party after making such a charge, OCC would
credit the funds to the Clearing Fund in accordance with Rule 1006(g).
    Proposed Interpretation and Policy .03 to Rule 1006 is based
without material amendment on existing Interpretation and Policy .04 to
Article VIII, Section 5 of OCC's By-Laws. Under the proposed
Interpretation and Policy, if OCC has a deficiency after it applies all
the available funds of a suspended Common Member and OCC determines
that it is likely to receive funds from a Cross-Guaranty Party under a
Limited Cross-Guaranty Agreement, OCC may, in anticipation of receipt
of such funds, forego making a charge, or make a reduced charge in
accordance with proposed Rule 1006(b), against other Clearing Members'
Clearing Fund contributions. If OCC does not subsequently receive the
funds or receives a smaller amount than anticipated, OCC may make a
charge or additional charges against contributions in accordance with
proposed Rule 1006(b).
    Proposed Interpretation and Policy .04 to Rule 1006 is based
without material amendment on existing Interpretation and Policy .05 to
Article VIII, Section 5 of OCC's By-Laws. Under the proposed
Interpretation and Policy, if, under a Limited Cross-Guaranty

Agreement, OCC receives funds from a Cross-Guaranty Party in respect of
a suspended Common Member but is subsequently required to return such
funds for any reason, OCC may make itself whole by making a charge or
additional charges, as the case may be, against the contributions of
Clearing Members, other than the suspended Common Member.
    Existing Article VIII, Section 1(b) of OCC's By-Laws, which
concerns the general lien on all cash, Government securities, and other
property of the Clearing Member contributed to the Clearing Fund, would
be moved without material change to new Rule 1006(i). Additionally,
existing Interpretation and Policy .02 of Article VIII, Section 3 of
OCC's By-Laws, which concerns the treatment of securities deposited in
an account of OCC at an approved custodian, would be relocated to new
Rule 1006(j) without change.
    OCC also proposes to relocate existing Article VIII, Sections 5(c),
and (e) of OCC's By-Laws, which concern notice of any charges against
the Clearing Fund, the use of current and retained earnings to address
losses, and the use of the Clearing Fund to effect borrowings, to new
Rules 1006(d), (e), and (f),\51\ respectively, without material
amendment.\52\ OCC would also relocate existing Article VIII, Section 6
of OCC's By-Laws, which concerns the making good of any charges against
the Clearing Fund (i.e., Clearing Fund replenishment and assessments)
to new Rule 1006(h) without material changes.\53\ The proposed Policy
and Methodology Description would also contain a discussion of OCC's
Clearing Fund replenishment and assessment powers generally intended to
reflect this existing authority in the By-Laws. In addition, the
proposed Policy would (1) provide the Executive Chairman, Chief
Administrative Officer, or Chief Operating Officer with the authority
to approve proportionate charges against the Clearing Fund and (2)
require that OCC's Accounting department maintain procedures for the
allocation of losses due to a Clearing Member default and to replenish
the Clearing Fund in the event a deficiency in the Clearing Fund
results from events other than those specified in proposed Rule 1006.
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    \51\ Under clause (i) of new Rule 1006(f), OCC would also be
permitted to take possession of Government securities in
anticipation of a potential default by or suspension of a Clearing
Member, as is currently the case under existing Interpretation and
Policy .06 to Article VIII, Section 5.
    \52\ OCC notes that it would make a number of non-substantive
clarifying changes to the rule text in proposed Rule 1006 so that
existing rule text referencing ``computed contributions to the
Clearing Fund'' and ``as fixed at the time'' would be rephrased as
``required contributions to the Clearing Fund'' and ``as calculated
at the time.'' The proposed change is designed to more accurately
reflect that these rules are intended to refer to a Clearing
Member's required Clearing Fund contribution amount as calculated
under the proposed Rules, Policy and Methodology Description and
eliminate any potential confusion with a Clearing Member's ``fixed
amount'' as determined under Rule 1003(a).
    \53\ OCC notes that it would modify the rule text in question to
clarify that a Clearing Member's obligation to make good the
deficiency in its Clearing Fund contribution, resulting from a
proportionate charge or otherwise, would be in relation to its
currently ``required'' contribution amount and not the amount of the
contribution on deposit as of the time of the charge.
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    Additionally, OCC proposes to amend the definition of ``Clearing
Fund'' in Article I and Article V, Section 3 of the By-Laws to reflect
the fact that OCC's Clearing Fund-related provisions would now be
contained in Chapter X of the Rules. In addition, OCC proposes to
change references to ``Chapter 11'' of the Rules in Article VI, Section
27 of OCC's By-Laws to ``Chapter XI'' To conform the references to
OCC's Rules. OCC proposes conforming changes to Rule 1106 to reflect
the reorganization of Article VIII of the By-Laws into Chapter X of the
Rules. OCC also proposes to amend Rule 609 to change the term
``securities'' to ``contracts'' to clarify that its authority to call
for intra-day margin also applies to non-securities products cleared by
OCC.
    OCC also proposes conforming changes to delete existing
Interpretations and Policies .02 and .03 of Rule 1001, which deal with
the minimum confidence level used to size the Clearing Fund and the
phase-in of the former weighting allocation methodology, respectively.
Under the proposed change, the confidence level used to size the
Clearing Fund and the phase-in of the proposed weighting allocation
methodology would be addressed in the Policy and Methodology
Description (as described above). As a result, these Interpretations
and Policies would no longer be needed.
    In addition, consistent with its effort to aggregate all Clearing
Fund-related provisions to Chapter X of the Rules, OCC proposes to
relocate Article VIII, Sections 7 (Contribution Refund) and 8 (Recovery
of Loss) of the By-Laws to new Rules 1009, and 1010, respectively,
without material amendment.
    OCC also proposes to relocate certain By-Law provisions related to
the form and method of Clearing Fund contributions into Chapter X of
the Rules. Specifically, OCC proposes to relocate Article VIII, Section
3(a) and (c); Interpretation and Policy .04 to Article VIII, Section 3;
and Article VIII, Section 4 to proposed Rule 1002 concerning Clearing
Fund contributions. These By-Law provisions would be relocated to
Chapter X of the Rules without material amendment. OCC also would
relocate Interpretation and Policy .01 to Rule 1001 concerning minimum
Clearing Fund size into new Rule 1001(b). The form and method of OCC's
Clearing Fund contributions also would be generally described in the
proposed Policy and Methodology Description documents. In addition, and
consistent with current OCC practice, the proposed Policy would impose
a requirement that the specific securities eligible to be used as
Clearing Fund contributions be permitted to be pledged in exchange for
cash through one of OCC's committed liquidity facilities so that OCC
continues to maintain sufficient eligible securities to fully access
such facilities.
    As noted above, under proposed Rule 1007, OCC would make available
on a daily basis certain reports listing the current amount and form of
each Clearing Member's contribution to the Clearing Fund, the current
amount of the contribution required of such Clearing Member, and any
deficit in the Clearing Member's contribution or surplus over and above
the required amount, as applicable. Proposed Rule 1007 would also
include reporting on the Clearing Member's required cash contribution
to the Clearing Fund.
    OCC also proposes to relocate existing Rule 1004 (Withdrawals) to
new Rule 1008 and would modify the proposed rule to reflect that
Clearing Members may withdraw excess Clearing Fund deposits on the same
day that OCC issues a report to the Clearing Member showing a surplus
(as opposed to the following business day), which is consistent with
current operational practices.
    In addition, OCC proposes to update references to Article VIII of
the By-Laws in its Collateral Risk Management Policy and Default
Management Policy to reflect the relocation of OCC's Clearing Fund-
related By-Laws into Chapter X of the Rules.
    Finally, OCC currently maintains procedures regarding its processes
for (i) the monthly resizing of its Clearing Fund (Monthly Clearing
Fund Sizing Procedure), (ii) the addition of financial resources
through intra-day margin calls and/or an intra-month increase of the
Clearing Fund to ensure that it maintains adequate financial resources
in the event of a default of a Clearing Member/Clearing Members Group
presenting the largest exposure to OCC (FRMC Procedure), and the
execution of any intra-month resizing of the Clearing Fund (Clearing
Fund Intra-Month Re-

sizing Procedure).\54\ OCC proposes to retire its existing Clearing
Fund Intra-Month Re-sizing Procedure, FRMC Procedure, and Monthly
Clearing Fund Sizing Procedure as these procedures would no longer be
relevant to OCC's proposed Clearing Fund and stress test methodology
and would be replaced by the proposed Rules, Policy and Methodology
Description described herein.
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    \54\ See supra note 11.
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    OCC's Monthly Clearing Fund Sizing Procedure provides that the
Clearing Fund is resized on the first business day of each month by
identifying the peak five-day rolling average of Clearing Fund Draws
(using OCC's current Clearing Fund methodology) over the most recent
three-month period. This peak five-day rolling average is supplemented
with a prudential margin of safety of $1.8 billion. The Monthly
Clearing Fund Sizing Procedure further describes the internal
procedural and administrative steps taken by OCC staff in the monthly
Clearing Fund sizing processes (e.g., the internal reports and
processes used to populate relevant data and calculate the monthly
Clearing Fund size and the internal reporting and notifications made by
OCC staff during the resizing process). Under the proposed Policy and
Methodology Description, OCC would continue to determine the Clearing
Fund size for a given month by using a peak five-day rolling average of
Clearing Fund Draws over the prior three months; however, these
calculations would be done using the proposed Sizing Stress Test
results and would no longer require a prudential margin of safety.\55\
The remaining internal procedural and administrative steps taken by OCC
staff in the monthly Clearing Fund sizing processes would no longer be
``rules'' of OCC as defined by the Exchange Act \56\ as those aspects
of the procedure: (1) Would no longer be relevant to OCC's proposed
Clearing Fund and stress testing methodologies and processes, (2) would
be reasonably and fairly implied by the proposed Rules, Policy, and
Methodology Description, and/or (3) would otherwise not be deemed to be
material aspects of OCC's Clearing Fund-related operations.\57\
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    \55\ See supra note 22.
    \56\ Section 19(b)(1) of the Exchange Act requires a self-
regulatory organization (``SRO'') such as OCC to file with the
Commission any proposed rule or any proposed change in, addition to,
or deletion from the rules of such SRO. See 15 U.S.C. 78s(b)(1).
Section 3(a)(27) of the Exchange Act defines ``rules of a clearing
agency'' to mean its (1) constitution, (2) articles of
incorporation, (3) bylaws, (4) rules, (5) instruments corresponding
to the foregoing and (6) such ``stated policies, practices and
interpretations'' (``SPPI'') as the Commission may determine by
rule. See 15 U.S.C. 78c(a)(27). Exchange Act Rule 19b-4(a)(6)
defines the term ``SPPI'' to mean, in addition to certain publicly
facing statements, ``any material aspect of the operation of the
facilities of the [SRO].'' See 17 CFR 240.19b-4(a)(6). Rule 19b-4(c)
provides, however, that an SPPI may not be deemed to be a proposed
rule change if it is: (i) Reasonably and fairly implied by an
existing rule of the SRO or (ii) concerned solely with the
administration of the SRO and is not an SPPI with respect to the
meaning, administration, or enforcement of an existing rule the SRO.
    \57\ OCC notes that it would adopt new internal procedures to
address the procedural and administrative steps associated with the
monthly Clearing Fund sizing, Clearing Fund sufficiency monitoring,
and intra-month resizing processes; however, these procedures would
not be filed as ``rules'' of OCC under the Exchange Act. These
procedures also would conform to the proposed changes described
herein.
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    OCC's FRMC Procedure outlines various responsibilities,
deliverables and communications with respect to OCC's financial
resource monitoring and resource call processes. While the FRMC
Procedure describes material aspects of OCC's current financial
resource monitoring and call-related operations, it also describes the
non-material procedural and administrative steps taken by OCC staff in
carrying out these processes. For example, the FRMC Procedure contains
procedural steps for (1) comparing Clearing Fund Draws against the
Clearing Fund size and determining whether applicable thresholds are
breached, (2) internal notifications and reporting within OCC regarding
the imposition of enhanced monitoring or recommendations for margin
calls or intra-month resizing of the Clearing Fund,\58\ (3) other
external communications to Clearing Members \59\ regarding margin
calls, and (4) determining whether a cash draft is required to satisfy
a deficit resulting from a margin call. Under the proposal, the
proposed Policy would continue to describe the material aspects of
OCC's Clearing Fund operations as they relate to the financial resource
monitoring and resource call process under the new Clearing Fund and
stress testing methodology, subject to a number of modifications
described above.\60\ Any remaining procedural details would not be
``rules'' of OCC as OCC believes that those aspects of the procedures:
(1) Would no longer be relevant to OCC's proposed Clearing Fund and
stress testing methodologies and processes, (2) would be reasonably and
fairly implied by the proposed Rules, Policy, and Methodology
Description, and/or (3) would otherwise not be deemed to be material
aspects of OCC's Clearing Fund-related operations.
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    \58\ OCC notes that the weekly reporting process currently
described in the FRMC Procedure would no longer be codified in the
``rules'' of OCC; however, the proposed Policy would establish new
governance, monitoring and review requirements for OCC's Clearing
Fund and stress testing methodology, which are described in detail
above.
    \59\ The proposed Policy would contain a general requirement
that Clearing Members be notified of any intra-day margin calls
under the policy but the procedural details of such notification
would be contained in the Clearing Fund Sufficiency Monitoring
Procedure.
    \60\ See e.g., supra notes 33-37 and associated text.
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    OCC's Clearing Fund Intra-Month Re-sizing Procedure outlines the
various internal responsibilities, deliverables and communications with
respect to an intra-month re-sizing the Clearing Fund as determined
under the FRMC Procedure. The procedure describes the procedural and
administrative steps taken by OCC staff in the intra-month resizing
process, including the procedural steps for (1) calculating increased
contribution requirements based on various internal reports and
processes, (2) preparing information memoranda announcing an intra-
month resizing, (3) internal notifications and reporting within OCC
regarding an intra-month resizing, (4) other external communications to
Clearing Members \61\ and OCC's regulators regarding an intra-month
resizing of the Clearing Fund, and (5) determining whether a cash draft
is required to satisfy a deficit resulting from an intra-month resizing
of the Clearing Fund. Under the proposed changes described herein,
these procedural details would not be ``rules'' of OCC as OCC believes
that those aspects of the procedure: (1) Would no longer be relevant to
OCC's proposed Clearing Fund and stress testing methodologies and
processes, (2) would be reasonably and fairly implied by the proposed
Rules, Policy, and Methodology Description, and/or (3) would otherwise
not be deemed to be material aspects of OCC's Clearing Fund-related
operations.
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    \61\ The proposed Policy would contain a general requirement
that Clearing Members, OCC's Risk Committee, and OCC's regulators be
notified of any intra-month Clearing Fund resizing but the
procedural details of such notification would be contained in the
Clearing Fund Sizing Procedure.
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Anticipated Effect on, and Management of, Risk
    OCC believes that the proposed changes, and in particular, the new
Clearing Fund and stress testing methodology, would both enhance OCC's
risk management capabilities as well as promote OCC's ability to more
thoroughly size, monitor and test the sufficiency of its Pre-Funded
Financial Resources under a wide range of hypothetical and historical
stress scenarios. The proposed Clearing Fund and stress testing
methodology is designed to improve OCC's ability to calibrate its Pre-
Funded Financial

Resources to withstand a broader range of extreme but plausible
circumstances under which its one or two largest Clearing Members may
default, thereby reducing the risk that such resources would be
insufficient in an actual default.
    As noted above, the proposed Clearing Fund and stress testing
methodology would enhance OCC's framework for testing the sizing,
adequacy, and sufficiency of its Pre-Funded Financial Resources by
incorporating a wide range of extreme hypothetical and historical
stress scenarios. Under the proposal, OCC would establish a new risk
tolerance with respect to sizing OCC's Pre-Funded Financial Resources
to cover a 1-in-50 year hypothetical market event at a 99.5% confidence
level over a two-year look-back period. As noted above, OCC believes
that a 1-in-50 year hypothetical market event represents the outer
range of extreme but plausible scenarios for OCC's cleared products. As
a result, OCC would size its Clearing Fund based on more conservative
1-in-80 year Hypothetical Scenarios, and would do so under a more
conservative Cover 2 Standard, so that OCC sizes its Clearing Fund on a
monthly basis at a level designed to cover its potential exposures
under extreme but plausible market conditions. Moreover, OCC would
utilize Sufficiency Stress Tests to evaluate the sufficiency of its
Pre-Funded Financial Resources against potential credit exposures
arising from range of scenarios to determine whether OCC should: (1)
Implement the enhanced monitoring of Clearing Fund Draws, (2) require
additional margin deposits, or (3) re-size the Clearing Fund on an
intra-month basis so that OCC continues to maintain sufficient
financial resources to cover a wide range of foreseeable stress
scenarios that include, but are not limited to, the default of the two
Clearing Member Groups that would potentially cause the largest
aggregate credit exposure in extreme but plausible market conditions.
Moreover, the proposed changes would introduce a number of
Informational Stress Tests that would serve as valuable risk management
tools for OCC to monitor and assess its Pre-Funded Financial Resources
against a wide range of scenarios, including but not limited to extreme
but implausible and reverse stress test scenarios.
    The proposed changes also would introduce certain anti-procyclical
measures into the monthly Clearing Fund sizing process designed to
limit the potential decrease of the Clearing Fund's size from month to
month and therefore reduce the likelihood that a market shock would
require OCC to call for further resources from Clearing Members on an
intra-month basis. The measures would prevent the Clearing Fund from
decreasing rapidly when a previous peak falls out of the three month
look-back period, and also reduce the likelihood that the Clearing Fund
would be set at a size such that a Clearing Member Group with stress
test exposures that are trending upward at the end of the sizing period
would exceed the threshold for an intra-month resize immediately
following monthly resizing of the Clearing Fund.
    Taken together, OCC believes that the proposed changes to its
Clearing Fund and stress testing methodology and Policy are designed to
improve OCC's ability to calibrate its Pre-Funded Financial Resources,
and when necessary, call for additional financial resources from its
Clearing Members, so that it can withstand a wide range of scenarios
under which its one or two largest Clearing Members may default,
thereby reducing the risk that such resources would be insufficient in
an actual default and enhancing OCC's ability to manage risks in its
role as a systemically important financial market utility.
    OCC also proposes to increase its minimum initial and fixed
Clearing Fund contribution amounts from $150,000 to $500,000. While the
proposed change would require a small subset of OCC's Clearing Members
to contribute a relatively modest increase in their mutualized
contribution to OCC's Clearing Fund (at most, a $350,000 increase), OCC
does not believe the increased minimum contribution requirements would
have a material impact on OCC's risk management activities, the risk
presented to affected Clearing Members, or the nature or level of risk
presented by OCC. OCC notes that in proposing the new minimum
contribution amounts, it analyzed, among other things, the potential
impact on Clearing Members that are at the minimum or otherwise below
or just over the newly proposed $500,000 requirement, the impact to
those members in dollar and percentage terms as well as compared to
their net capital, evolving market conditions, evolution in the size of
the Clearing Fund, minimum contribution requirements of other CCPs, and
heightened regulatory obligations on OCC given its status as a
systemically important financial market utility. In particular, OCC
notes that its existing initial and minimum fixed contribution
requirements have been in place since June 5, 2000, while its Clearing
Fund has grown from approximately $2 billion in 2000 to several
multiples of that, both currently and under the proposal described
herein.\62\ OCC also notes that the proposed increase in minimum
contribution requirements would not affect the overall size of OCC's
Clearing Fund. OCC believes the proposed increase in its minimum
contribution amounts is reasonable in light of its analysis and would
not result in a material change in risk to OCC or its Clearing Members.
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    \62\ See supra note 39 and accompanying text.
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    Additionally, OCC proposes to modify its allocation weighting
methodology to more closely align Clearing Members' Clearing Fund
contribution requirements with the level of risk they present to OCC.
Specifically, under the proposed Policy, Clearing Fund contribution
requirements would be based on an allocation methodology of 70% of
total risk, 15% of volume and 15% of open interest (as opposed to the
current weighting of 35% total risk, 50% open interest, and 15%
volume). In addition, OCC proposes to modify the volume component of
its Clearing Fund contribution allocation weighting methodology to
provide that OCC would use cleared volume, as opposed to executed
volume, to base the volume component of the allocation on where the
position is ultimately cleared as opposed to where it was executed. OCC
believes that these changes would better align incentives for each
Clearing Member to reduce the risk it introduces to the Clearing Fund
by determining each Clearing Member's proportionate share of the
Clearing Fund based on the risk it presents to OCC.
    OCC also proposes to adopt a new governance, monitoring, and
reporting framework in connection with the proposed Clearing and stress
testing methodology that would provide for daily, monthly, and annual
review and reporting activities designed to ensure that OCC monitors
and analyzes its stress testing scenarios, models, and underlying
parameters and assumptions on a regular basis and reports the results
of these analyses to appropriate decision makers at OCC. OCC does not
believe that these changes would materially impact the risk presented
to OCC or its participants.
    OCC also proposes a number of changes to its Rules to generally
reduce the time for Clearing Members to fund Clearing Fund deficits.
Specifically, new Rule 1005(a) would require that a Clearing Member
satisfy any deficit in its required Clearing Fund contribution
resulting from a decrease in the value of a Clearing Member's
contribution or by an adjusted contribution pursuant to

proposed Rule 1004 by no later than one hour after being notified by
OCC of such deficit. In addition, OCC would reduce the amount of time
within which a Clearing Member must satisfy a deficit from five
business days of the date on which the report is made available to two
business days of such date for any deficit arising due to regular
monthly sizing of the Clearing Fund, an intra-month resizing of the
Clearing Fund, or in circumstance in which a Clearing Member's