[Federal Register Volume 80, Number 73 (Thursday, April 16, 2015)]
[Notices]
[Pages 20534-20539]
[FR Doc No: 2015-08712]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74713; File No. SR-OCC-2014-811]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Amendment No. 2 to an Advance Notice Concerning the
Monthly Resizing of the Clearing Fund and the Addition of Financial
Resources

April 10, 2015.
    Pursuant to section 806(e)(1) of title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 \1\ (``Payment,
Clearing and Settlement Supervision Act'') and Rule 19b-4(n)(1)(i)
under the Securities Exchange Act of 1934 (``Exchange Act''),\2\ notice
is hereby given that on March 4, 2015, The Options Clearing Corporation
(``OCC'') filed with the Securities and Exchange Commission
(``Commission'') Amendment no. 2 to the advance notice (``Amendment No.
2'') as described in Items I, II and III below, which Items have been
prepared by OCC. On December 1, 2014, OCC originally filed the advance
notice with the Commission. On December 16, 2014, OCC filed Amendment
No.1 to the advance notice (``Amendment No. 1''), which amended and
replaced, in its entirety, the advance notice as originally filed on
December 1, 2014.\3\ Amendment No. 1 to the advance notice was
published for comment in the Federal Register on January 26, 2015.\4\

The Commission did not receive any comments on Amendment No. 1 to the
advance notice. Amendment No. 2 to the advance notice amends and
replaces, in its entirety, Amendment No. 1 to the advance notice. The
Commission is publishing this notice to solicit comments on Amendment
No. 2 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\ In Amendment No. 1, OCC amended the advance notice to
include the Monthly Clearing Fund Sizing Procedure and the Financial
Resource Monitoring and Call Procedure as exhibits to the filing,
both defined hereinafter, as Exhibit 5A and Exhibit 5B,
respectively. OCC has requested confidential treatment for Exhibit
5A, Exhibit 5B, and Exhibit 5C, referred to hereinafter, pursuant to
Exchange Act Rule 24b-2.
    \4\ Securities Exchange Act Release No. 74091 (January 20,
2015), 80 FR 4001 (January 26, 2015) (File No. SR-OCC-2014-811). OCC
also filed the proposal contained in the advance notice, and
Amendment No. 1 thereto, as a proposed rule change, and subsequent
amendment no. 1 thereto, under section 19(b)(1) of the Exchange Act
and Rule 19b-4 thereunder. See Securities Exchange Act Release No.
73853 (December 16, 2014), 79 FR 76417 (December 22, 2014) (File No.
SR-OCC-2014-22). The Commission did not receive any comments on the
proposed rule change.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This advance notice is filed by OCC in connection with OCC's
proposal to establish procedures regarding the monthly resizing of its
Clearing Fund and 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 or group of affiliated Clearing Members
presenting the largest exposure to OCC.
    This Amendment No. 2 to SR-OCC-2014-811 (SR-OCC-2014-811 is
hereinafter defined as the ``Filing'') amends and replaces in its
entirety the Filing as originally submitted on December 1, 2014, and
amended on December 16, 2014. The purpose of this Amendment No. 2 is to
clarify the operation of a Margin Call Event in the period of time
between the calculation of the next month's Clearing Fund Sizing and
the collection of the funds pursuant to the Clearing Fund Sizing.
Specifically, the amendment clarifies that: (i) Funds deposited by a
clearing member pursuant to a Margin Call Event are considered in
aggregate with other funds remaining on deposit with OCC by the same
Clearing Member pursuant to a separate Margin Call Event within the
same monthly period, as applicable; and (ii) funds deposited by a
clearing member pursuant to a Margin Call Event(s) may not be withdrawn
until OCC collects all funds to satisfy the next regular monthly
Clearing Fund resizing. OCC is also proposing amendments that clarify
the definition of ``Financial Resources'' within the Filing. A restated
description of the purpose of the proposed rule change is below. In
addition, conforming changes were made to Exhibit 5B, the Financial
Resources Monitoring and Call Procedure, which is attached hereto.
Further, OCC is proposing to add the Clearing Fund Intra-Month Re-
Sizing Procedure, as Exhibit 5C to the Filing, through this Amendment
No. 2. The Clearing Fund Intra-Month Re-Sizing Procedure would provide
additional clarity regarding the resizing process discussed above.

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 on the advance notice were not and are not
intended to be solicited with respect to the advance notice and none
have been received.

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

    The proposed change would establish new procedures regarding the
monthly resizing of the Clearing Fund and the addition of financial
resources through intra-day margin calls and/or an intra-month increase
of the Clearing Fund to ensure that OCC maintains adequate Financial
Resources in the event of a default of a Clearing Member or group of
affiliated Clearing Members presenting the largest exposure to OCC.
Purpose of the Proposed Change
    The proposed change is intended to describe the situations in which
OCC would exercise authority under its Rules to ensure that it
maintains adequate Financial Resources \5\ in the event that stress
tests reveal a default of the Clearing Member or Clearing Member Group
\6\ presenting the largest exposure would threaten the then-current
Financial Resources. This proposed change would establish procedures
governing: (i) OCC's resizing of the Clearing Fund on a monthly basis
pursuant to Rule 1001(a) (the ``Monthly Clearing Fund Sizing
Procedure''); and (ii) the addition of Financial Resources through an
intra-day margin call on one or more Clearing Members under Rule 609
and, if necessary, an intra-month increase of the Clearing Fund
pursuant to Rule 1001(a) (the ``Financial Resource Monitoring and Call
Procedure'').\7\ The Monthly Clearing Fund Sizing Procedure would
permit OCC to determine the size of the Clearing Fund by relying on a
broader range of sound risk management practices than those
historically used under Rule 1001(a).\8\ The Financial Resource
Monitoring and Call Procedure would require OCC to collect additional
Financial Resources in certain circumstances, establish how OCC
calculates and collects such resources and provide the timing by which
such resources would be required to be deposited by Clearing Members.
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    \5\ ``Financial Resources'' means, with respect to a projected
loss attributable to a particular Clearing Member or Clearing Member
Group, as defined below, the sum of the margin deposits (less any
excess margin a Clearing Member or Clearing Member Group may have on
deposit at OCC) and deposits in lieu of margin in respect of such
Clearing Members' or Clearing Member Groups' accounts, and the value
of OCC's Clearing Fund, including both the Base Amount, as defined
below, and the prudential margin of safety, as discussed below.
    \6\ ``Clearing Member Group'' means a Clearing Member and any
affiliated entities that control, are controlled by or are under
common control with such Clearing Member. See OCC By-Laws, Article
I, sections 1.C.(15) and 1.M(11).
    \7\ This advance notice filing has also been filed as a proposed
rule change (SR-OCC-2014-22).
    \8\ The procedures described herein would be in effect until the
development of a new standard Clearing Fund sizing methodology.
Following such development, which will include a quantitative
approach to calculating the ``prudential margin of safety,'' as
discussed below, OCC will file a separate rule change and advance
notice with the Commission that will include a description of the
new methodology as well as a revised Monthly Clearing Fund Sizing
Procedure.
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Background
    OCC monitors the sufficiency of the Clearing Fund on a daily basis
but, prior to emergency action taken on October 15, 2014,\9\ OCC had no
express authority to increase the size of the Clearing Fund on an
intra-month basis.\10\ During ordinary course daily monitoring on
October 15, 2014, and as a result of increased volatility in the
financial markets in October 2014, OCC determined that the Financial
Resources needed to cover the potential loss associated with a default
of the Clearing Member or Clearing Member Group presenting the largest
exposure could

have exceeded the Financial Resources then available to apply to such a
default.
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    \9\ On October 16, 2014, OCC filed an emergency notice with the
Commission to suspend the effectiveness of the second sentence of
Rule 1001(a). See Securities Exchange Act Release No. 73579
(November 12, 2014), 79 FR 68747 (November 18, 2014) (SR-OCC-2014-
807). On November 13, 2014, OCC filed SR-OCC-2014-21 with the
Commission to delete the second sentence of Rule 1001(a), preserving
the suspended effectiveness of that sentence until such time as the
Commission approves or disapproves SR-OCC-2014-21. See Securities
Exchange Act Release No. 73685 (November 25, 2014), 79 FR 71479
(December 2, 2014), (SR-OCC-2014-21).
    \10\ See OCC Rule 1001(a).
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    To permit OCC to increase the size of its Clearing Fund prior to
the next monthly resizing that was scheduled to take place on the first
business day of November 2014, OCC's Executive Chairman, on October 15,
2014, exercised certain emergency powers as set forth in Article IX,
section 14 of OCC's By-Laws \11\ to waive the effectiveness of the
second sentence of Rule 1001(a), which states that OCC will adjust the
size of the Clearing Fund monthly and that any resizing will be based
on data from the preceding month. OCC then filed an emergency notice
with the Commission pursuant to section 806(e)(2) of the Payment,
Clearing and Settlement Supervision Act of 2010 \12\ and increased the
Clearing Fund size for the remainder of October 2014 as otherwise
provided for in the first sentence of Rule 1001(a).\13\
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    \11\ OCC also has submitted an advance notice that would provide
greater detail concerning conditions under which OCC would increase
the size of the Clearing Fund intra-month. The change would permit
an intra-month increase in the event that the five-day rolling
average of projected draws are 150% or more of the Clearing Fund's
then current size. See Securities Exchange Act Release No. 72804
(August 11, 2014), 79 FR 48276 (August 15, 2014) (SR-OCC-2014-804).
    \12\ 12 U.S.C. 5465(e)(2).
    \13\ See supra, note 10.
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    Clearing Members were informed of the action taken by the Executive
Chairman \14\ and the amount of their additional Clearing Fund
requirements, which were met without incident. As a result of these
actions, OCC's Clearing Fund for October 2014 was increased by $1.8
billion. In continued reliance on the emergency rule waiver and in
accordance with the first sentence of Rule 1001(a), OCC set the
November 2014 Clearing Fund size at $7.8 billion, which included an
amount determined by OCC to be sufficient to protect OCC against loss
under simulated default scenarios (i.e., $6 billion), plus a prudential
margin of safety (the additional $1.8 billion collected in
October).\15\ All required contributions to the November 2014 Clearing
Fund were met by affected Clearing Members.
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    \14\ See Information Memorandum #35397, dated October 16, 2014,
available on OCC's Web site, http://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp. Clearing members also were
informed that a prudential margin of safety of $1.8 billion would be
retained until a new Clearing Fund sizing formula has been approved
and implemented.
    \15\ See Information Memorandum #35507, dated October 31, 2014,
available on OCC's Web site, http://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp.
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    Under Article IX, section 14(c), absent the submission of a
proposed rule change to the Commission seeking approval of OCC's waiver
of the provisions of the second sentence of Rule 1001(a), such waiver
would not be permitted to continue for more than thirty calendar days
from the date thereof.\16\ Accordingly, on November 13, 2014, OCC
submitted SR-OCC-2014-21 to delete the second sentence of Rule 1001(a)
and, by the terms of Article IX, section 14(c), preserve the suspended
effectiveness of the second sentence of Rule 1001(a) beyond thirty
calendar days.\17\
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    \16\ See OCC By-Laws, Article IX, section 14(c).
    \17\ See supra, note 10. OCC also submitted this proposed rule
change to the Commodity Futures Trading Commission.
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    SR-OCC-2014-21 was submitted in part to permit OCC to determine the
size of its Clearing Fund by relying on a broader range of sound risk
management practices than considered in basing such size on the average
daily calculations under Rule 1001(a) that are performed during the
preceding calendar month. The Monthly Clearing Fund Sizing Procedure,
as described below, is based on such broader risk management practices
and establishes the procedures OCC would use to determine the size of
the Clearing Fund on a monthly basis. Similarly, SR-OCC-2014-21 was
submitted in part to permit OCC to resize the Clearing Fund more
frequently than monthly when the circumstances warrant an increase of
the Clearing Fund. The Financial Resource Monitoring and Call
Procedure, as described below, establishes the procedures that OCC
would use to add Financial Resources through an intra-day margin call
on one or more Clearing Members under Rule 609 and, if necessary, an
intra-month increase of the Clearing Fund pursuant to Rule 1001(a).\18\
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    \18\ As noted in SR-OCC-2014-21, OCC would use its intra-month
resizing authority only to increase the size of the Clearing Fund
where appropriate, not to decrease the size of the Clearing Fund.
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Monthly Clearing Fund Sizing Procedure
    Under the Monthly Clearing Fund Sizing Procedure, OCC would
continue to calculate the size of the Clearing Fund based on its daily
stress test exposures under simulated default scenarios as described in
the first sentence of Rule 1001(a) and resize the Clearing Fund on the
first business day of each month. However, instead of resizing the
Clearing Fund based on the average of the daily calculations during the
preceding calendar month, as stated in the suspended second sentence of
Rule 1001, OCC would resize the Clearing Fund so that it is the sum of:
(i) An amount equal to the peak five-day rolling average of Clearing
Fund draws observed over the preceding three calendar months of daily
idiosyncratic default and minor systemic default scenario calculations
based on OCC's daily Monte Carlo simulations (``Base Amount'') and (ii)
a prudential margin of safety determined by OCC and currently set at
$1.8 billion.\19\
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    \19\ On a daily basis, OCC computes its exposure under the
idiosyncratic and minor systemic events. The greater of these two
exposures is that day's ``peak exposure.'' To calculate the
``rolling five day average'' OCC computes the average of the peak
exposure for each consecutive five-day period observed over the
prior three-month period. To determine the Base Amount, OCC would
use the largest five-day rolling average observed over the past
three-months. This methodology was used to determine the Base Amount
of the Clearing Fund for November 2014 and December 2014.
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    OCC believes that the proposed Monthly Clearing Fund Sizing
Procedure provides a sound and prudent approach to ensure that the
Financial Resources are adequate to protect against the largest risk of
loss presented by the default of a Clearing Member or Clearing Member
Group. By virtue of using only the peak five-day rolling average and by
extending the look-back period, the proposed Monthly Clearing Fund
Sizing Procedure is both more responsive to sudden increases in
exposure and less susceptible to recently observed decreases in
exposure that would reduce the overall sizing of the Clearing Fund,
thus mitigating procyclicality.\20\ Furthermore, the prudential margin
of safety provides an additional buffer to absorb potential future
exposures not previously observed during the look-back period. The
proposed Monthly Clearing Fund Sizing Procedure would be supplemented
by the Financial Resource Monitoring and Call Procedure, described
below, to provide further assurance that the Financial Resources are
adequate to protect against such risk of loss.
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    \20\ Considering only the peak exposures is a more conservative
methodology that gives greater weighting to sudden increases in
exposure experienced by Clearing Members, thus enhancing the
responsiveness of the procedure to such sudden increases. By using a
longer look-back period, the methodology would respond more slowly
to recently observed decreases in peak exposures.
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Financial Resource Monitoring and Call Procedure
    Under the Financial Resource Monitoring and Call Procedure, OCC
would use the same daily idiosyncratic default calculation as under the
Monthly Clearing Fund Sizing Procedure to monitor daily the adequacy of
the Financial Resources to withstand a default by the Clearing Member
or Clearing Member Group presenting the largest exposure under

extreme but plausible market conditions.\21\ If such a daily
idiosyncratic default calculation projected a draw on the Clearing Fund
(a ``Projected Draw'') that is at least 75% of the Clearing Fund
maintained by OCC, OCC would be required to issue an intra-day margin
call pursuant to Rule 609 against the Clearing Member or Clearing
Member Group that caused such a draw (``Margin Call Event'').\22\
Subject to a limitation described below, the amount of the margin call
would be the difference between the Projected Draw and the Base
Clearing Fund (``Exceedance Above Base Amount''). In the case of a
Clearing Member Group that causes the Exceedance Above Base Amount, the
Exceedance Above Base Amount would be pro-rated among the individual
Clearing Members that compose the Clearing Member Group based on each
individual Clearing Member's proportionate share of the ``total risk''
for such Clearing Member Group as defined in Rule 1001(b), i.e., 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. However, in the case of
an individual Clearing Member or a Clearing Member Group, the margin
call would be subject to a limitation under which it could not exceed
the lower \23\ of: (a) $500 million, or (b) 100% of a Clearing Member's
net capital. Such limitation would be measured in aggregate with any
funds remaining on deposit with OCC deposited by the same Clearing
Member pursuant to a Margin Call Event within the same monthly period,
as applicable, until collection of all funds to satisfy the next
regular monthly Clearing Fund resizing (the ``500/100
Limitation'').\24\
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    \21\ Since the minor systemic default scenario contemplates two
Clearing Members' simultaneously defaulting and OCC maintains
Financial Resources sufficient to cover a default by a Clearing
Member or Clearing Member Group representing the greatest exposure
to OCC, OCC does not use the minor systemic default scenario to
determine the adequacy of the Financial Resources under the
Financial Resource Monitoring and Call Procedure.
    \22\ Rule 609 authorizes OCC to require the deposit of
additional margin in any account at any time during any business day
by any Clearing Member for, inter alia, the protection of OCC, other
Clearing Members or the general public. Clearing Members must meet a
required deposit of intra-day margin in immediately available funds
at a time prescribed by OCC or within one hour of OCC's issuance of
debit settlement instructions against the bank account(s) of the
applicable Clearing Member(s), thereby ensuring the prompt deposit
of additional Financial Resources.
    \23\ ``Capping'' the intra-day margin call avoids placing a
``liquidity squeeze'' on the subject Clearing Member(s) based on
exposures presented by a hypothetical stress test, which would have
the potential for causing a default on the intra-day margin call.
Back testing results determined that such calls would have been made
against Clearing Members that are large, well-capitalized firms,
with more than sufficient resources to satisfy the call for
additional margin with the proposed limitations.
    \24\ The Risk Committee would be notified, and could take action
to address potential Financial Resource deficiencies, in the event
that a Projected Draw resulted in a Margin Call Event and as a
result of the 500/100 Limitation the margin call was less than the
Exceedance Above Base Amount, but the Projected Draw was not so
large as to result in an increase in the Clearing Fund as discussed
below.
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    Upon satisfaction of the margin call, OCC would use its authority
under Rule 608 to preclude the withdrawal of such additional margin
amount until it collects all of the funds determined by the next
Monthly Clearing Fund Sizing Procedure. Based on three years of back
testing data, OCC determined that it would have had Margin Call Events
in 10 of the months during this time period. For each of these months,
the maximum call amount would have been equal to $500 million, with one
exception in which the maximum call amount for the month was $7.7
million.\25\ After giving effect to the intra-day margin calls, i.e.,
by increasing the Financial Resources by $500 million, there was only
one Margin Call Event where there was an observed stress test
exceedance of the Financial Resources.
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    \25\ The back testing analysis performed assumed a single
Clearing Member caused the exceedance.
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    To address this one observed instance, the Financial Resource
Monitoring and Call Procedure also would require OCC to increase the
size of the Clearing Fund (``Clearing Fund Intra-month Increase
Event'') if a Projected Draw exceeds 90% of the Clearing Fund, after
applying any funds then on deposit with OCC from the applicable
Clearing Member or Clearing Member Group pursuant to a Margin Call
Event. The amount of such increase (``Clearing Fund Increase'') would
be the greater of: (a) $1 billion; or (b) 125% of the difference
between (i) the Projected Draw, as reduced by the deposits resulting
from the Margin Call Event and (ii) the Clearing Fund. Each Clearing
Member's proportionate share of the Clearing Fund Increase would equal
its proportionate share of the variable portion of the Clearing Fund
for the month in question as calculated pursuant to Rule 1001(b). OCC
would notify the Risk Committee of the Board of Directors (the ``Risk
Committee''), Clearing Members and appropriate regulatory authorities
of the Clearing Fund Increase on the business day on which the Clearing
Fund Intra-month Increase Event occurred. This ensures that OCC
management maintains authority to address any potential Financial
Resource deficiencies when compared to its Projected Draw estimates.
The Risk Committee would then determine whether the Clearing Fund
Increase was sufficient, and would retain authority to increase the
Clearing Fund Increase or the margin call made pursuant to a Margin
Call Event in its discretion. Clearing Members would be required to
meet the call for additional Clearing Fund assets by 9:00 a.m. CT on
the second business day following the Clearing Fund Intra-Month
Increase Event. OCC believes that this collection process ensures
additional Clearing Fund assets are promptly deposited by Clearing
Members following notice of a Clearing Fund Increase, while also
providing Clearing Members with a reasonable period of time to source
such assets. Based on OCC's back testing results, after giving effect
to the intra-day margin call in response to a Margin Call Event plus
the prudential margin of safety, the Financial Resources would have
been sufficient upon implementing the one instance of a Clearing Fund
Intra-month Increase Event.
    OCC believes the Financial Resource Monitoring and Call Procedure
strikes a prudent balance between mutualizing the burden of requiring
additional Financial Resources and requiring the Clearing Member or
Clearing Member Group causing the increased exposure to bear such
burden. As noted above, in the event of a Margin Call Event, OCC limits
the margin call until collection of all funds to satisfy the next
regular monthly resizing to an aggregate of $500 million, or 100% of a
Clearing Member's net capital in order to avoid putting an undue
liquidity strain on any one Clearing Member. However, where a Projected
Draw exceeds 90% of OCC's Clearing Fund, OCC must act to ensure that it
has sufficient Financial Resources, and determined that it should
mutualize the burden of the additional Financial Resources at this
threshold through a Clearing Fund Increase. OCC believes that this
balance would provide OCC with sufficient Financial Resources without
increasing the likelihood that its procedures would, based solely on
stress testing results, cause a liquidity strain on any on Clearing
Member that could result in such member's default.
    The following examples illustrate the manner in which the Financial
Resource Monitoring and Call Procedure would be applied. All assume
that the Clearing Fund size is $7.8 billion, $6 billion of which is the
Base Amount and $1.8 billion of which is the prudential margin of
safety. The 75% threshold in these examples is $5.85 billion.

Example 1: Single CM
    Under OCC's stress testing the Projected Draw attributable to
Clearing Member ABC, a Clearing Member with no affiliated Clearing
Members and net capital of $500 million, is $6.4 billion, or 82% of the
Clearing Fund. OCC would make a margin call for $400 million, which
represents the Exceedance Above Base Amount. In this case the 500/100
Limitation would not be applicable because the Exceedance Above Base
Amount is less than $500 million and 100% of the Clearing Member's net
capital. The Clearing Member would be required to meet the $400 million
call within one hour unless OCC prescribed a different time, and OCC
would retain the $400 million until collection of all the funds to
satisfy the next monthly Clearing Fund sizing calculation.
    If, on a different day within the same month, CM ABC's Projected
Draw minus the $400 million already deposited with OCC results in an
Exceedance above Base Amount, another Margin Call Event would be
triggered, with the amount currently deposited with OCC applying toward
the 500/100 Limitation.
Example 2: Clearing Member Group
    Under OCC's stress testing the Projected Draw attributable to
Clearing Member Group DEF, comprised of two Clearing Members each with
net capital of $800 million, is $6.2 billion, or 79% of OCC's Clearing
Fund. OCC would initiate a margin call on Clearing Member Group DEF for
$200 million. The call would be allocated to the two Clearing Members
that compose the Clearing Member Group based on each Clearing Member's
risk margin allocation. In this case the 500/100 Limitation would not
be applicable because the Exceedance Above Base Amount is less than
$500 million and 100% of net capital. The margin call would be required
to be met within one hour of the call unless OCC prescribed a different
time. For example, in the case where one Clearing Member accounts for
75% of the risk margin for the Clearing Member Group, that Clearing
Member would be allocated $150 million of the call and the other
Clearing Member, accounting for 25% of the risk margin for the Clearing
Member Group, would be allocated $50 million of the call. The funds
would remain deposited with OCC until collection of all the funds to
satisfy the next monthly Clearing Fund sizing calculation.
Example 3: Clearing Member Group With $500 Million Cap
    Under OCC's stress testing the Projected Draw attributable to
Clearing Member Group GHI, comprised of two Clearing Members each with
net capital of $800 million, is $6.8 billion, or 87% of the Clearing
Fund. The Exceedance Above Base Amount would be $800 million, allocated
to the two Clearing Members that compose the Clearing Member Group
based on each Clearing Member's risk margin allocation. Using the 75/25
risk margin allocation from Example 2, one Clearing Member would be
allocated $600 million and the other Clearing Member would be allocated
$200 million. The first Clearing Member would be required to deposit
$500 million with OCC, which is the lowest of $500 million, that
member's net capital, or that member's share of the Exceedance Above
Base Amount, and the other Clearing Member would be required to deposit
$200 million with OCC. After collecting the additional margin, OCC
would determine whether the Projected Draw would exceed 90% of the
Clearing Fund after reducing the Projected Draw by the additional
margin. This calculation would divide a Projected Draw of $6.1 billion,
which is the original Projected Draw of $6.8 billion reduced by the
additional margin, by the Clearing Fund of $7.8 billion. The resulting
percentage of 78% would be below the 90% threshold, and accordingly
there would not be a Clearing Fund Intra-month Increase Event.
Example 4: Margin Call and Increase in Size of Clearing Fund
    Under OCC's stress testing the Projected Draw attributable to
Clearing Member JKL, a Clearing Member with no affiliated Clearing
Members and net capital of $600 million, is $10.0 billion, or 128% of
the Clearing Fund. OCC would make a margin call for $500 million, which
represents the lowest of the Exceedance Above Base Amount, $500 million
and 100% of net capital. The Clearing Member would be required to meet
the $500 million call within one hour unless OCC prescribed a different
time, and OCC would retain the $500 million until collection of all the
funds to satisfy the next monthly Clearing Fund sizing calculation.
After collecting the additional margin, OCC would determine whether the
Projected Draw would exceed 90% of the Clearing Fund after reducing the
Projected Draw by the additional margin. This calculation would divide
a Projected Draw of $9.5 billion, which is the original Projected Draw
of $10 billion reduced by the additional margin, by the Clearing Fund
of $7.8 billion. The resulting percentage of 122%, while lower, would
still exceed the 90% threshold, and accordingly OCC would declare a
Clearing Fund Intra-month Increase Event. To calculate the Clearing
Fund Increase, OCC would first determine the difference between the
modified Projected Draw ($9.5 billion) and the Clearing Fund ($7.8
billion), which in this case would be $1.7 billion, OCC would then
multiply this by 1.25, resulting in $2.125 billion. Because this amount
is greater than $1 billion, the Clearing Fund Increase would be $2.125
billion and a modified Clearing Fund of OCC totaling $9.925 billion
($425 million in excess of the modified Projected Draw of $9.5
billion).
Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes that the proposed change regarding the establishment
of the Monthly Clearing Fund Sizing Procedure and Financial Resource
Monitoring and Call Procedure described above is consistent with
section 805(b)(1) of the Payment, Clearing and Settlement Supervision
Act \26\ because the proposed procedures will promote robust risk
management by setting forth a process in order to ensure that OCC
maintains adequate Financial Resources in the event of a default of a
Clearing Member or Clearing Member Group presenting the largest
exposure to OCC. The proposed change regarding the establishment of
these procedures is also consistent with section 806(e)(2) of the
Payment, Clearing and Settlement Supervision Act, upon which OCC relied
in originally suspending the effectiveness of the second sentence of
Rule 1001(a) and increasing the size of the Clearing Fund on October
15, 2014, because it allows OCC to continue to provide its services in
a safe and sound manner.\27\
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    \26\ 12 U.S.C. 5464(b)(1).
    \27\ 12 U.S.C. 5464(e)(2); see SR-OCC-2014-807, supra, note 8.
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Anticipated Effect on and Management of Risk
    OCC believes that the proposed change will reduce OCC's overall
level of risk because the proposed change makes it less likely that
OCC's Clearing Fund would be insufficient should OCC need to use its
Clearing Fund to manage a Clearing Member or Clearing Member Group
default. The Monthly Clearing Fund Sizing Procedure would permit OCC to
determine the size of its Clearing Fund by relying on a broader range
of sound risk management practices than

those considered in the suspended second sentence of Rule 1001(a). OCC
believes that using the peak five-day rolling average of Clearing Fund
draws observed over a three-month period will result in a monthly
resizing of the Clearing Fund that will better reflect the risks posed
by sudden increases in exposure experienced by Clearing Members. OCC
also believes that the proposed prudential margin of safety will
provide an additional buffer to protect against exposures not reflected
in the three-month look-back period. The Financial Resource Monitoring
and Call Procedure would enable OCC to minimize losses in the event of
a default of a Clearing Member or Clearing Member Group presenting the
largest exposure to OCC, by allowing it the flexibility to obtain
additional Financial Resources either through an intra-day margin call
or an intra-month increase in the size of the Clearing Fund, which
would ensure that the clearance and settlement of transactions in
options and other contracts occurs without interruption. Accordingly,
OCC believes that the proposed changes would reduce risks to OCC and
its participants. Moreover, and for the same reasons, the proposed
change will facilitate OCC's ability to manage risk.

III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action

    The advance notice may be implemented if the Commission does not
object to the advance notice within 60 days of the later of (i) the
date that the advance notice was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. OCC shall not implement the advance notice if the Commission
has any objection to the advance notice.
    The Commission may extend the period for review by an additional 60
days if the advance notice raises novel or complex issues, subject to
the Commission providing OCC with prompt written notice of the
extension. An advance notice may be implemented in less than 60 days
from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies OCC in writing that it does not object to the advance notice
and authorizes OCC to implement the advance notice on an earlier date,
subject to any conditions imposed by the Commission.
    The clearing agency shall post notice on its Web site of proposed
changes that are implemented.
    The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-OCC-2014-811 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2014-811. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the advance notice that are filed
with the Commission, and all written communications relating to the
advance notice between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of OCC and on OCC's Web site at
http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_811.pdf. All comments received will be posted without change;
the Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-OCC-
2014-811 and should be submitted on or before May 7, 2015.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-08712 Filed 4-15-15; 8:45 am]
 BILLING CODE 8011-01-P