Options Clearing Corporation (OCC) Alert! [OPEN FOR COMMENT] Order Instituting Proceedings to Determine Whether to Approve/Disapprove a Proposed Rule Change Concerning the Options Clearing Corporation’s Collateral Haircuts and Standards for Clearing Banks

Source: https://public-inspection.federalregister.gov/2023-06195.pdf

Introduction

• On December 5, 2022, the Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change SROCC-2022-012 (“Proposed Rule Change”).
• To change rules, policies, and procedures regarding collateral haircuts, minimum standards for clearing banks and letter-of-credit issuers, and concentration limits for letters of credit.
• The Proposed Rule Change was published for public comment in the Federal Register on December 23, 2022.
• The Commission has received comments regarding the Proposed Rule Change: https://www.sec.gov/comments/sr-occ-2022-012/srocc2022012.htm
• On February 3, 2023, pursuant to Section 19(b)(2) of the Exchange Act,6 the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change.

What is going on:

• OCC is a central counterparty (“CCP”), which means it interposes itself as the buyer to every seller and seller to every buyer for financial transactions.
• As the CCP for the listed options markets in the U.S., as well as for certain futures, OCC is exposed to certain risks arising from its relationships with its members as well as the banks that support OCC’s clearance and settlement services.
• Such risks include credit risk because OCC is obligated to perform on the contracts it clears even where one of its members defaults.
• OCC manages credit risk, in part, by collecting collateral from members (i.e., margin and Clearing Fund resources) sufficient to cover OCC’s credit exposure to Clearing Members under a wide range of stress scenarios.
• In doing so, OCC requires its Clearing Members to deposit collateral as margin to support obligations on short options, futures contracts, and other obligations arising within the members’ accounts at OCC.
• OCC also requires its members to deposit collateral serving as Clearing Fund assets to protect OCC, should the margin of a defaulting member be insufficient to address the potential losses from the defaulting member’s positions.
• OCC imposes a haircut to collateral to address the risk that such collateral may be worth less in the future than at the time it was pledged to OCC.
• With regard to risks posed by the banks that support OCC’s clearance and settlement services, OCC maintains standards for third-party relationships, such as those with banks through which OCC conducts settlement (“Clearing Banks”), and banks that issue letters of credit that Clearing Members may deposit as margin collateral.

Summary of the Proposed Rule Change:

OCC proposes to revise its rules, including certain policies, to make the following three changes related to the management of collateral haircuts and banking relationships:

1. Replace the current processes for applying haircuts to Government and Government-Sponsored Enterprise (“GSE”) debt securities provided as collateral* with a new process for applying fixed collateral haircuts that it would set and adjust from time to time, based on a process defined in OCC’s Collateral Risk Management Policy.
2. Codify internal standards for Clearing Banks and letter-of-credit issuers in OCC’s Rules to provide transparency on minimum standards for banking relationships that are critical to OCC’s clearance and settlement services.
3. Authorize OCC to set more restrictive concentration limits for letters of credit than those limits currently codified in its Rules.

*Generally, OCC defines, by rule, specific haircuts for Government and GSE debt securities. For margin collateral specifically, OCC currently also has authority to value such securities using Monte Carlo simulations as part of its margin methodology.

They are asking for comments:

Published today (3/27) so this one is coming up quickly!

How to comment:

Electronic Comments:

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml)
• Send an e-mail to [email protected]. Please include File Number SROCC-2022-012 on the subject line.

Paper comments:

• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-OCC-2022-012.

Things to keep in mind:

• To help the Commission process and review your comments more efficiently, please use only one method.
• The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml).
• Copies of the submission, all subsequent amendments, all written statements with respect to the Proposed Rule Change that are filed with the Commission, and all written communications relating to the Proposed Rule Change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m.
• Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC’s website at https://www.theocc.com/CompanyInformation/Documents-and-Archives/By-Laws-and-Rules.
• All comments received will be posted without change.
• Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions.
• You should submit only information that you wish to make available publicly
• All submissions should refer to File Number SR-OCC-2022-012 and should be submitted on or before 4/11/23.
• Rebuttal comments should be submitted by 4/24/2023

TLDRS:

OCC proposes [OPEN for comment] to revise its rules, including certain policies, to make the following three changes related to the management of collateral haircuts and banking relationships:

1. Replace the current processes for applying haircuts to Government and Government-Sponsored Enterprise (“GSE”) debt securities provided as collateral* with a new process for applying fixed collateral haircuts that it would set and adjust from time to time, based on a process defined in OCC’s Collateral Risk Management Policy.
2. Codify internal standards for Clearing Banks and letter-of-credit issuers in OCC’s Rules to provide transparency on minimum standards for banking relationships that are critical to OCC’s clearance and settlement services.
3. Authorize OCC to set more restrictive concentration limits for letters of credit than those limits currently codified in its Rules.

Reddit Post