The Options Clearing Corporation (“OCC") appreciates the opportunity to submit these comments on the above-reference proposal (“Proposal” or “Proposed Rules”) under the Securities Exchange Act of 1934 (“Exchange Act”). The Proposal would (i) require covered clearing agencies (“CCAs”) to be able to monitor intraday exposure and be able to make intraday margin calls as frequently as warranted; (ii) require CCAs to have alternative sources of data or an alternate risk-based margin system in the event that substantive inputs from third-parties to a CCA’s margin system are unavailable; and (iii) define certain required components of each CCA’s recovery and wind-down plan (“RWP”).
As a SIFMU and the sole central clearinghouse for U.S. exchange-listed options, OCC supports the Commission’s goal of ensuring that the CCA standards reflect, to the degree appropriate, developments in markets and relevant international standard setting. Any changes to the CCA standards, however, should be approached in the context of the demonstrated stability and resilience of existing CCAs and their core services. The Commission should carefully consider changes to existing requirements to avoid potential unforeseen consequences that could come from the addition of overly prescriptive requirements that impose one-size-fits-all mandates rather than allowing CCAs to engage in their core risk management functions using their knowledge of and expertise in the products and markets they serve.
In many respects, the Commission has struck this balance in the Proposal. As proposed, the intraday margin requirements provide sufficient discretion – in determining surveillance intervals and margin call thresholds – to calibrate their margin practices in a manner appropriate to the markets they serve and products they clear, while still fulfilling the Commission’s goal of ensuring that they have the operational capability to address material developments in the risks they are bearing. In finalizing the rule, the Commission should retain this discretion, and recognize the importance of allowing CCAs to consider, in setting their intraday margin practices, not just potentially fleeting market movements, but also the benefits of maximizing, to the extent possible, predictability in liquidity demands for clearing members, and avoiding the potentially procyclical effects of repeated, unscheduled margin calls.
With respect to the alternative data source requirements, OCC recognizes the concerns that animate the Proposal and broadly supports the Commission’s goal of ensuring that CCA margin models will remain operative even when certain third-party data becomes unavailable. OCC, as is likely true of nearly all CCAs, already identifies substantive inputs into its model and potential alternative sources of – or alternatives to - those inputs. Those determinations are made based on OCC’s understanding of its margin model’s operation and the impact of each substantive input into that model. In certain instances, an alternative source of a precise, like-for-like substitute for a certain substantive input may not be available or may be prohibitively expensive to obtain when weighed against the impact of that input on the model’s performance; in such cases, a manual or intermittent process may substitute for an automated feed without material impact on the model’s effectiveness. In finalizing the Proposal, the Commission should recognize the need for CCAs to retain flexibility to make these judgments based on their own needs and the parameters of their proprietary models.
Similarly, the Proposed Rules concerning RWP contents generally provide CCAs with flexibility to tailor their RWPs to address their unique circumstances, and in particular the fact that many CCAs act as the sole central counterparty in the market(s) they serve. As such, OCC is generally supportive of this aspect of the Proposal, which broadly reflects known best practices for CCP RWPs. Below, we suggest minor amendments to the Proposal to ensure that any final rule reflects the importance of this discretion and the need to balance ongoing assurance and verification of components of the RWP with the significant amount of time and required resources that would be involved with any additional, separate testing requirement.
Below we offer more detailed comments on the Proposed Rules.