2025-01412. Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Amendment No. 3 to Proposed Rule Change by The Options Clearing Corporation To Establish a Margin Add-On Charge That Would Be Applied to All Clearing ...

Table 1—Summary of Changes Proposed by Amendment No. 3

[Footnotes at end of table.]

Initial filing	Amendment	Rationale for amendment
The Intraday Risk Charge would be calculated based on the average of the previous month's daily peak intraday risk increases observed from 20- minute snapshots in overnight and regular trading hours, between 12:30 a.m. through 3:15 p.m. Central Time	The Intraday Risk Charge would be calculated based on the average of the previous month's daily peak intraday risk increases observed from 20-minute snapshots between 11:00 a.m. through 12:30 p.m. Central Time	Industry participants commented that 20-minute snapshots during trading hours were too frequent, and suggested the OCC use fewer snapshots at predictable intervals.a OCC would continue to manage the intraday risk associated with overnight trading activity through its existing extended trading hour procedures.b
An OCC Officer may issue a margin call if a verified intraday risk increase during regular trading hours is greater than 3 standard deviations of a Clearing Member's Intraday Risk Charge	An OCC Officer may issue a margin call at a single intraday collection time if a Clearing Member's verified intraday risk increase at or around 12:00 p.m. Central Time is greater than 3 standard deviations of the previous month's daily peak intraday risk increases, observed from 20-minute snapshots between 12:30 a.m. through 3:15 p.m. Central Time	The single collection timeframe aligns with (1) the timeframe in which the observations for the Intraday Risk Charge are measured, and (2) OCC's current scheduled Portfolio Revaluation margin calls previous approved by the Commission.c Measuring against the Clearing Member's peak intraday risk increases from both overnight and regular trading hours would result in a manageable number of potential risk increases to investigate for purposes of issuing margin calls, allowing OCC to focus on intraday activity presenting the most risk.
	OCC would continue to monitor for breaches of the 3 standard deviation threshold in 20-minute snapshots throughout the trading day, and would continue to have authority to issue an intraday margin call under Rule 609, as it does today. Margin calls issued outside of the single intraday collection time must be approved by the Chief Financial Risk Officer, Chief Executive Officer, Chief Operation Officer, or Chief Risk Officer	This amendment aligns with (1) Commission guidance in the above-referenced final rule that schedule intraday margin calls may not be sufficient and that CCAs need to have the ability to make unscheduled intraday margin calls,d and (2) OCC's current Portfolio Revaluation margin call process in allowing margin calls to be issued outside the single intraday collection time with escalated approvals
120-day implementation period following receipt of all necessary regulatory approval	OCC would implement the changes in September 2025	Industry participants have commented that 120 days is insufficient for them to prepare for the changes. The proposed implementation dates are within the compliance period for the Commission's above-referenced final rule, which requires a CCA to implement rule-filed changes by December 15, 2025.e
a   See, e.g., letter from Kimberly Unger, CEO and Executive Director, The Security Traders Association of New York, Inc. dated October 30, 2024, available at https://www.sec.gov/​comments/​sr-occ-2024-010/​srocc2024010.htm.
b   See Exchange Act Release No. 74268 (Feb. 12, 2015), 80 FR 8917 (Feb. 19, 2015) (SR-OCC-2014-24) (SR-OCC-2014-24) (requiring Clearing Members qualified to participate in overnight trading sessions to provide an additional margin requirement in an amount of the lesser of $10 million or 10% of the Clearing Member's net capital).
c   See Exchange Act Release No. 82658 (Feb. 7, 2018), 83 FR 6646, 6648 (SR-OCC-2017-007).
d   See Exchange Act Release No. 101446, supra note 7, 89 FR 91005.
e   Id. at 91037.

( print page 7724)

(1) Purpose

Background

OCC is the sole clearing agency for standardized equity options listed on national securities exchanges registered with the Commission. OCC also clears stock loan and futures transactions. In its role as a clearing agency, OCC guarantees the performance of its Clearing Members for all transactions cleared by OCC by becoming the buyer to every seller and the seller to every buyer (or the lender to every borrower and the borrower to every lender, in the case of stock loan transactions). These clearing activities could expose OCC to financial risks if a Clearing Member fails to fulfil its obligations to OCC. In its role as guarantor for all transactions cleared through OCC, one of the more material risks related to a Clearing Member's failure to perform is credit risk arising from the activity of the Clearing Members whose performance OCC guarantees. OCC manages these financial risks through financial safeguards, including the collection of margin collateral from Clearing Members designed to, among other things, address the market risk associated with a Clearing Member's positions during the period of time OCC has determined it would take to liquidate those positions.

At the start of each business day, OCC collects margin requirements for each marginable account calculated by OCC's proprietary System for Theoretical Analysis and Numerical Simulation (“STANS”) based on the account's end-of-day positions from the previous business day.^[8] OCC also makes intraday margin calls in defined circumstances. For example, pursuant to OCC Rule 609 and OCC's Margin Policy, which has been filed with and approved as a rule by the Commission,^[9] OCC requires the deposit of intraday margin to reflect changes in the value of securities deposited by the Clearing Member as margin when certain defined thresholds are breached.^[10] OCC also issues intraday margin calls when unrealized losses observed for an account based on positions from extended trading hours (“ETH”) ^[11] exceed certain thresholds.^[12] In addition, OCC maintains broad authority under OCC Rule 609 to issue intraday margin calls or otherwise set a Clearing Member's margin requirement in other circumstances, including as a protective measure pursuant to Rule 307.^[13]

Since the time these existing margin collection processes were established, OCC has observed a significant increase in contract volume and, in particular, volume in option contracts traded on the day of their expiration—so-called “zero-days-to-expiration” or “0DTE” options.^[14] Currently, 0DTE option trading volume can spike to up to 40% of total trading volume on Friday expirations.^[15] This increase in 0DTE options trading has coincided with the proliferation of option expiries. Traditionally, listed options expired on the third Friday of the month.^[16] In 2005, the Chicago Board Options Exchange (“Cboe”), one of the participant exchanges for which OCC provides clearance and settlement services, began listing weekly options on the S&P 500 Index (“SPX”) expiring each Friday of the month, and subsequently introduced Monday and Wednesday weekly SPX expirations in 2016 before adding Tuesday and Thursday weekly SPX expirations in 2022.^[17] Weekly and daily expiration cycles were introduced to options on other indexes, single-name stocks, and exchange traded products ( e.g., ETFs). As a result, options now expire every trading day of the year.

The increase in 0DTE options trading combined with increased intraday trading activity across other products poses challenges to OCC's risk management, particularly with respect to the management of OCC's overnight and intraday risk exposure to its Clearing Members in between the collections of margin at the start of each business day. Because OCC's STANS margin calculation is based on end-of-day positions, the margin requirement may not account for 0DTE options trading activity, since the Clearing Member would have either traded out of or exercised the options position, or the option would have expired by the end of the day. Similarly, in the current system the risk increase from intraday trading activity across other products would only be captured once end-of-day positions are established, which when margin calculations are applied would not account for the intraday risk increase from any positions that were traded out of. In addition, OCC's portfolio revaluation process for purposes of determining intraday margin calls to address the change in value of margin collateral is based on a Clearing Member's start-of-day collateral deposits, which would not include margin for 0DTE options or intraday positions. For these reasons OCC proposes to establish the Intraday Risk Charge add-on to capture such risk increases, and the associated Intraday Monitoring Thresholds regime to observe and measure risk increasing activity.

Proposed Changes

Based on industry and participant feedback and to conform to the recent release of the Commission's final rule amending the CCA Standards concerning intraday margin calls, and in order to mitigate OCC's intraday risk exposures, OCC proposes to: (i) narrow the window over which the Intraday Risk Charge would be calculated to between 11:00 a.m. to 12:30 p.m. Central Time, (ii) to remove any ( print page 7725) reference to the Intraday Risk Charge with respect to the Intraday Monitoring Thresholds and limit the issuance of a margin calls to a single intraday collection time at or around 12:00 p.m. Central Time, (iii) clarify that intraday margin calls would be issued at a single intraday collection time, and any margin calls outside of the collection time must be approved by the Chief Financial Risk Officer, Chief Executive Officer, Chief Operations Officer, or Chief Risk Officer, (iv) provide FRM Officers with discretion on whether to issue or not issue a margin call based on certain facts and circumstances, while also requiring the documentation of such decisions, and (v) extend the implementation time frame from within 120 days of approval to September of 2025 to align with the projected Ovation release date, and provide more time for industry participants to prepare for the proposed rule change.

1. Intraday Risk Charge Add-On

In the Initial Filing,^[18] OCC had proposed a margin add-on charge (the “Intraday Risk Charge”), which would be calculated using the system currently employed to monitor Clearing Members' overnight trading activity. Through OCC's Watch Level surveillance under its Third-Party Risk Management Framework, OCC has also used this system to identify patterns of risk increasing activity in 0DTE options for purposes of considering and calculating protective measures in the form of additional margin for particular Clearing Members when certain thresholds have been breached relative to a Clearing Member's net capital. OCC proposed to extend that approach to all Clearing Members (without regard to net capital thresholds) and with respect to all products OCC clears.

OCC's current intraday margin system recalculates the STANS margin risk using portfolio position sets updated every 20 minutes between 8:30 a.m. and 6:30 p.m. Central Time, and at-least every hour during ETH sessions. OCC considers that 20 minutes is sufficient time under OCC's current system capabilities to provide consistent and reliable snapshot results at a steady cadence during regular trading hours with heavy trading activity. Outside of regular trading hours and during overnight trading, hourly intervals between snapshots were deemed more appropriate because of the significantly lower trading activity. OCC currently employs and will continue to use the intraday margin system for ETH monitoring, including to determine when to issue an ETH margin call.^[19] This system calculates a forecasted margin requirement as if the positions at that point in time were present during the previous night's margin calculation. Results that show an increase to the prior night's margin requirement based on the STANS expected shortfall and stress test components are considered risk increasing. OCC would use the outputs from the previous night's daily STANS methodology calculation, incorporating current portfolio changes, to monitor that day's peak intraday risk increases. Under the Initial Filing,^[20] the Intraday Risk Charge would have been calculated monthly as at least the average of the peak intraday risk increases ( i.e., an average of the largest risk increase calculated on each business day of the lookback period) as measured throughout overnight and regular trading hours ( i.e., between 12:30 a.m. through 3:15 p.m.).

OCC proposes to amend the proposed Intraday Risk Charge so that it is determined based on a narrower monitoring interval. Specifically, OCC would calculate the Intraday Risk Charge based on the average daily increased risk identified through OCC's current intraday margin system between the hours of 11:00 a.m. and 12:30 p.m. Central Time; provided however, that OCC may adjust the Intraday Risk Charge as described further below. This change would address comments that the 20-minute snapshots during overnight and intraday trading hours were too frequent and suggested that OCC use fewer snapshots at predictable intervals. In particular, by narrowing the window, Execution-Only Clearing Members ^[21] that are able to allocate trades prior to that window may eliminate or significantly reduce their intraday risk exposure for purposes of determining an Intraday Risk Charge.

As under the Initial Filing,^[22] the Intraday Risk Charge would be calculated on the first business day of the month and would be based on data and STANS outputs generated over the lookback period, which will be set as the previous month. The Intraday Risk Charge would be calculated monthly as at least the average of the peak intraday risk increases over the shorter duration. OCC considers the one-month lookback period, a timeframe that includes one monthly and multiple weekly standard expirations, to be a conservative approach that would react faster to recent changes in the risk behavior of Clearing Members compared to a more extended lookback period and produces more relevant forecasts for the next monitoring cycle.^[23]

As under the Initial Filing,^[24] the calculation of the peak intraday activity would capture all products that OCC clears, including 0DTE options. The Intraday Risk Charge would apply to all margin accounts other than cross-margin accounts for OCC's cross-margining program with the Chicago Mercantile Exchange (“CME”), which do not currently support intraday position feeds. OCC would retain authority to increase the amount of the charge for a particular Clearing Member beyond the average of the peaks, either when adjusting the Intraday Risk Charge on a monthly basis or on an intra-month basis, when conditions would warrant a different approach consistent with maintaining sufficient financial resources to cover OCC's intraday credit exposure. Conditions that would cause OCC to increase the Intraday Risk Charge above the minimum amount include when OCC determines it maintains insufficient margin resources to cover the pattern or distribution of risk increases over the previous lookback period, or in cases of an account's business expansion. OCC would also have authority to decrease the amount of the charge, which would be limited to a Clearing Member's business reduction, termination of account(s), transfer of positions to different account(s), or the imposition of protective measures under Rule 307B. Such charge adjustments may apply to particular or all Clearing Members.

To effect the proposed changes, OCC proposes to amend Rule 601 by adding ( print page 7726) a new paragraph (i) as described above to incorporate the shorter time frame involved in the calculation of the Intraday Risk Charge. As in the Initial Filing,^[25] OCC proposes to define the Intraday Risk Charge under proposed Rule 601(i)(1) to mean the additional margin assets required from a Clearing Member to mitigate any increased risk exposure to OCC not otherwise covered by the margin requirements already calculated in accordance with Rule 601 and OCC's policies and procedures. To reflect the narrower time from which the observations that determine the Intraday Risk Charge would be drawn, Rule 601(i)(1) would further provide that OCC may assess the Intraday Risk Charge as part of the Clearing Member's daily margin required, as needed, to mitigate exposure and cover uncollateralized risk resulting from “intraday trading activities,” as opposed to “overnight and intraday trading activities” as proposed in the Initial Filing.^[26] In the amended proposal, OCC would similarly remove other references to overnight trading activity from the OCC Rules and Margin Policy as proposed in the Initial Filing.

Proposed Rule 601(i)(2) would be modified to provide the method of calculation for the Intraday Risk Charge add-on, which would generally be set as the average of the peak intraday risk increases from portfolio position changes between 11:00 a.m. and 12:30 p.m. Central Time over the preceding month.^[27] Proposed Rule 601(i)(3), would remain unchanged from the Initial Filing.^[28] Specifically, that Rule would provide that OCC retains authority to adjust the Intraday Risk Charge if OCC determines that circumstances particular to a Clearing Member's activity would warrant a different approach consistent with maintaining sufficient financial resources to cover OCC's intraday credit exposure. Any adjustment under this Rule to decrease the amount of the Intraday Risk Charge calculated from the previous month's intraday risk increases would be limited to a Clearing Member's business reduction, termination of account(s), transfer of positions to different account(s), or the imposition of protective measures under Rule 307B. Rule 601(i)(3) would also provide that OCC retains the authority to adjust the Intraday Risk Charge more frequently than monthly.

OCC would also amend its Margin Policy to describe material aspects of the Intraday Risk Charge as discussed herein. As under the Initial Filing,^[29] the new charge would be added to the “Add-On Charges” section. That proposed addition, as amended, would provide that between 11:00 a.m. through 12:30 p.m., OCC measures the intraday exposure to each margin account for which intraday position information is available to identify intraday risk increases above the baseline STANS risk measurement. The proposed amendments to the Margin Policy would define this time window as the “Intraday Risk Charge Measurement Time.” As under the Initial Filing,^[30] the Margin Policy would define “risk increases” in this context as results that show an increase to a portfolio's prior night calculated risk measurement based on the STANS expected shortfall and stress test components.

As under the Initial Filing,^[31] the Margin Policy would further provide that on at least a monthly basis, OCC's Financial Risk Management department (“FRM”) reviews and verifies the daily peak increases in the Intraday Risk Charge Measurement Time based on a referenced procedure maintained by FRM's Market Risk business unit.^[32] This verification of risk-increasing activity is intended to address certain known limitations in OCC's existing intraday system.³³ For example, the system does not take into account options affected by corporate action adjustments and newly listed option series or strikes, which do not receive adjusted metrics until the next overnight margin calculation process. In addition, the 20-minute snapshot generated by the system may not capture a complete trade in a single snapshot, which may result in a misalignment of the peak calculation for an account. The snapshot timing may also cause collateral movements to be recorded as risk-increasing deposits instead of being risk-reducing movements. Pursuant to the referenced procedures, Market Risk would verify the peak daily results to prevent erroneous results from affecting the calculation of the Intraday Risk Charge. This verification process is similar to, and would proceed in a similar manner as, Market Risk's long-standing process for verifying results from OCC's system for monitoring a portfolio's unrealized losses based on current prices and start-of-day positions for purposes of charging intraday margin calls.³⁴ Upon completion of the verification process, OCC would apply the Intraday Risk Charge to Clearing Members for the upcoming month.

As under the Initial Filing,^[35] the Margin Policy would provide that OCC may impose the Intraday Risk Charge in the amount of the average of the verified peak daily risk increases in the Intraday Risk Charge Measurement Time over the prior month with FRM Officer ^[36] approval. Adjustments to the charge can occur at the time of the monthly review or on an intramonth basis, e.g., in response to the intraday monitoring thresholds discussed below. Reductions would be limited to persistent changes in clearing activity that would reduce the risk profile of the account, e.g., business reduction, account terminations transfer of positions to different account(s), or the imposition of protective measures under Rule 307B. Any changes that would increase the charge over the minimum calculated may result from changes in the pattern or distribution of risk increases over the previous lookback period or persistent changes in clearing activity that would increase the risk profile of the account, e.g. business expansions. If the FRM Officer recommends any changes to an Intraday Risk Charge, the Model Risk Working Group (“MRWG”) must review and is authorized to escalate the recommendation to the Office of the Chief Executive Officer, who must review and is authorized to approve the changes.^[37] The Margin Policy vests review responsibility and escalation authority to the MRWG because it is a cross-functional group responsible for assisting OCC's management in overseeing OCC's model-related risk ( print page 7727) comprised of representatives from relevant OCC business units. OCC believes that the MRWG is the appropriate decisionmaker to consider whether a higher Intraday Risk Charge is warranted because it is composed of the subject matter experts most familiar with the performance of and risks associated with OCC's margin models, including personnel in OCC's Model Risk Management business unit, who, under OCC's Risk Management Framework, are responsible for evaluating model parameters and assumptions and providing effective and independent challenge through OCC's model lifecycle.^[38]

OCC has reviewed the potential impact of the proposed add-on charge on all Clearing Members over a thirteen-month period.^[39] OCC has observed that the proposed add-on would have generated a margin increase of less than 1.1% in the aggregate on average,^[40] representing almost $1.099 billion across all Clearing Members out of margin requirements. For comparison, under the Initial Filing, the proposed add-on would have generated an average margin increase of approximately $1.968 billion, less than a 1.9% increase. Of the ten firms that would be most impacted, which collectively represent approximately 73% of the additional margin that would have been assessed, the average daily margin percentage increases ranges from approximately 1% to less than 15%, based on data from September 2023 to September 2024, or between $22 million and $315 million.

As compared to the Initial Filing, that aggregate amount of the additional margin would be distributed across market-maker, firm and customer accounts as follows:

Table 2—Impact by Account Type

	Initial filing	Proposed amendment
Market-Maker Accounts	$392.1 million	$276.6 million.
Firm Accounts	$590.5 million	$306.3 million.
Customer Accounts	$986.1 million	$516.7 million.
All Accounts	$1.9686 billion	$1.0996 billion.