FR 2025-01412

General Summary

The document under review is a notice from the Securities and Exchange Commission (SEC) regarding a proposed rule change filed by The Options Clearing Corporation (OCC). This proposed change, known as Amendment No. 3, aims to address risks arising from intraday and overnight trading activities by introducing an Intraday Risk Charge. This charge is intended to mitigate risks associated with fast-paced trading activities, particularly those involving options that expire on the same day they are traded, known as "zero-days-to-expiration" (0DTE) options. These proposed rules are designed to ensure that OCC's risk management practices are updated to account for modern trading patterns, aligning with recent SEC directives and feedback from industry stakeholders. The SEC is open to receiving public comments on this proposal and has scheduled the implementation of these changes for September 2025.

Significant Issues or Concerns

One of the primary concerns with the document is the complexity and technicality of its language, which may be difficult for a general audience to grasp. The document makes extensive use of industry jargon and acronyms such as STANS, CCA Standards, and 0DTE, without providing detailed explanations. This could impede understanding for those not deeply familiar with securities regulation and options trading.

Additionally, while the document provides an assessment of the financial impact of the proposed Intraday Risk Charge on Clearing Members, the potential consequences are not laid out clearly enough for all stakeholders to appreciate. There's an assumption of pre-existing knowledge about OCC's operational rules, such as Rule 601 and Rule 609, which may not be well known outside industry circles.

The rationale for the specific timing of the Intraday Risk Charge Measurement is not clearly articulated, leaving room for confusion among readers who are not familiar with the intricacies of OCC’s processes. Furthermore, while alternative approaches to managing intraday risk are briefly mentioned, the document does not delve into why these alternatives were deemed unsuitable, which may limit stakeholder confidence in the chosen method.

Potential Impact on the Public

For the broader public, especially investors and those trading options, this rule proposal reflects a move towards greater financial stability and risk management in trading environments. This is particularly relevant in today's fast-paced, digital-driven trading markets where significant risks can emerge quickly due to high trading volumes around option expirations.

However, the intricate nature of the proposal might alienate non-specialist public members who wish to provide input but find the technical language a barrier. The lack of detailed public commentary integration may also leave the general public questioning how their views might be considered.

Impact on Specific Stakeholders

For Clearing Members and those directly involved in trading, the proposed rule change could have significant implications. Positively, the rule could lead to enhanced stability and security in trading environments, reducing the likelihood of defaults and associated market disruptions due to uncovered risk exposures.

Negatively, Clearing Members may face increased operational and financial burdens due to the additional margin requirements, potentially impacting their liquidity and trading strategies. Execution-only Clearing Members may find the proposal particularly challenging if they cannot easily adjust their practices to align with the new monitoring and charge assessment window.

Overall, while the proposed changes aim to protect the integrity of the financial markets and enhance systemic risk management, the execution details and their impacts remain a critical consideration for industry stakeholders and the SEC. The extended timeframe seeks to provide sufficient preparation time, though successful implementation will depend heavily on effective communication and cooperation between the OCC, industry participants, and regulatory bodies.

The document outlines a proposed rule change by The Options Clearing Corporation (OCC) to address financial risks associated with intraday and overnight trading activities. Central to this proposal is the introduction of a margin add-on charge known as the "Intraday Risk Charge." This financial mechanism is intended to enhance OCC's ability to manage credit exposure arising from trading activities that occur during the day, which are not adequately captured by their current margin system.

In evaluating the potential financial impact of this charge, OCC conducted an assessment over a thirteen-month period. The results suggest that the proposed add-on would lead to a margin increase of less than 1.1% in the aggregate on average, amounting to almost $1.099 billion across all Clearing Members. This is a significant financial adjustment that would apply across the board to all participants involved with clearing activities through OCC. Comparatively, the initial proposal would have resulted in an average margin increase of approximately $1.968 billion, illustrating a less burdensome adjustment in this latest proposal.

The new rule is expected to disproportionately affect certain firms. The ten firms most impacted by this charge would face daily margin increases ranging from approximately 1% to less than 15%, translating to financial increases between $22 million and $315 million for these entities. This underscores a potential issue with varying degrees of impact on different Clearing Members based on their trading volume and strategies, notably those with significant positions in "zero-days-to-expiration" or "0DTE" options.

For firms classified as Execution-Only Clearing Members, the document anticipates a specific financial impact, introducing approximately $23.4 million of additional margin in aggregate. This amount reflects a reduction from the initial estimate of $39.4 million, assuming no strategic trading changes are made by these members.

In addition to the general margin increase, the financial policy includes a stipulation that proposed margin calls would adhere to a minimum threshold. Specifically, margin calls require a minimum of $500,000, thereby ensuring that these calls are only enforced under substantial exposure increases, aligning with the existing OCC Clearing Fund deposit requirements for each member.

The document also projects an increase in the average daily margin call amount with the amendments. The expected amount averages at $27 million, up from $25.1 million under the initial filing. This increase can be attributed to the reduction in pre-funded Intraday Risk Charge due to the implementation of the proposed amendments.

One of the issues identified in the document relates to the complexity of the financial calculations and their potential impact on different Clearing Members. Although the document aims to clarify these calculations, there is still a level of ambiguity around how the new charges will affect each member, which could lead to differing interpretations and financial preparations among members. Additionally, public comments were acknowledged but not detailed, leaving potential gaps in transparency around how these financial impacts were communicated and adjusted based on feedback.

This financial proposal is also contingent on the timely implementation of OCC's new system, Ovation, which may influence the proposed financial changes' scheduled rollout and ultimately, OCC’s ability to manage these risks effectively. Without a robust contingency plan, any delays could result in unforeseen financial challenges for OCC and its members.