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Options Clearing Corporation Proposes Changes to Calculating the Size of its Clearing Fund

Wednesday, September 14, 2011
Tatiana Rodriguez | Bloomberg Law CFTC, Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change To Revise Its By-Laws and Rules To Establish a Clearing Fund Amount Intended To Support Losses Under a Defined Set of Default Scenarios, 76 Fed. Reg. 51087 (Aug. 17, 2011) The Options Clearing Corporation (OCC) proposed revising by-laws and rules that establish the size of its clearing fund to the amount required within a confidence level selected by OCC to sustain possible losses under a defined set of scenarios. It replaces a previously withdrawn proposal that put forth similar revisions, adding data and improving the readability of certain text. Under the proposal the amount of the charge to the fund would be equal to the larger of the amount that would result from (1) a default by single "clearing member group" whose default would be likely to result in the largest draw against the clearing fund or (2) an event involving the near-simultaneous default of two randomly-selected "clearing member groups," in each case as calculated by the OCC with a specified confidence level. The initial confidence levels would be 99 percent and 99.9 percent, respectively. The OCC would have the ability to use a different confidence level, but would have to propose a new rule to do so. The amount of change would continue to be calculated monthly. The proposal is intended to more directly take into account anticipated losses resulting from the clearing member default scenarios described by the OCC and thereby establish the clearing fund at a size that is sufficient to cover such losses without relying on any rights of the OCC to require clearing members to replenish clearing funds. The revised formula takes into consideration various types of default scenarios not previously considered. Further, the proposal is consistent with standards published by the Bank for International Settlements and the International Organization of Securities Commissioners, including the requirement that a clearing organization "maintain sufficient financial resources to withstand, at a minimum, a default by a clearing member in a short time frame." The OCC noted that under the proposed formula, the clearing fund would currently be 10 percent larger and during extreme market volatility, such as in October 2008, the fund would be around 27 percent to 31 percent bigger. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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