July 10, 2015.
On May 1, 2015, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change SR-OCC-2015-010 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 
and Rule 19b-4 thereunder.
The proposed rule change was published for comment in the Federal Register on May 22, 2015.
The Commission received no comment letters regarding the proposed change. For the reasons discussed below, the Commission is granting approval of the proposed rule change.
OCC is proposing to implement new risk models to support the clearance and settlement of Asian-style and Cliquet flexibly structured options 
(“Asian Options” and “Cliquet Options,” respectively). OCC already clears other flexibly structured options (“Current Index Flex Options”) 
on various securities indices 
and risk manages clearing member positions (i.e., computes margin requirements) through its STANS methodology.
Asian Options use an “Asian-style” methodology for determining the exercise settlement amount of an option, which is the difference between the aggregate exercise price and the aggregate current underlying interest value, which is based on the average of twelve monthly price “observations.” OCC states that traders of Asian Options will select an observation date as well as an expiration date.
Cliquet Options use a cliquet 
method for determining the exercise settlement amount of the option, which is the greater of: (i) Zero (i.e., the underlying index had negative returns during the option's tenor); and, (ii) the difference between the aggregate exercise price and the aggregate current underlying interest value, which is based on the sum of the Capped Returns of the underlying index on 12 predetermined “observation dates” 
(each an “Observation Date,” and the computed value an “Observation”).
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OCC states that both Asian Options and Cliquet Options will be only available in European style exercises, and will be subject to OCC's expiration exercise procedures set forth in OCC Rule 805, as supplemented by OCC Rule 1804. In addition, OCC represents that it will initially clear Asian Options and Cliquet Options on the S&P 500 Index, Nasdaq 100 Index, Russell 2000 Index and Dow Jones Industrial Average Index and it may clear Asian Options and Cliquet Options on other indices in the future.
New Risk Models
As noted above, OCC will risk manage clearing member positions in Asian Options and Cliquet Options through its STANS methodology. Due to certain features of Asian Options and Cliquet Options described below, OCC proposed adding new pricing models into its STANS methodology so that OCC may compute appropriate margin requirements for clearing members holding positions in Asian Options and Cliquet Options.
Asian Options differ from the Current Index Flex Options currently cleared by OCC due to the option's exercise settlement amount being a function of the arithmetic average of the underlying index on certain observation dates, rather than the value of the underlying index of a given option on the exercise date or expiration date. Based on this phenomenon, OCC proposed to add a new pricing model for Asian Options that will be a shifted lognormal model 
to accommodate the fact that Asian Options will have an arithmetic average value of the underlying index within the final exercise settlement amount calculation. OCC states that the shifted lognormal model will account for the fact that the current underlying interest value on the expiration date of an Asian Option is based on an arithmetic average of prices, and not the value of the underlying index on the option's expiration date, which introduces non-normality into the probability distribution of contract payoffs.
With respect to the Asian Option shifted lognormal pricing model, OCC proposed to utilize a modified Black-Scholes pricing model with a shift parameter that employs the first three statistical “moments.” In accordance with such model, OCC states that the first moment is the expected value of an Asian Option's value based on the option's implied volatility, the second moment accounts for the statistical volatility of the option's value, and the third moment accounts for the statistical skewness of the option's value. OCC represents that the moments are intended to account for variability in the arithmetic average value of an Asian Option's underlying index. OCC states that the shifted lognormal distribution (i.e., the lognormal probability distribution derived using the first through third moments above) is then priced through the standard Black-Scholes equation.
OCC further states that the shift parameters are then adjusted out of the Black-Scholes price in order to derive a price for a given Asian Option that is appropriate to be utilized within the STANS methodology for the purposes of computing clearing member margin on Asian Options.
Similar to Asian Options, the price of a given Cliquet Options is based on monthly Observations of an underlying index. OCC states that while a shifted lognormal model is an appropriate pricing model for Asian Options, the capped return feature of Cliquet Options makes the numerical solution to the Black-Scholes Partial Differential Equation 
the appropriate pricing model for Cliquet Options.
OCC therefore proposed to add a Cliquet Option pricing model to its STANS methodology that will compute the numerical solution to the Black-Scholes Partial Differential Equation. OCC represents that such a solution will provide OCC with the price of a given Cliquet Option that will be utilized within the STANS methodology for the purposes of computing clearing member margin requirements.
With respect to the pricing of a given Cliquet Option, and based on the capped return feature of Cliquet Options, OCC states that it will identify the known implied volatility skew of standard options with the same underlying interest, a similar tenor and a similar amount of forward moneyness 
of the given Cliquet Option. OCC represents that its calculation of forward moneyness will include an adjustment to account for any known Observations of the underlying interest for a given Cliquet Option. OCC further states that the known implied volatility skew will subsequently be utilized within the Black-Scholes Partial Differential Equation so that OCC will be able to derive the price of a given Cliquet Option, which will then be utilized within the STANS methodology for purposes of computing clearing member margin requirements on a Cliquet Options.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act 
directs the Commission to approve a proposed rule change of a self-regulatory organization if the Commission finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such self-regulatory organization. Section 17A(b)(3)(F) of the Act 
requires, among other things, that the rules of a clearing agency are designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. In addition, Start Printed Page 42141Rule 17Ad-22(b)(2) 
requires registered clearing agencies, among other things, to establish, implement, maintain, and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements.
The Commission finds that the proposed rule change is consistent with Section 17A of the Act 
and the rules thereunder applicable to OCC. The proposal will integrate new pricing models into the STANS methodology to accommodate the manner in which the exercise settlement amount for Asian Options and Cliquet Options is determined. The Commission believes these changes are designed to enable OCC to accurately compute margin requirements for Asian Option and Cliquet Option positions through its STANS methodology, therefore reducing the risk that clearing member margin assets would be insufficient should OCC need to use such assets to close-out the positions of a defaulted clearing member. The Commission therefore believes that the proposed rule change is reasonably designed to limit OCC's credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements, consistent with the requirements of Rule 17Ad-22(b)(2).
Accordingly, the Commission believes that the proposed rule change is designed to assure the safeguarding of securities and funds in OCC's custody or control or for which it is responsible, consistent with section 17A(b)(3)(F) of the Act.
On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of section 17A of the Act 
and the rules and regulations thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-2015-010) be, and hereby is, approved.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Jill M. Peterson,
[FR Doc. 2015-17400 Filed 7-15-15; 8:45 am]
BILLING CODE 8011-01-P