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Federal Register / Vol. 86, No. 28 / Friday, February 12, 2021 / Notices Description available to Clearing Members.11
The proposed STANS Methodology Description would include substantially the same information as the Margins Methodology with the exception of various details, described below, that OCC does not believe would be appropriately included in the STANS
Methodology Description.12 OCC stated that the purpose of the STANS
Methodology Description would be to enable an informed reader to understand OCCs modeling choices and the interconnectedness of STANS model components in producing OCC margin requirements, and that the portions of the Margins Methodology not carried forward in the STANS Methodology Description are extraneous to this purpose.13
Proposed STANS Methodology Description As noted above, the proposed STANS
Methodology Description covers OCCs system for calculating daily and intraday margin requirements for its Clearing Members. The proposed document includes three sections with various subsections as described below and in greater detail in the Notice of Filing.
The STANS Methodology Description begins with an executive summary. The executive summary would state that the purpose of STANS is to determine margin requirements for OCCs Clearing Members, and would describe the types of positions and collateral modeled through STANS. The executive summary would also briefly describe OCCs procedures related to both model monitoring and price editing.
Model components. The bulk of the STANS Methodology Description covers the model components in STANS, including model and econometric calibration, copula construction, implied volatility smoothing and options pricing, and the application of the theoretical derivatives prices to actual positions in Clearing Members accounts to calculate margin requirements through the aggregation of various component charges. The subsections related to model and econometric calibration cover the use of i returns on equity securities that are based on current market prices to create econometric parameters and for pricing;
ii implied volatility risk factors to measure the expected future volatility of an options underlying security at expiration; iii Nelson-Siegel 11 See
Notice of Filing, 85 FR at 85790.
does not propose to change its margin methodology as part of the Proposed Rule Change.
13 See Notice of Filing, 85 FR at 85790.
12 OCC

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framework to price treasury securities;
iv a generic futures model to price linear derivatives with limited term structures; v a specialized factor model to price variance futures; vi a synthetic futures model to price specified products such as volatility index-based futures e.g., VIX futures; and vii econometric parameters related to volatility forecasts and marginal distributions, and calibrates these parameters using ten-year histories of the foregoing data inputs.
The sub-sections related to copula construction describes the use of a copula to quantify the joint behavior and dependence structure of the risk factors used by STANS.14 The STANS
Methodology Description covers OCCs process for estimating the copula as well as simulating price movements based on random draws from the multivariate Students t-distribution described by the copula. The document also describes OCCs process for identifying and separately processing risk factors with incomplete data sets that lack sufficient data to estimate the copula. Specifically, the STANS Methodology Description addresses the application of conditional and default simulations to estimate correlations for risk factors excluded from the copula simulation in STANS
due to a lack of data.
The sub-sections related to implied volatility smoothing and options pricing describe how OCC uses the inputs and outputs described in the subsections on model and econometric calibration and copula construction. Specifically, the STANS Methodology Description discusses OCCs processing for performing implied volatility smoothing as well as pricing European-style options, American-style options, Asian FLEX options,15 and Cliquet options.16
The document also discusses how STANS can also be used to price forward start options.17
The sub-sections related to the aggregation of various component 14 A copula is a mathematical construct used in probability theory to calculate the cumulative distribution of a set of random variables.
15 Asian options are European-style options for which the settlement price is determined based on 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. See Securities Exchange Release No. 74966 May 14, 2015, 80 FR 29784 May 22, 2015 File No. SROCC2015010.
16 Cliquet options are European-style options for which the settlement price is determined based on the positive sum of capped returns of an index on pre-determined dates over a specified period of time. See id., n. 9.
17 Forward start options are options for which the strike price in dollars is unknown prior to the determination date of the strike shortly before expiration. See Notice of Filing, 85 FR at 85796.

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charges discuss a based margin charge, error compensation charge, liquidation cost charge, and positive risk reversal charge. The base margin charge consists of an ES calculation with the addition of Extreme Value Theory loss modeling and a stress test component. The error compensation charge is designed to compensate for the estimation error inherent in ES calculations. The liquidation cost charge is designed to cover the costs of selling long positions at the current bid price and covering short positions at the current ask price following the default of a Clearing Member. The positive risk reversal charge ensures that total calculated margin requirement is at least equal to the estimated liquidation cost, even in the event a position is liquidated at the current market price.
Model utilities. The final substantive section of the STANS Methodology Description addresses several model utilities that OCC applies at various points in the STANS methodology, to incorporate various market and operational factors that affect options pricing and thereby produce model results which more accurately reflect current and potential market conditions.
Such utilities include the incorporation of expected cash dividends on a stock into options pricing in STANS. The STANS Methodology Description also addresses OCCs processes for obtaining relevant risk factors for both the most recent opening price and the most recent closing price to include a joint distribution of both overnight and daily returns on relevant risk factors within the copula described above. Further, the STANS Methodology Description discusses OCCs process for addressing option expirations occurring during the period in which OCC closes out a defaulted Clearing Members portfolio.
Finally, the document describes the portfolio specific haircut model that OCC uses to haircut values for withdrawals or deposits of collateral made throughout the day.
Additional Details As noted above, STANS Methodology Description would not include details from the Margins Methodology that OCC
believes are extraneous to the purpose of enabling an informed reader to understand OCCs modeling choices and the interconnectedness of STANS model components in producing OCC margin requirements. As described below, and in greater detail in the Notice of Filing, the details in the Margins Methodology that would not be included in the
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