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Federal Register / Vol. 86, No. 28 / Friday, February 12, 2021 / Notices
STANS Methodology Description fall thematically into eight categories.18
First, the STANS Methodology Description would not describe historical modeling practices and potential future enhancements that do not describe how a model currently functions. For example, the STANS
Methodology Description would not include background on OCCs decision to incorporate implied volatility modeling into STANS. Similarly, the STANS Methodology Description would not summarize historical changes OCC
has made to the manner in which STANS calculates a total margin charge.
Second, the STANS Methodology Description would not describe the set of current products to which each STANS component applies. For example, the STANS Methodology Description would list products eligible for implied volatility scenarios modeling in STANS.
Third, the STANS Methodology Description would not describe OCCs model configuration choices. Such configuration choices include a list of control parameters of the NewtonRaphson method OCC uses to calculate implied volatilities for vanilla options.
Similarly, the STANS Methodology Description would not describe the parameters that OCC uses to calibrate liquidation grids when calculating its liquidation cost charge.
Fourth, the STANS Methodology Description would not describe model testing results and supporting rationale.
Such testing results would include model testing and validation results for OCCs implied volatility model.
Similarly, the STANS Methodology Description would not describe the mathematical rationale for the cumulative distribution function, inverse cumulative distribution function, and degrees of freedom for the Students t-distribution used by the GARCH model for implied volatility risk factors.
Fifth, the STANS Methodology Description would not describe standard mathematical and economic theories and techniques that are wellknown in quantitative finance, readily found in public sources, and do not include OCC-specific modifications or applications. For example, the STANS
Methodology Description would not describe the standard GlostenJagannathan-Runkle GARCH model and the use of a Students t-distribution.
Similarly, the STANS Methodology Description would not describe the Vega-weighted least squares calculation performed during the first round of 18 See
Notice of Filing, 85 FR at 85790.

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optimization to produce arbitrage-free options prices for European options.
Sixth, the STANS Methodology Description would not include redundant descriptions of a model component appearing in multiple chapters. For example, the Executive Summary of the STANS Methodology Description would not include details of the STANS methodology also found in the main body of the document.
Similarly, the section of the proposed STANS Methodology Description discussing conditional and default simulations would not include introductory text restating the use of time series in STANS, which is described elsewhere in the document.
Seventh, the STANS Methodology Description would not describe OCCs implementation of a model in its internal technology systems. Such details include detailed steps for a linear interpolation/extrapolation used to construct a volatility surface from smoothed volatilities. Similarly, the STANS Methodology Description would not include discussion of the processes OCC uses to operationalize the STANS
methodology in its systems.
Finally, the STANS Methodology Description would not describe manual margin adjustments and add-ons that OCC employs pursuant to OCC rules, policies, or procedures outside of STANS. Such adjustments include additional margin charges related to cross-margin accounts established under OCCs Rule 704. Similarly, the STANS
Methodology Description would not describe derived scenarios, which are a special case of conditional simulations related to exchange rate risk factors addressed elsewhere in OCCs procedures.
Changes to Margin Policy OCC also proposes conforming changes to its Margin Policy to reflect the adoption of the STANS
Methodology Description and the retirement of the Margins Methodology.
Additionally, OCC proposes to make other non-substantive changes to the Margin Policy to correct typographical errors, update references to other related internal OCC policies and procedures, and conform the policy to OCCs current internal policy template.
III. Discussion and Commissions Findings Section 19b2C of the Exchange Act directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations
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thereunder applicable to such organization.19 After carefully considering the Proposed Rule Change, the Commission finds that the proposal is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to OCC. More specifically, the Commission finds that the proposal is consistent with Section 17Ab3F of the Exchange Act,20 Rule 17Ad22e6 21
thereunder, as described in detail below.
A. Consistency With Section 17Ab3F of the Exchange Act Section 17Ab3F of the Exchange Act requires, among other things, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control or for which it is responsible.22 OCC uses STANS to set risk-based margin requirements for its Clearing Members. OCC proposes to describe its modeling choices and the interconnectedness of STANS model components in producing such margin requirements within its rules by adopting the STANS Methodology Description. The aspects of STANS
described in the STANS Methodology Description directly relate to OCCs ability to accurately risk manage Clearing Member portfolios by calculating and collecting an appropriate amount of collateral. The Commission notes that only some of the aspects of STANS addressed in the STANS Methodology Description are currently addressed in the portions of the Margins Methodology that OCC has filed with the Commission.
The Commission believes that, even with the removal of the additional details from the Margins Methodology described above, the proposed STANS
Methodology Description is designed to help ensure that OCCs margin methodology calculates and collects margin sufficient to mitigate OCCs credit exposure to a Clearing Member default. The Commission also believes that accurate calculation of margin is necessary to help ensure that OCC is able to risk manage the default of a Clearing Member without recourse to the assets of non-defaulting Clearing Members, which supports the safeguarding of securities and funds in OCCs custody. Accordingly, the Commission believes that the replacement of the Margins Methodology with the STANS Margin 19 15

U.S.C. 78sb2C.
U.S.C. 78q1b3F.
21 17 CFR 240.17Ad22e6.
22 15 U.S.C. 78q1b3F.
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