John Davidson joined OCC on May 8 as President and Chief Operating Officer. He shares his insights on the listed options industry and his responsibilities at the world's largest equity derivatives clearing organization.
You have over 35 years of experience in financial services. What is the biggest change you have seen in that sector?
The biggest change that I have observed is the application of technology to the sector. In 1980 trading floors, both on an exchange and "upstairs", were characterized by people shouting at each other. "Voice brokers" ruled the OTC fixed income and FX domains. There were legions of people working "out-trades" just after and before the floor opened or in the "Q.T. Room" four levels below ground at the NYSE. Everyone spoke fractions rather than decimals, and the "Greeks" were restaurants in Astoria in New York or on Halsted Street in Chicago.
How has the role of a central counterparty changed since the 2008 economic crisis?
Central counterparty clearing was invented in 1872 by the Minneapolis Grain Exchange. The fundamentals have changed very little since then, but the understanding of the relevant risks and the sophistication of the tools and techniques to manage both the expected and particularly unexpected outcomes have improved dramatically. Since 2008, the focus on the value of central counterparties in risk mitigation of standardized financial instruments across a broader range of asset classes has taken hold. Concomitant to that has been a much greater emphasis by regulators and supervisors on the design and operational effectiveness of the financial safeguard systems of these clearing houses.
With volumes being relatively flat for listed options for the last five years, where do you see any growth opportunities?
The happy news about OCC's systems and operations is that they are largely volume-insensitive. And while volumes may have been relatively flat over large units of time, we have certainly seen significant spikes in day-to-day transaction volume. Clearly growth will come from product innovation. Much of that is the province of the 20 exchanges and trading venues for whom we provide clearing services, and our ability to support innovation-generated growth is not what it needs to be. An exception to this general rule is our work providing central counterparty intermediation in the securities lending business. As demand for more efficient and effective collateral and liquidity management increases, clearing stock borrow/stock loan transactions will be an area of significant growth and benefit to the entire industry.
You have served as a member of OCC's Board of Directors. What attracted you to come back as President and COO?
I have been involved with central counterparties and settlement systems throughout my career. I am a bit of a nerd but do not have the psychological makeup to be a trader. Listed derivatives generally and options in particular are products about which I have a great deal of intellectual curiosity. The opportunity to manage the technology, operations and transformation of the entity that sits in the center of the U.S. options universe is very exciting. I bring the leadership skills and vision that will help get OCC to the next level in its quest to be the "gold standard" for central counterparty financial intermediation.
What is the biggest opportunity facing you at OCC?
OCC was "present at creation" of the exchange-traded options markets initially in Chicago and soon thereafter in New York and Philadelphia. Today, along with that history is some very legacy technology that while highly resilient and volume-insensitive, really limits our ability to support the product innovation of our exchanges and market venues or to take advantage of new areas for the provision of robust clearing, settlement and risk management services. The biggest opportunity for me and my team is to timely replace that legacy system with something much more nimble and modular, while at the same time running the existing system with the highest levels of availability and customer service for our clearing members and exchanges until the transition is complete. That involves incremental risk, which we will carefully manage with the assistance of all our market participants, stakeholders and regulators. Opportunity only arises from intelligently managed risk taking.