Enhancing its resiliency as a Systemically Important Financial Market Utility (SIFMU), OCC, the world's largest equity derivatives clearing organization, today announced that the U.S. Securities and Exchange Commission (SEC) approved Phase II of the company's Financial Safeguards Framework (FSF) on December 11, 2019. The approved changes to OCC's rules, clearing fund, and stress testing and margin methodology were implemented on December 16, 2019.
"Enhancing OCC's resiliency as a SIFMU is critical to our continued ability to reduce systemic risk, increase market transparency, and provide capital and collateral efficiencies for the users of the U.S. equity derivatives and securities lending markets," said Scot Warren, Chief Operating Officer. "We appreciate the work by the SEC to approve this important measure."
Dale Michaels, Executive Vice President, Financial Risk Management, added, "Regulatory approval of Phase II of our Financial Safeguards Framework provides OCC's clearing member firms and liquidity providers with a significantly improved stress testing and margin methodology along with enhanced resources. It also adds measures to account for specific wrong-way risk and idiosyncratic risk in our margin and clearing fund stress testing methodologies."
Phase II of OCC's FSF implemented the following changes to OCC's rules, clearing fund, and stress testing and margin methodologies to supplement and enhance the September 4, 2018 Phase I implementation:
- Incorporating an additional set of stress test scenarios that are designed to capture the risk of extreme moves in individual or small subsets of securities.
- Enhancing OCC's stress testing methodology for modeling certain volatility index futures.
- Improving the calibration of OCC's clearing fund contribution allocations.
- Adopting new rules and margin charges to address the specific wrong-way risk presented by clearing members firms clearing self-referencing positions.
Phase I of OCC's FSF included the resizing of OCC's clearing fund to cover the simultaneous default of its two largest clearing member firms (Cover Two).