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The Foundation for Secure Markets
What Is OCC?
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Talent and Leadership
OCC attracted a Board of Directors with significant levels of expertise in risk management, technology, operations, compliance, regulatory policy and audits. The Board of Directors, which includes five public directors, has substantially augmented the effectiveness of its governance processes, oversight capabilities, and assessment of management's performance.
Starting in 2014, OCC devoted significant energy to recruiting a new senior management team with deep regulatory and industry expertise to create a more effective and efficient organization.
Management changes included the hiring of a new Executive Chairman, Craig Donohue and the creation of a new Office of the CEO.
John Davidson was hired as President and Chief Operating Officer, and then promoted to CEO.
Scot Warren was brought on as EVP, Business Development. He then was promoted to Chief Administrative Officer, and then to Chief Operating Officer.
Other important executive hires with extensive compliance and leadership experience in financial services included Amy Shelly as Chief Financial Officer, Joe Adamczyk as Chief Compliance Officer, Mark Morrison as Chief Security Officer, Dale Michaels as EVP, Financial Risk Management, and most recently Janet Angstadt as General Counsel.
Since 2012, OCC has increased its headcount (approximately 75%) significantly to add capacity and expertise in a number of areas including Compliance, Financial Risk Management, Information Security and Internal Audit.
OCC is in a stronger financial position than ever before. At the end of 2018, OCC held approximately $112 billion in margin on behalf of our customers, and $9.5 billion in our clearing fund.
OCC's 2018 total cleared volume increased 21 percent to 5.24 billion contracts, a record for us. Our systems have proven to be resilient, and we have cleared the markets every day, even in times of record volumes, serving our vital role. Our ongoing transformation will allow us to continue doing so with enhanced technology, security and compliance focus.
Waterfall Resources and Management
OCC has significantly enhanced its immediate access to sufficient liquidity resources to timely meet all of its obligations to clearing members.
OCC has increased its credit facility to $3 billion, of which $2 billion comes from a syndicate of banks. The majority of the banks that participate are not clearing members which reduces concentration of risk and the associated risk of contagion. The other $1 billion is from CalPERS, the largest U.S. public pension fund, which was specifically selected to address wrong-way risk and diversify OCC's credit facilities.
OCC also maintains a minimum of $3 billion in cash in its clearing fund which is held in an account with the Federal Reserve Bank of Chicago.
OCC enhanced its Clearing Fund, moving to a "Cover Two" methodology
In 2018, OCC received SEC approval of Phase I of its Financial Safeguards Framework (FSF). In Phase I, OCC revised its Clearing Fund Methodology and redesigned the methodology to size OCC's clearing fund, which is now based on stress testing results that include a wide range of historical and other "extreme but plausible scenarios" rather than trebling margin variances. This resizing allowed OCC to return $3 billion in capital to its clearing members.
A Cover Two methodology allows OCC to manage the default of its two largest clearing members. This exceeds U.S. regulatory requirements.
The new FSF reduces pro-cyclicality by decoupling the simultaneous increase in margin and clearing fund contributions that can place undue liquidity demands on OCC's clearing members.
The new FSF also makes the manner in which OCC handles stress shocks on index options products and single-name equity options consistent.
OCC established a Clearing Fund Working Group to review and evaluate the Clearing Fund and stress testing methodology.
We also modified the allocation methodology for clearing fund contribution requirements that improves transparency and incentivizes clearing members to manage margin risk.
In 2018, OCC became the first SIFMU whose primary supervisory agency is the SEC to have its recovery tools and recovery and wind-down plan approved by the SEC. This gives OCC critical tools designed to enable OCC to successfully manage extreme market disruptions in future financial crises.
OCC improved its recovery tools including its assessment powers to increase the minimum amount of assessments available to OCC, while eliminating the unlimited demands on clearing members, and provide clearing members with better clarity about their maximum exposure to OCC.
Operational Resources and Management
In 2013, OCC had only $25 million in operating capital. Today, aligned with regulatory standards, OCC maintains capital above its target capital level of $247 million.
OCC's proposed Capital Management Policy which was filed with the SEC on August 9, 2019, details OCC's principles for developing, monitoring and reporting its capital level.
The proposed Capital Management Policy also establishes a replenishment plan for additional capital in the unlikely event OCC's capital falls below defined thresholds.
Since 2014, OCC also made substantial progress to reduce its retirement plan liabilities by freezing the pension, adopting a liability driven investing strategy and increasing cash contributions.
These efforts raised the funding ratio for OCC's defined benefit plan from only 64% in 2014 to 97.7% in 2019.
OCC is in the top two percent of companies that have achieved a rating of AA+/Stable or better from Standard and Poor's.
In 2017, OCC expanded its corporate insurance coverage to include a cyber policy and raised the levels of coverage on all other policies to be within industry standard.
Legal Framework and Compliance Processes
OCC created and implemented a sustainable and comprehensive series of compliance risk management processes and a regulatory framework that has transformed how OCC does business and approaches compliance.
OCC created the Regulatory Compliance Oversight Group (RCOG), comprised of the CEO, Chief Operating Officer, Chief Risk Officer, Chief Compliance Officer, Chief Regulatory Counsel, and General Counsel to improve the overall effectiveness of OCC's approach to compliance and hold management accountable.
The RCOG provides systemic and regular oversight of compliance efforts with a focus on internal coordination and accountability by business owners. Board-level oversight of RCOG is provided by the Ad Hoc Regulatory Oversight Working Group.
Margin Methodology and Models
OCC applies margin requirements on a daily basis to each account maintained at OCC by its clearing member firms. Intraday calls for additional margin may be made on accounts incurring significant losses.
OCC's System for Theoretical Analysis and Numerical Simulations (STANS) provides a sophisticated risk assessment capability. STANS allows OCC to measure, monitor, and manage the level of risk exposure of its clearing members' portfolios.
The STANS margin approach is based on expected shortfall at a 99.0 percent level, which means we include all observations, including the worst-case scenarios, and average those amounts from 99 to 100 percent. OCC's margin approach is, by definition, more conservative.
OCC is the first derivatives clearinghouse in the world to use a large-scale Monte Carlo- based risk management methodology.
OCC employs a two-day margin period of risk for its initial margin model, which like the expected shortfall approach, exceeds the regulatory standards for exchange-traded derivatives to cover a 99 percent confidence level and a one-day margin period of risk.
OCC has worked diligently to make enhancements to its Margin Methodology and systems to ensure it is fully compliant
The most important of these enhancements to OCC's Margin Methodology is a significant modification to the margin model that accounts for the impact of changes in implied volatility on the prices of the instruments cleared by OCC. To adjust correlations and the asymmetry of returns more timely, the STANS Daily Univariate Project was filed for immediate effectiveness on July 24,2018.
OCC has taken risk management a step further in its methodologies and runs de- correlation scenarios where there is an additional charge at a higher confidence level based on the greater of historical, zero, or perfect correlations of products to cover the risk of markets moving in a much different way than in the past.
OCC utilizes back-testing to assess the adequacy of its margin models, it conducts a monthly review of its margin model parameters and assumptions which is reflected in OCC's newly approved Margin Policy, Model Risk Management Policy, and in OCC's supporting procedures.
OCC runs a wide range of stress tests on a daily basis to size and determine sufficiency of its clearing fund.
The Comprehensive Stress Testing (CST) is a system that supports the stress testing components of the Financial Safeguards Framework in OCC's clearing system. OCC has invested significant time and internal resources to enhance the CST to maximize its utility.
OCC has expanded the range of stress test scenarios it currently runs on a daily basis for informational purposes. CST currently has the capacity to run a variety of stress tests, including two sizing scenarios, two adequacy scenarios, twenty sufficiency scenarios, and a large number of informational scenarios.
Part of OCC's transformation is through the Renaissance Initiative, a multi-year, multi-million-dollar investment to modernize its technology infrastructure, including its risk management, core clearing, and data systems, in order to better serve market participants and the investing public, continue to meet evolving regulatory expectations and enhance our ability to be effective and efficient in the delivery of our services.
The Renaissance Initiative will deliver numerous improvements to OCC's capabilities, including improved real-time and extended hours risk management, enhanced operational efficiency through process engineering and automation, and improved information transparency and service to clearing firms.
The Renaissance Initiative will enhance the capabilities of its Risk, Clearing, and Data Systems:
- The internally developed risk platform elements of the Renaissance Initiative build upon the program already underway at OCC with many features operating on Cloud infrastructure. The Renaissance Initiative also includes new risk systems that will provide an environment for intraday risk management, intra-day computations, pricing and re-valuation.
- OCC will use a combined approach for its new clearing system, pairing internal work with the adoption of software developed by third parties. Enhancements to ad-hoc reporting with new filtering functionality, control mechanisms throughout systems, application programming interfaces (APIs) will make it easier to procure and submit data to and from the system, a functionally easier process to introduce new products, among others.
- The development of OCC's Data platform, which will be independent from its clearing and risk systems, will comprehensively address OCC's historical data limitations. The Renaissance Initiative will build a proprietary data model to support OCC's business that is separate and distinct from our current technology solution, and will provide self-service capability for data discovery, search and historical analysis.
With the Renaissance Initiative, OCC is building in robust cybersecurity and compliance controls directly into the software during the development process.