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occ is evolving
to better
serve market
participants
with innovation,
enhanced
resiliency, and
operational
excellence.

Our Mission

We promote stability and market integrity through effective and efficient clearance, settlement and risk management services while providing thought leadership and education to market participants and the public about the prudent use of products we clear.

Donohue

“On behalf of the Board of Directors and employees at OCC, I am pleased to share with you our 2016 Annual Report.”

craig s. donohue

EXECUTIVE CHAIRMAN AND CHIEF EXECUTIVE OFFICER

rathi

Chairman’s Message

In 2016, we saw sustained strong volume in the U.S. listed equities options industry. OCC’s total cleared contract volume reached 4.17 billion, the fifth highest annual contract volume in our history. Securities lending reached a new high with more than 1.9 million cleared stock loan transactions, representing growth of 37 percent from the previous year. 2016 cleared futures volume was also OCC’s highest ever at 104 million contracts, up 56 percent from 2015.

These achievements underscore the critical role OCC plays as the world’s largest equity derivatives clearing organization in serving industry participants and the greater public interest. With the launch of the ISE Mercury Exchange in 2016, the year ended with 14 U.S. listed equities options markets, and with OCC providing central counterparty clearing and settlement services to 19 exchanges and trading platforms for options, security futures, financial and commodity futures, and securities lending transactions.

In this report, you will get an update on the work OCC is doing in its role as a Systemically Important Financial Market Utility (SIFMU) to fulfill our purpose of ensuring confidence in the financial markets and the broader economy. You will read about our efforts to enhance our resiliency and operational effectiveness, to foster growth, innovation and thought leadership, and to build a high-performance culture.

You will also learn of our progress in continuing OCC’s mission as a foundation for secure markets and have the opportunity to read commentary from three OCC stakeholders and market participants. Kapil Rathi, Senior Vice President and Head of Options Business Strategy for the Bats Global Markets, Terry Savage, a Syndicated Personal Finance Columnist and a Founding Member of The Chicago Board Options Exchange, and Joe “JJ” Kinahan, Chief Market Strategist and Managing Director for TD Ameritrade, each provide their thoughts on how OCC bolsters market resiliency, provides confidence to the financial markets, and helps to educate investors on the risks and rewards of trading options.

In 2016, we continued to make enhancements to foster market confidence and reduce systemic risk.

Enhancing Our Resiliency

It has been clearly demonstrated that regulated central counterparties (CCPs) such as OCC have an excellent track record of performing extremely well during times of market stress. As we noted in public comments throughout the year, this demonstrated resiliency led global policymakers to mandate that more financial transactions be centrally cleared through CCPs following the 2008 financial crisis. In 2016, we continued to make enhancements to foster market confidence and reduce systemic risk while maintaining our role as an independent risk manager. The resulting changes that were made to meet heightened regulatory expectations continue to instill greater confidence in OCC’s ability to support market participants in both the ordinary course and during times of market stress.

As a SIFMU, enhancing our resiliency is our key priority— from working closely with regulators in response to changes in the regulatory framework to bolstering our business processes and internal controls. We fully support the U.S. Securities and Exchange Commission’s (SEC) ongoing efforts to strengthen the regulation of registered clearing agencies and to promote the safe and reliable operation of registered clearing agencies as this improves efficiency, transparency and access for market participants. The SEC’s Covered Clearing Agency (CCA) proposal embraces best practices and is similar to others that seek to prescribe risk management standards, such as Principles for Financial Markets Infrastructure (PFMI). In 2016, OCC began publishing our quantitative disclosure regarding PFMI in accordance with The Committee on Payments and Market Infrastructures- International Organization of Securities Commissions (CPMI-IOSCO), and these new requirements and expectations for CCPs are a positive reflection of the capabilities OCC has developed and delivered to the marketplace.

We are gratified by the SEC’s reaffirmation of its approval of our capital plan. The SEC noted “given OCC’s critical clearing functions and its systemic importance, the Commission agrees that having OCC increase its capitalization is appropriate and in the public interest.” The Commission also found that “the capital plan does not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the [Exchange] Act.” Of utmost importance, the benefits extend beyond enhancing the resiliency of the markets served by OCC and our commitment to operating as an industry utility.

In September, Standard & Poor’s reaffirmed OCC’s AA+/Stable rating, noting “OCC has a credible plan to build the capital and liquidity resources to absorb default of its two largest members.” This is a positive recognition of our ongoing efforts to strengthen our financial safeguards framework and better address international standards, and it reflects favorably on the commitment of our colleagues to strengthen the resiliency, risk management and capitalization of our organization.

Our guiding purpose to ensure confidence in the financial markets and broader economy drives our focus on continuous enhancements to our risk and control environment. In 2016, this included driving compliance with SEC’s Regulation SCI, responding to the new requirements outlined in the SEC’s standards for CCAs, revising our policies and procedures, and delivering custom educational training. Additionally, the development of our risk and control principles and proposal on pre-trade risk controls served as the catalyst for positive change in the resiliency of the listed options market, to the credit of the options exchanges and for the benefit of the entire industry. The nearly 40 rule changes filed by the options exchanges are consistent with the risk controls outlined in our March proposal to the SEC, and our concerted efforts are demonstrable actions by the industry to bolster the resiliency of options markets against the risk from erroneous trading activity.

OCC’s strong collaboration with its Board of Directors to further enhance our resiliency is essential to building upon our roadmap for the future. One such component includes addressing OCC’s already strong posture on cybersecurity. The Board’s Technology Committee was very supportive of our engagement with Stroz Friedberg to conduct a review of the increasingly complex security landscape faced by our industry. These insights actively informed OCC’s security investments in 2016 and vision of the future as we enter into work with Oliver Wyman on an assessment of our current state technologies that will inform our blueprint for OCC’s future state capabilities.

OCC remains a strong,
visible advocate on
behalf of the industry
to address important
regulatory, legislative
and tax issues.

Fostering Growth, Innovation and Thought Leadership

As a leader of industry initiatives in Washington, D.C., OCC remains a strong, visible advocate on behalf of the industry to address important regulatory, legislative and tax issues. We were pleased with the U.S. Department of Labor’s final fiduciary rule to allow investors to hold listed options in their retirement accounts. With the collective efforts of the U.S. Securities Markets Coalition, we educated Members of Congress and regulators on the importance of providing individuals with the right risk management tools to help them save for their retirement. We will continue to advocate for investor education as the underpinning for the responsible and prudent use of listed options by investors. OCC and the Coalition will also continue proactive discussions on mark-to-market and other tax reform proposals with the U.S. House of Representatives’ Ways and Means Committee. The Coalition is also addressing the impact of certain provisions of the bank regulatory capital rules on the listed options market, and we will remain active in seeking interpretative relief.

In addition to our work in Washington, D.C., OCC’s advocacy on issues impacting our organization, our clearing members and their customers is reflected through our efforts to gain recognition of U.S. central counterparties such as OCC as qualifying central counterparties by the European Commission (EC). This recognition is important to OCC and market participants for several reasons, foremost among them that it would allow European Union (EU) banks’ and EU bank affiliates’ exposure to those CCPs to be subject to a lower risk weight in calculating their regulatory capital. The SEC’s approval of the CCA rules in September 2016 is a critical step toward an equivalency agreement between that agency and the EC. We are pleased that the EU extended the transitional period deadline, and intend to continue working with the SEC, the EC, and the European Securities and Markets Authority as they strive toward a common approach for the regulation of cross-border CCPs.

At OCC, we understand the global and interconnected nature of the listed U.S. equities options markets and believe it is vital for OCC and the industry to continue their advocacy work on behalf of market participants. We will continue to promote with regulators and policymakers the importance of providing individual investors with unbiased educational content through The Options Industry Council (OIC). Since 1992, OIC’s contributions to the investing and brokerage communities have been significant to the growth of the listed options industry. In 2016, more than 102,000 individual options investors took part in OIC’s robust online, podcast and live educational programming, while OIC’s professionals also delivered options education and content to prominent industry partners including the CFA Institute, the Financial Planning Association, Fidelity, E*Trade, Merrill Edge, etf.com, ETF report and Inside ETFs. Beyond U.S. borders, OIC proactively responded to the global demand for options education, creating a presence in England, Poland, Switzerland, Singapore and China and addressing interest from 226 additional countries. We look forward to celebrating OIC’s 25th anniversary in 2017 and more than two decades of helping individual investors, financial advisors and institutional investors understand the benefits and risks of exchange-listed options.

Collaboration and partnership remain a critical focus for OCC and are demonstrated in several notable endeavors. First, we were pleased to renew our pre-funded committed repurchase facility with eSecLending and CalPERS, the largest U.S. pension fund, for a total of $1 billion. This renewal features a staggered maturity schedule under which $500 million was available for renewal in June 2016 and the remainder would be made available for renewal in January 2017, allowing OCC to diversify its liquidity resources. Additionally, in 2016, OCC supported new product launches from Nasdaq Futures, Chicago Board Options Exchange, AMEX and NYSE Arca to better serve their respective customer and clearing member needs.

We are investing in our internal control
infrastructure to enhance our resiliency and
strengthen our operational effectiveness
as an independent risk manager.

In Active Pursuit of Excellence

Strengthening OCC’s mission to provide exceptional risk management and innovative solutions to reduce systemic risk requires strong leadership. We are fortunate that we have a talented and knowledgeable Board of Directors that has defined a strategic direction for our organization and provides robust leadership and guidance to our management team. The addition of three new board members in 2016— Susan Lester, who has over 30 years of banking experience; Tom Wittman, Executive Vice President and Global Head of Equities for Nasdaq, Inc.; and Bill Yates, Treasurer for TD Ameritrade— enhances our Board’s ability to provide valuable market knowledge and expertise in support of the work of our leadership team.

In 2016, we also enhanced our leadership structure with the creation of the Office of the Executive Chairman, which included Mike McClain as Chief Operating Officer in charge of technology and operations, and Scot Warren as Chief Administrative Officer to oversee the alignment of our enterprise with the execution of our corporate objectives. The new structure allows us to combine the breadth and depth of experience necessary to optimally support OCC as we move forward.

We are vigilant about the need to have the right people in the right roles, and to have the agility to make meaningful change in our leadership structure to further our progress and momentum. The addition of Amy Shelly as Chief Financial Officer, Dale Michaels as head of Financial Risk Management, Chip Dempsey as Chief Commercial Officer, and Julie Bauer as head of Government Relations, demonstrates that OCC can attract top talent to join our organization. The promotions of John Fennell to Chief Risk Officer, Joe Adamczyk to Chief Compliance Officer, and Adi Agrawal to Chief Audit Executive, are a reflection of the deep bench strength on our team.

The outstanding work performed in 2016 by the entire OCC team was manifested in our company’s recognition as Clearinghouse of the Year by two important financial publications: Global Investor/ISF Magazine and Futures and Options World (FOW) Magazine. These acknowledgements of OCC as the preeminent clearing organization validate the dedication and hard work exhibited by our Board of Directors and OCC colleagues and are a tremendous recognition of OCC’s adaptation to the heightened expectations as a SIFMU.

In Closing

Looking ahead, OCC will remain an industry advocate for market participants as they face an evolving regulatory and tax environment. This includes not only working with global policymakers, but also developing and distributing unbiased educational content for investors and market participants who want to use the listed equities options markets as a risk management tool. We remain steadfast in our commitment to serving as the foundation for secure markets and in ensuring confidence in the financial markets and the broader economy. We will maintain our ongoing investment in our internal control infrastructure to enhance our resiliency and strengthen our operational effectiveness as an independent risk manager while we continue to explore new business opportunities that complement our existing products and lower the overall cost of clearing and collateral for market participants. By upholding our leadership position in equity derivatives and securities lending, we will further strengthen the strategic relationships we have with our stakeholders, which will allow OCC to continue to contribute to industry growth and to the reduction of systemic risk in the financial system.

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Craig S. Donohue
Executive Chairman and Chief Executive Officer

officer
michael w. Mcclain

chief operating officer

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scot E. Warren

chief administrative OFFICER

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Chief Operating Officer and
Chief Administrative Officer’s Message

We are pleased to report that OCC continues its leadership role in risk management, clearing and settlement for exchange-listed options, futures and stock loan transactions, thanks to the tireless dedication of our 560 colleagues. In 2016, OCC processed more than 4.17 billion cleared contracts, with an average daily volume totaling 16.5 million cleared contracts. We realized our peak monthly volume in November, with 394 million options and futures contracts cleared, while December 14 marked our highest open interest day, with 346 million options and futures contracts cleared. Our securities lending activity continues to be an area of strong growth, achieving new highs in 2016 with more than 1.9 million cleared transactions, exceeding our 2015 volume by 37 percent, and an average daily loan value of more than $147 billion.

These noteworthy figures represent OCC’s continued and uncompromising focus on operational excellence and enhanced resiliency as the foundation for secure markets. The new structure of the Office of the Executive Chairman allows us, as Chief Operating Officer and Chief Administrative Officer, to work with Craig Donohue to drive enterprise-wide alignment with a concentrated focus on the execution of our corporate objectives. This change ensures we maintain our commitment to making enhancements that strengthen our core functions and ensure regulatory compliance while advancing our resiliency to new levels.

At OCC, we have embraced our designation as a Systemically Important Financial Market Utility (SIFMU). In 2016, 96 percent of OCC’s clearing members indicated a high level of satisfaction with our ability to meet their needs, and we take great pride in this achievement as a customer-focused organization. We also met 99.4 percent of our bespoke quality standards in data integrity, availability and data timeliness. Notably, our responsibility to meet the high standards of our members was reinforced with the honor of being recognized as 2016 Clearinghouse of the Year by two distinctive industry publications, Global Investor/ISF Magazine and Futures and Options World (FOW) Magazine.

Throughout 2016, OCC continued to make tremendous strides in our enhancement of our risk controls across the organization. Well-designed risk controls form the bedrock of our resiliency and enable our colleagues to promote stability and market integrity through effective, efficient clearing and risk management services.

We are committed to strengthening
our core functions, ensuring
regulatory compliance and advancing
our resiliency to new levels.

A key focus for OCC in 2016 was to drive compliance with the U.S. Securities and Exchange Commission’s (SEC) Regulation SCI. Our active engagement to address this important regulation realized the development of cybersecurity tools and controls, including the adoption of the National Institute of Standards Technology (NIST) Special Publications (SP) 800-53 standard followed by the U.S. government. Adhering to this specific benchmark has enabled OCC to bring forth new technologies and conduct enriched training for our colleagues. In addition, we maintained extensive testing of our business continuity and disaster recovery plans and initiated significant investments in related projects.

OCC also supports the SEC’s ongoing efforts to strengthen regulation and promote the safe and reliable operation of registered clearing agencies. We remain diligent in our progress to adhere to the new requirements outlined in the SEC’s standards for the operation and governance of covered clearing agencies (CCA), and we have heightened our emphasis on revising our policies, procedures and processes to meet those rules. The SEC’s approval of the CCA rules is a critical step toward an equivalency agreement between the SEC and the European Commission that will allow central counterparties, such as OCC, who are subject to SEC regulation to be eligible for recognition by the European Securities and Markets Authority and for attaining qualified central counterparty status for purposes of European capital regulation.

We believe so firmly in sustaining resiliency that, in 2016, we conducted intensive educational workshops for OCC’s officers and directors on our risk and control environment to complement OCC’s already robust learning framework. In 2017, we will deliver this customized training to all colleagues across the organization and incorporate this training into our new hire onboarding program. We also executed on investments to deliver additional corporate-wide controls that underscore effective automation and workflow processes. The implementation of Oracle Cloud ERP as our new financial management system delivers increased efficiencies and strengthens our risk and control environment. The year also brought about the successful launch of our Workday transformation to automate a variety of human resource management functions, enabling OCC’s HR team to sharpen its focus on building a high-performance culture and attracting the best talent.

Maintaining a high-performance
culture is critical to deliver on our purpose
to ensure confidence in the financial
markets and the broader economy.

To support our efforts to attract and retain critical talent, we are working to transform our physical work environment. As we grow as an organization, it has become clear that we need more space capacity to ensure the right environment for our teams at our two primary locations in Chicago and Texas. Therefore, in 2016, we formally closed on the sale of our Keller, Texas facility, and our OCC colleagues in Keller will move to a brand new 46,000 square foot office in the Cypress Waters community of Dallas, Texas, in the second quarter of 2017. We look forward to completing our workspace transformation with a scheduled move of our Chicago corporate office at 1 N. Wacker Drive to 125 S. Franklin Street sometime in the second quarter of 2018. These moves are indicative of our commitment to provide a best-in-class work environment that will further our high-performance culture, foster greater interaction and collaboration among our colleagues, and strengthen our leadership position in transaction processing and risk management.

At OCC, we believe that maintaining a high-performance culture is critically important to deliver on our purpose to ensure confidence in the financial markets and the broader economy. Our evolution from a market utility to an industry influencer inspires our colleagues to work seamlessly across our business, compliance and internal audit functions in alignment with our corporate values. These values guide our behaviors and our close engagement with our partner exchanges, clearing members and market participants. We take stewardship of these relationships and the care of assets entrusted to us very seriously. Our emphasis on performance and accountability means that we seize initiative, honor our word and follow through on our commitments. We place immense prominence on our collaboration with our colleagues, peers and external partners. By fostering innovation and agility in our organization, our systems and the markets through investor education, industry advocacy and automation, we will find new opportunities to serve our market participants. Finally, but most importantly, our foundational values of ethics and integrity command that we follow the spirit of all rules and regulations.

OCC’s emphasis on operational excellence and commitment to sustaining resiliency in all that we do is paramount. We are energized by our momentum to meet the heightened requirements stipulated by our regulators in our role as a SIFMU because it is the right thing to do for our partner exchanges, clearing members, market participants, our colleagues and the broader economy. We are bolstered by the collective achievements of our colleagues in 2016, and excited by the tremendous opportunities ahead of us in 2017.

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Michael W. McClain
Chief Operating Officer

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Scot E. Warren
Chief Administrative Officer

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