Message from
the Chief Executive
Officer and the
Chief Operating
John P. Davidson
Scot E. Warren
On behalf of our colleagues in Chicago, Dallas and Washington, D.C., we are pleased to report that in 2018, OCC continued to provide world-class risk management, clearance and settlement services to the users of the U.S. equity options and futures markets. We did this while also furthering our culture, compliance posture, and technology transformation to better serve our stakeholders and the users of the markets we serve.

2018 Highlights
OCC is always focused on flawless execution and in delivering operational and capital efficiencies to our participating exchanges and clearing firms in our role as a Systemically Important Financial Market Utility (SIFMU). In 2018, we cleared 5.24 billion total contracts, which was up 21 percent from 2017 and the highest industry total since 2011. This reflects the stability and integrity of our services. Cleared exchange-listed options volume grew 22.6 percent from 2017 to 5.14 billion contracts, and we experienced strong growth in exchange-listed options, equity options, ETF options, index options, and OCC’s securities lending transaction activity.

Since 2014, our focus has been on executing the first phase of our transformation strategy; enhancing our resiliency and securing our foundation. In our role as a SIFMU, OCC had to transform to meet the increased demands of a new regulatory environment. We needed to solidify our financial and capital resources, and we had to focus on developing and retaining a strong leadership team.

Due to the substantial changes we implemented in 2018, OCC now has a clearing fund that is based on a wide range of stress test scenarios. With this change we also expanded our coverage to allow OCC to withstand the simultaneous default of our two largest clearing firms, rather than our single largest. This goes above and beyond U.S. regulatory requirements and positions OCC well for the future.
Capital Plan
Subsequent to our year-end, on February 13, 2019, the Securities and Exchange Commission disapproved OCC’s Capital Plan. It is vital for OCC, as a SIFMU and the sole provider of clearance and settlement services for the U.S. listed options market, to remain appropriately capitalized at all times. The Commission’s disapproval of the Capital Plan relates to OCC’s capital available to cover operational risks. It does not affect OCC’s financial resources available to protect against a clearing member default. Those resources remain over $8.5 billion, in addition to margin collateral holdings at OCC. OCC’s Capital Plan served a critical purpose in ensuring that OCC was properly capitalized. In 2014, OCC had only $25 million in capital. Today, in accordance with regulatory obligations, OCC maintains sufficient capital with liquid net assets funded by equity above its target level of $247 million, reflecting the ability to adequately fund our business operations and to have the financial capacity to absorb unexpected operational losses. This is in keeping with the critical role that we provide to the U.S. listed equity options markets and our designation as a SIFMU.

As a result of the SEC’s order, OCC, with the support of our Board of Directors, took the following actions:
  • Reaffirmed the target capital requirement of $247 million;
  • Retained amounts that otherwise would have been issued as refunds and dividends for 2018; and,
  • Raised clearing fees by one half of one cent from $0.05 to $0.055. The revised fee schedule, which took effect April 1, 2019, is: 1-999 contracts, $0.055; 1,000 + contracts, $55.

    Separately, OCC’s Stockholder Exchanges agreed to allow OCC to retain in the aggregate $40 million of their initial $150 million capital contribution to be repaid at a later date, provided that such repayment does not cause OCC’s liquid net assets funded by equity to fall below the $247 million target capital level.

    Because of these actions, we are currently operating and expect to continue operating with the same level of target capital that we maintained prior to the Commission’s decision. To address the impact of the Commission’s order, we are working with our Board, industry participants and our regulators to develop a viable plan to replenish OCC’s capital, as required by regulation, in the unlikely event of operational losses. As we discuss below, the Commission’s disapproval does not affect the investments we are making to modernizing our technology infrastructure. It also will not affect our Corporate Plan and Strategy.
  • OCC is always focused on flawless execution and in delivering operational and capital efficiencies to our participating exchanges and clearing firms in our role as a Systemically Important Financial Market Utility (SIFMU).
    The Renaissance Initiative, when completed, will enhance the capabilities of our risk, clearing and data systems.
    OCC has established operational and technology goals and we have worked diligently on further establishing the groundwork necessary to ultimately replace ENCORE, our two-decade old clearing and risk management platform. We are proud to say we made exceptional strides with the launch late in 2018 of our Renaissance Initiative, which is our program to replace Encore. Although we must still rely on our current system for the near future, we made measurable progress in 2018 toward the eventual launch of a more flexible architecture that separates the clearing and risk management functions and that is cost-effective, nimble and readily adaptable to market demands.

    The Renaissance Initiative, when completed, will enhance the capabilities of our risk, clearing and data systems. For risk management, the internally developed risk platform elements of the Renaissance Initiative build upon the program already underway at OCC, with many features operating in cloud infrastructure. This will provide an improved environment for intra-day risk management, intra-day computations, pricing and re-evaluation. It will enhance the efficiency and speed of margin, stress-testing, and back-testing capabilities and will increase transparency and insight for our clearing firms into exposures via ad hoc queries and intra-day analysis.

    OCC will use a combined approach for its new clearing system, pairing internal work with the adoption of software developed by third parties. The benefits to OCC and our clearing firms include enhancements to ad hoc reporting with new filtering functionality, control mechanisms throughout systems, application programming interfaces that will make it easier to procure and submit data to and from the system, speed and agility in supporting new products and following industry standards for our futures processing.

    The development of our new data platform, which will be independent from the risk and clearing 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 provide self-service capability for data discovery, search and historical analysis.

    Technology is at the heart of OCC, and therefore we must ensure that we maintain stringent cybersecurity measures. During 2018, our investment in information security, led by our Security Services team, continued to prove extremely beneficial to OCC and market participants. Our tools and capabilities are growing in sophistication and responsiveness, and we will continue to enhance our information security defenses, which are critical to OCC as it works to deliver on its responsibilities as a SIFMU.

    OCC’s most important function is to provide stability and market integrity through effective and efficient clearance, settlement and risk management services. Along with the phenomenal year of trading activity in options and futures, we also continued to support product innovation by our participating exchanges as they launched new products. In 2018, we supported the launch of 168 new products to help grow the equity options and futures markets.
    Our People
    To design better solutions and deliver stronger results, it takes people working together in a collaborative and cooperative environment. On Memorial Day weekend in 2018, our Chicago colleagues moved into new office space that fosters a culture of increased collaboration, teamwork, and accountability. Just as their Dallas colleagues experienced in 2017 with their move into a new office environment, our Chicago colleagues are interacting and achieving successful outcomes together. The users of our services see the benefit from the progress we made in 2018.

    In 2018, we meaningfully enhanced our risk management, our processes and procedures, our legal framework and our information security, and we supported innovation for the continued evolution of the markets. Our overall performance was well received by market participants: 88 percent of our clearing firms and 85 percent of our participating exchanges said they were satisfied or very satisfied with the level of service they received from OCC last year. Over 90 percent of our exchanges and clearing firms said they were satisfied with key interactions with various OCC departments, including Member Services, Collateral Services, National Operations, External Testing, and Risk Management. These high satisfaction levels reflect why OCC was named Best Clearing House by Markets Media and Best Clearing House – The Americas by FOW.

    While we appreciate this recognition, we know we must do more to clear the path for continued growth for the equity options and futures markets. We are working to make OCC more effective, efficient and agile in its capabilities in order to help drive more growth in options, futures and stock lending in 2019 and beyond.
    OCC’s most important function is to provide stability and market integrity through effective and efficient clearance, settlement and risk management services.

    John P. Davidson
    Chief Executive Officer

    Scot E. Warren
    Chief Operating Officer