Message from
the Executive
Craig S. Donohue
On behalf of the Board of Directors and my OCC colleagues, I am pleased to share with you our 2018 annual report. In this report, you will learn about the work we are doing to support OCC’s mission as a Systemically Important Financial Market Utility (SIFMU) and to provide high quality and efficient clearing, settlement and risk management services to the users of the U.S. equity options and futures markets.

This report also includes commentary from two prominent OCC stakeholders and market participants: Nandini Sukumar, Chief Executive Officer of the World Federation of Exchanges, and Gary Franklin, Vice President, Options Trading and Strategies, Raymond James Financial.

In 2018, we enhanced OCC’s compliance-related and financial resiliency, furthered our efforts to modernize our technology, strengthened our governance structure, and continued in our role as an advocate for the industry in Washington, D.C. This progress builds upon the solid foundation we have put in place since 2014 to shape and strengthen a culture of innovation and collaboration designed to ensure confidence in the financial markets and the broader economy, and to make OCC a destination for the best talent.

OCC’s 2018 total cleared volume increased 21 percent to 5.24 billion contracts, the highest cleared contract volume in our history. We experienced tremendous growth in the clearance and settlement of exchange-listed and equity options, ETF options, and index options. OCC’s securities lending CCP activity increased 17.2 percent in 2018 with over 1.37 million new transactions.

This success on behalf of our industry does not happen without the tremendous support of our Board of Directors, the leadership provided by John Davidson, Scot Warren and our Management Committee, and our hard-working colleagues in Chicago, Dallas and Washington, D.C. OCC’s ability to consistently support record volume numbers demonstrates that we continue to deliver on our key responsibilities to our clearing firms, participant exchanges and the investing public, and underscores OCC’s important role as the foundation for secure markets.
Enhancing Our Resiliency
Since 2014, OCC has focused significant attention and effort on enhancing our resiliency and securing our foundation by improving our risk and control environment. We made great progress in enhancing our compliance posture as part of our longer-term efforts as a SIFMU.

In July, the first phase of OCC’s new Financial Safeguards Framework (FSF) was approved by the U.S. Securities and Exchange Commission (SEC). This new framework includes an improved methodology to determine the size of our clearing fund, driven by enhanced stress-testing capabilities that include historical market activity as well as extreme yet plausible scenarios while lessening potential liquidity strains on our clearing firms. This improved methodology resulted in OCC returning more than $3 billion to our clearing firms. The FSF includes a “Cover Two” approach that allows OCC to cover the concurrent default of its two largest clearing firms. This approach exceeds U.S. regulatory standards and better aligns OCC with other systemically important derivative clearing houses. We also launched a new risk-based allocation for clearing fund contribution requirements that improves transparency and incentivizes clearing members to manage margin risk.
Our Renaissance Initiative...
is an ambitious, multi-year
investment to comprehensively
redevelop and
modernize OCC’s risk
management, clearing and
data systems to better
serve market participants.
In August, OCC became the first clearing house whose primary supervisory agency is the SEC to receive approval of its Recovery Tools and Recovery and Orderly Wind-Down Plan. This plan allows OCC to successfully manage extreme market disruptions and establishes improved assessment powers as well as new tools to extinguish losses.

In terms of financial resiliency, OCC’s funding and operations are designed to support our role in reducing systemic risk across global financial markets. OCC’s capital plan, which had been in effect since 2015, reinforced our overarching goal to remain a world-class clearing service for the financial industry by ensuring that we maintain the capital necessary to cover operational risks. While we are disappointed with the disapproval of OCC’s capital plan by the SEC, we are moving forward with alternate means, as described elsewhere in this annual report by John Davidson, Scot Warren, and Amy Shelly, to ensure that we continue to maintain a target capital level aligned with regulatory expectations.

In late 2018, we launched our Renaissance Initiative, perhaps the most important project undertaken by OCC in the last 20 years. It is an ambitious, multi-year investment to comprehensively redevelop and modernize OCC’s risk management, clearing and data systems to better serve market participants. The goals of this project, under the leadership of John Davidson, Scot Warren and Chief Information Officer Dave Hoag, are to enhance OCC’s resiliency, improve our compliance posture, and help us operate in a more effective and efficient manner so we can drive industry growth. The Renaissance Initiative also will make OCC a more agile organization that can deliver transformational change in terms of business capabilities that will allow us to better serve the users of our markets.
Strengthening Our Governance and Management Structure
Even as we continue to enhance our resiliency and modernize our technology, OCC is only as good as its people. In 2018, we continued to attract to our company capable individuals with the experience and vision that we seek to make sure OCC is providing the best risk management, clearance and settlement services in the world.

We have been fortunate to attract a Board of Directors that brings significant expertise in risk management, technology, operations, compliance, regulatory policy and audit. In 2018, our Board of Directors was strengthened with the addition of Elizabeth King, who serves as Chief Regulatory Officer of the Intercontinental Exchange and General Counsel of NYSE Group. In addition, the following directors were re-elected to the OCC Board of Directors in 2018: Thomas A. Frank, Executive Vice President/CIO, Interactive Brokers, LLC; Stephen Luparello, General Counsel, Citadel Securities; Christine L. Show, Managing Director/Global Head of Listed Derivative Operations, SG Americas Securities, LLC; Thomas Cardello, Chief Executive Officer, Venice Financial Management, LLC; and Alice Patricia White, retired economist. In early January 2019, Chris Isaacson, Chief Operating Officer of Cboe Global Markets Inc., joined the OCC Board of Directors.

We also have assembled an impressive and accomplished senior leadership team that is collaborating with our colleagues in Chicago, Dallas and Washington, D.C. to drive the important initiatives we are undertaking. John Davidson and Scot Warren have been at the forefront of leading OCC’s recent successes as we work to enhance our resiliency and secure our foundation, improve our risk and control environment and complete our comprehensive compliance plan.

Recognizing the critical roles John and Scot have played to help OCC achieve these results and the importance of leveraging their skills and experience as we continue to pursue our key business initiatives, our Board of Directors unanimously accepted my recommendation in December 2018 to promote John to Chief Executive Officer and Scot to Executive Vice President and Chief Operating Officer. I, along with the Board of Directors, am very confident in John and Scot’s abilities to continue the progress and momentum that has been created over the past four years, and I look forward to continuing to work with them as Executive Chairman.
Advocating For Our Industry
OCC is very proud of its leadership role in working with policymakers on behalf of the U.S. equity options and futures industry and the users of these markets. OCC and the U.S. Securities Markets Coalition engage in regular outreach to congressional and regulatory officials and staff to educate them on options market trends and developments, as well as to discuss the potential impacts of various regulatory and tax proposals on investors who use the markets we clear.

We were pleased that those efforts were successful when H.R. 5749, the Options Markets Stability Act, was passed unanimously by the U.S. House of Representatives on July 10. The legislation requires the appropriate U.S. federal banking agencies to increase the risk sensitivity of the capital treatment of centrally- cleared options. While the measure was not considered by the Senate and therefore did not become law in 2018, federal banking agencies published proposed rules in December that would, among other things, address this concern.

Our commitment to supporting the industry is also highlighted by our educational work through The Options Industry Council (OIC), an industry resource managed by OCC. The development of unbiased content has made a significant contribution to the continued education of the users of the U.S. exchange-listed options markets. More than 84,000 individual options investors participated in OIC’s robust 2018 digital and live instructional programming while OIC’s team of professionals delivered compelling options educational content to prominent industry partners such as Fidelity Investments, Charles Schwab & Co., Investment Wealth Institute, CFA Institute, and Financial Planning Association. The OIC also partnered with Greenwich Associates and Burton-Taylor on two studies focusing on institutional use of options, and options demand in Europe, respectively.
In Closing
Along with the accomplishments described here, OCC launched a new brand identity last year, a tangible representation of redefining our role as the foundation for secure markets. Our rebranding was not only a change in our logo, but a change to reflect our sincere rally cry to clear the path toward a new level of excellence at OCC and for our industry.

We are transforming how we do business at OCC in ways that will allow us to continue to seamlessly clear record numbers of contracts each day. We will continue to enhance our resiliency in all facets of our business and embrace the excitement of undertaking our Renaissance Initiative, which will further support our ability to grow and adapt with the markets.

OCC’s success in 2018 is a function of many factors coming together and yet much more is in front of us. We are confident that for 2019 and the years to follow, our story will continue to be one of positive change and continued support for the markets we clear in our role as the foundation for secure markets.

Craig S. Donohue
Executive Chairman