Message from
the Chief Financial
Amy C. Shelly
The options market in 2018 had a particularly strong year. Heightened market activity led to greater-than-anticipated cleared contract volume of more than 20 million contracts cleared each day, which is critical to OCC’s financial operations.

We remain focused on delivering operational excellence to our participating exchanges, clearing firms, and the users of our markets. Our 2018 regulatory approvals allowed us to employ rigorous stress testing to size our clearing fund, while also operating under a set of standards that align OCC with other globally-important derivatives clearing houses. As a result of our clearing fund resizing, we were able to return $3 billion in capital to our clearing members.

Additionally, OCC continued to manage costs in a prudent and fiscally responsible manner. Investing in OCC’s technology and people is essential to the success of the organization and to our ability to meet our requirements as a systemically important financial market utility (SIFMU). Effectively managing our cost structure means that we can better serve the users of the U.S. equity options and futures markets.

OCC benefited from decisions made in Washington, D.C., where the Federal Reserve voted to implement four increases in the federal funds rate. While higher rates have varying effects throughout the economy and the financial markets, including on clearing firms, OCC’s overnight investments were able to earn a higher rate of return.

We fortified our financial posture by successfully renewing our bank credit facility at $2 billion. While doing so, we included a series of new banks in the facility, which expanded our business relationships and provided an added measure of risk mitigation for OCC. We also enhanced the pre-funded financial resources available to OCC by requiring a minimum of $3 billion in cash in the clearing fund, which is held at the Chicago Federal Reserve Bank. Additionally, we renewed our innovative $1 billion lending commitment with CalPERS, the largest U.S. pension fund, in what continues to be an exceedingly productive relationship, and we are pleased to have this unique arrangement with a non-bank partner. The financial soundness of CalPERS means that market participants have yet another reason to be assured of OCC’s ability to meet its promise to clear and settle listed options and futures trades each market day.
As noted elsewhere in this report, in February 2019 the SEC disapproved OCC’s capital plan. It is important to note that this disapproval relates specifically to the capital provided by OCC’s shareholders in 2015 and the agreement to provide additional funds to OCC if necessary to cover operational risks. The decision does not affect our 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. Today, OCC maintains sufficient capital above its capital base target of $247 million, reflecting the ability to adequately fund our business operations and to have the financial capacity to absorb unexpected operational losses.

As a result of the SEC’s actions, in February 2019 S&P placed OCC on a Credit Watch Negative with respect to its AA+ rating and will evaluate OCC in three months to review progress toward the development of a plan to help ensure that it remains adequately capitalized at all times and in compliance with all applicable regulations. While the S&P report said, “We continue to view OCC as a highly creditworthy and trusted central risk manager,” this action by S&P serves as a reminder of OCC’s need to take immediate action on this important matter.

At the start of 2018, we were preparing to strengthen our compliance, our internal controls and our financial standing, all of which we did. As cleared volume levels exceeded our expectations, our resources expanded, placing us in position to accelerate certain components of the work we have been doing to prepare OCC for the future. This includes our uncompromising focus on operational excellence and on delivering greater capital efficiencies to our clearing firms.

As we look ahead to 2019, OCC continues to be in an incredibly strong position to perform its functions as a SIFMU. In our role as a central counterparty, we must ensure that the relationships we have are backed by mutual faith and trust, yet these relationships also must be supported by financial integrity. In the past year, we built on OCC’s already firm position as the foundation for secure markets.

Investors, regulators and clearing firms demand stability and market integrity from a company like OCC. Whether markets are calm or volatile, participants must be able to rely on OCC, without exception. In 2018, we fulfilled the fiduciary responsibility we have to the users of these markets. We did not waver. We were decisive, prudent and efficient, just as we will continue to be in 2019 and beyond.

Amy C. Shelly
Chief Financial Officer