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OCC Enhances Resilience with Regulatory Approval of Recovery and Wind Down and Associated Recovery Tools

By John Davidson, OCC President and Chief Operating Officer
August 29, 2018

On August 23, OCC, the world's largest equity derivatives clearing organization, received approval from the U.S. Securities and Exchange Commission of the company's proposed recovery tools and proposed recovery and orderly wind-down (RWD) plan. These are critical risk management tools designed to enable OCC to enhance its resiliency as a Systemically Important Financial Market Utility (SIFMU) and successfully manage extreme market disruptions in future financial crises

OCC is the first SIFMU whose primary supervisory agency is the SEC to have its recovery tools and RWS plan approved by the SEC. Gaining approval of our RWD plan is the culmination of more than a year of collaborative work with our regulators and supervisors, as well as receiving input from clearing members, market participants, and OCC's Board of Directors.

This approval reflects positively on the progress OCC is making on the regulatory front, including approval earlier this year of the following initiatives:

  • Phase One of our Financial Safeguards Framework, which determines how we size our clearing fund and allocate contribution requirements from our clearing members;
  • Our minimum cash requirement in the clearing fund, which enhances liquidity resources;
  • Our margin and model risk management policies;
  • Our rule changes to enhance trade acceptance practices; and,
  • Our rule changes to calibrate our margin coverage for all risk factors in STANS on a daily basis.

The approval of OCC's RWD plan is a significant accomplishment that allows OCC to further align its recovery and wind-down planning with its peer clearing organizations and conform to accepted international standards in the Principles for Financial Market Infrastructure. It also enhances OCC's ability to successfully manage extreme market disruptions that may occur in future financial crises, which is critical to our mission of promoting stability and market integrity.

The recovery tools and RWD plan provide several key enhancements to OCC's resiliency:

Improved Assessment Powers: The improved assessment powers cap each clearing member's aggregate liability to replenish the Clearing Fund at 200 percent of the member's then-existing required contribution, during a minimum 15-day (maximum 20-day) cooling-off period.

  • The improved assessment powers will increase the minimum amount of assessments available to OCC, while eliminating the unlimited demands on clearing members (which could have had a destabilizing effect during a crisis).
  • The improved assessment powers also will provide clearing members with better clarity about their maximum exposure to OCC, thereby facilitating their own management of risk and, to the extent applicable, regulatory and capital considerations.

New Tools to Extinguish Losses: If an unprecedented loss event ever threatens to exhaust OCC's Clearing Fund resources (inclusive of assessments), the new recovery tools would provide OCC with the ability to call for voluntary payments and voluntary tear-ups and, if ultimately necessary, to impose mandatory tear-ups to extinguish the positions causing such losses.

Updated RWD Plan: The updated RWD plan better prepares OCC for potential threats, however remote, to its viability and lays out critical steps that OCC could take to ensure continuity of its critical clearing services to participants in times of extreme financial distress. The updated RWD plan now includes OCC's recovery tools and also reflects the significant organizational improvements that OCC has accomplished over the past few years.

While we have made significant progress to meet heightened regulatory expectations as a SIFMU, we recognize that we still have a lot to get done. With the continued collaboration of our regulators and supervisors and our commitment to achieving our goals, we will clear the path for OCC's continued success on behalf of the U.S. exchange-listed options industry.


Categories: Clearing Services, Company Updates, Compliance, Regulation, Risk Management