User acknowledges that it has reviewed the User Agreement and the Privacy Policy governing this site, and that continued use constitutes acceptance of the terms and conditions stated therein.

Industry Insight: John Fennell

John Fennell is Senior Vice President, Risk Management & Treasury Operations at OCC. He has been with OCC since 1993 and has spent the majority of his career in the Risk Department. Read about the changes he has witnessed in this area over the last 20 years, the impact of OCC's Systemically Important Financial Market Utility designation, goals for the future and more.

What is the role of OCC's risk management?

The label "risk management" has really evolved over the past few years. Early on, risk management represented managing the financial risk that external counterparties, primarily clearing members, brought to OCC. Now it represents managing all risks related to the company, at an enterprise level. Risks include not only the obvious risks like market risk and credit risk, but additional risks like operational, model, reputational, legal and regulatory risks.

OCC is making a significant investment to expand its capabilities in this area. When OCC received regulatory approval to separate the roles of Chairman and CEO, this created separation between the control functions (Internal Audit, Compliance, Model Validation and Enterprise Risk Management) and the business functions. This was done to ensure independence of the control functions when assessing OCC's business level controls. In addition, financial risk management, business line functions such as Credit Risk, Market Risk, Default Management, etc., was separated from the Chief Risk Officer and now reports to the CEO, again emphasizing the independence of the control functions. Going into 2014, OCC will be expanding these risk roles on both the control side and the business side by adding resources in financial risk management, enterprise risk, compliance and audit.

You've been involved with OCC's risk area for more than 20 years. How have things changed?

Risk management at OCC has advanced in scope, sophistication and discipline. We used to have a saying that risk management was 'more art than science' but in the last 10 years the science part of it has played a more sophisticated role with the addition of STANS and Monte Carlo simulations. The art has become more disciplined through the development of robust policies that provide a clear definition of OCC's risk tolerances and the governance associated with establishing those risk tolerances.

How does STANS benefit clearing members?

The STANS margin methodology uses sophisticated modeling techniques to identify where exposures within a clearing member's positions exist so the exposures can be collateralized by margin. It does this by modeling the co-movements of more than 7,000 different underlying instruments that can be carried by a clearing member in an account and not only highlights where exposures are being aggregated (e.g., concentration risk), but also where different positions hedge and reduce exposure. This helps OCC incent clearing members to maintain positions that carry less risk with OCC, which can result in a lower margin requirement.

How does cross-margining provide financial flexibility to program participants?

The cross-margin program maximizes capital efficiency by recognizing a clearing member's hedged positions split between two different clearinghouses, such as OCC and CME. Without cross-margining each clearinghouse would charge the member margin on its respective un-hedged positions, requiring a significant amount of collateral be posted and increasing pressure on the member's liquidity resources. Combining both sets of positions into a single account allows for the hedges to be recognized, which becomes even more critical during periods of intense market volatility.

How has OCC's designation as a Systemically Important Financial Market Utility, or SIFMU, reshaped the landscape for your work?

Being designated as a SIFMU was a significant event in OCC's history. As one of only a handful of organizations identified as being critical to the U.S. financial markets infrastructure, it is important that OCC operate in a robust and disciplined manner. While we have maintained a high level of performance over the past 40 years, the SIFMU designation has caused us to reevaluate areas where we might improve and also to ensure that all critical activities are repeatable, especially during periods of extreme market conditions. This assessment has resulted in an effort to build out company-wide policies and procedures by year-end that clearly define roles, responsibilities, risk tolerances and governance in a transparent manner. In addition, several action plans designed to enhance OCC's processes will be implemented by end of first quarter 2014.

What are some of the goals and growth opportunities for the risk area in 2014?

One of the areas we will focus on in 2014 is liquidity risk - first, to better identify and forecast scenarios that cause liquidity risk and second, to expand OCC's access and flexibility to sources of liquidity. OCC plays a significant role in setting and administering customer margin requirements. We will work in tandem with industry participants and exchanges to evaluate and consider potential enhancements to the processes for customer margins. There will be continued growth of risk management enterprise-wide. I would expect to see a significant evolution in the way that OCC manages risk associated with implied volatility as well as the approaches OCC takes to risk manage volatility products.