March 2018

OCC Continues To Clear The Path For The Exchange-Listed Options Industry

In 2017 OCC achieved a number of key milestones that position our company for continued resiliency, innovation and growth ...

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OCC Continues To Clear The Path For The Exchange-Listed Options Industry

In 2017 OCC achieved a number of key milestones that position our company for continued resiliency, innovation and growth while providing our exchange partners, clearing firms, and market participants with open access and reliable central counterparty services with operational excellence.

OCC total cleared volume in 2017 was over 4.3 billion contracts, up four percent from 2016 and the third-highest year ever in our history. Cleared exchange-listed options rose three percent to 4.1 billion contracts, and cleared futures contracts grew by 32 percent to 138 million contracts, representing an increasingly diversified product mix. OCC's stock loan transaction business continued to attract market participants with 2.3 million new loan transactions in 2017, up 22 percent from a year ago.

Enhancing OCC's resiliency as a Systemically Important Financial Market Utility (SIFMU) is critical to our continued ability to reduce systemic risk, increase market transparency, and provide capital and collateral efficiencies for the users of the U.S. exchange-listed options markets.

We continue to work to reduce systemic risk across the global financial markets, particularly supporting the efforts of the SEC to improve the registered clearing entities. The SEC's reaffirmation in 2016 of our capital plan allows OCC to continue to comply with domestic and global regulatory requirements on sufficient liquid net assets.

Our solid financial positioning earned OCC a reaffirmation by Standard & Poor's of our AA+/Stable rating. S&P said OCC "enjoys large economies of scale and has ample capacity to absorb up to 2.5 times the largest historical trading volumes per day with the current OCC systems… In our opinion, operational risk receives an appropriate level of attention and resources, and is well managed (including technology and recovery centers)."

In 2017 under the leadership of John Davidson, we initiated the process to evaluate options for replacing our 20-year old Encore clearing platform and related infrastructure with a modularized system that will use an OCC-specific data model and warehouse. Upon completion, this project will deliver a more nimble and self-controlled system that will provide our clearing firms and partner exchanges with additional capabilities.

OCC takes great pride in its leadership role of working with policymakers on behalf of our industry. Along with the U.S. Securities Markets Coalition, OCC has established a robust dialogue with Members of Congress and their staff to educate them on various tax and regulatory proposals that could negatively impact individual investors and market participants who use the U.S. exchange-listed options markets to help manage their financial risk.

As a result of such efforts, the Tax Cuts and Jobs Act, signed into law on December 22, 2017, did not include a mark-to-market provision for derivatives. This is an important accomplishment for the exchange-listed options industry, and we remain committed to engaging in thoughtful discussion with our nation's leaders, lawmakers and regulators on the many critical issues facing the industry in 2018, including bank capital and risk-weighted asset rules.

Our work in Washington, D.C. continues to be complemented by OCC's industry influence as highlighted by our educational work through The Options Industry Council (OIC), whose contributions have been significant to the growth of the U.S. exchange-listed options markets. In 2017, more than 222,000 individual options investors participated in OIC's robust digital and live instructional programming while its team of professionals also delivered compelling and unbiased educational content to numerous prominent industry partners, including the CFA Institute, Bloomberg, Blackrock, Morgan Stanley, Charles Schwab, E*Trade, and etf.com. We also take great pride in celebrating OIC's 25th year of helping investors and market participants better understand the benefits and risks of exchange-listed options by providing them with free, unbiased educational content in order to promote responsible use of these risk management tools.

We are proud of what OCC accomplished in 2017. Our collective efforts and teamwork have put OCC in a position to deliver more innovative products and services in the coming years. We remain committed to serving as the foundation for secure markets and in ensuring confidence in the financial markets and the broader economy. We will continue to invest in solutions that enhance our resiliency and fortify our operational effectiveness as an independent risk manager. We will persist in proactive exploration of new business opportunities that complement our existing products and lower clearing and collateral costs for market participants.

Strengthening stakeholder relationships is paramount as we mature our leadership position in equity derivatives, futures, and securities lending. This stewardship allows OCC to further contribute to our industry's growth, and most importantly, leads to the reduction of systemic risk in the global financial system.

Craig Donohue, John Davidson, Scot Warren


Q&A with Matt Wolfe, OCC Vice President of Product Development

Matt Wolfe, Vice President of Product Development, discusses the key issues that may affect the securities lending market in 2018.

Are you positive or negative about the prospects of the securities lending market this year? Why?

Positive. We have experienced continued growth over the last several years. In 2017 we saw cleared stock loan volume at OCC increase 22 percent from 2016, and we expect to see that continue in 2018 as we work to enhance our program and add participants. We are working to include product enhancements as well as expanding OCC's membership criteria to support a broader set of lenders. It seems that the investments made across the industry in order to better understand and manage the capital and balance sheet costs of transactions are showing benefits. It also appears that the industry has adapted to regulatory changes and is now better positioned to understand and identify opportunities. Hopefully that will translate to increased balance sheet allocations and innovative counterparty decisions that will increase both rates and utilization.

Will indemnification continue to be a point of contention for many agent lenders and beneficial owners? Is there a solution?

I think that indemnification will continue to be an important consideration, but I believe that once a CCP solution is available for agent lenders and beneficial owners, indemnification won't be as contentious for cleared loans. When beneficial owners and agent lenders are able to clear their transactions, the counterparty becomes a systemically important central counterparty, such as OCC, with an S&P rating of AA+, and a robust and transparent risk management practice. That should significantly reduce the cost of capital and the amount of capital needed to provide indemnification. Or perhaps someday indemnification will be dropped altogether since the CCP's function is to provide a guarantee to the lender against any loss should there be a default by their borrower.

Will 2018 be the year CCPs finally get a foothold in the market?

As the only U.S. CCP and largest worldwide for securities lending transactions where return of stock or cash to bi-lateral and exchange-traded stock loan participants is guaranteed, OCC already has a foothold in the securities lending market with over $75 billion in loans being cleared. This year marks the 25th anniversary of the launch of our clearing program, but access has been limited. We are currently working on expanding our model to better accommodate the buy-side through various enhancements and are very much looking forward to expanding our footprint and level of service to the securities lending market.

Is the U.S. market likely to see any major reforms to regulation effecting securities financing (e.g. Dodd Frank) this year?

The regulatory changes implemented over the last few years have resulted in a more resilient financial services industry. I haven't heard of any major reforms that are in the works related to securities lending. And I would not be surprised to see an initiative in the U.S. similar to Securities Financing Transactions Regulations in order to better equip regulators with data to enable them to monitor and fine-tune requirements. My hope for 2018 is to enable more of the market to realize the capital efficiencies and costs savings that are afforded to clearing within the current regulations.


OIC Continues to Educate Market Participants on the Benefits and Risks of Exchange-listed Options

Celebrating its 25th anniversary, OIC continues its mission as the leading provider of free, unbiased educational content to educate individual investors, financial advisors, and institutions on the benefits and risks of using exchange-listed options as risk management solutions.

OIC hosts a variety of free webinars for market participants to learn more about using options in their portfolios. On February 15th, Dan Sheridan, OIC instructor and President of Sheridan Mentoring, discussed how investors can select options strike prices and expiration dates when initiating an options position. On February 22nd, Peter Lusk, OIC instructor and senior instructor at Cboe, discussed cash secured puts and the covered combination as strategies that investors may consider to produce income.

On March 15th, Mark Benzaquen, OIC Senior Investor Services Specialist, helped investors decipher the terminology surrounding dividends during OIC's free webinar, "The Dividend Effect." On March 22nd, OIC hosted an "Income with Portfolio Overwriting" webinar, with OIC Instructor Allan Ellman, President of The Blue Collar Investor. This webinar focused on how portfolio overwriting can potentially generate income by using covered call writing in long-term, buy-and-hold portfolios. You can access all of OIC's webinar content here.

Along with webinars, OIC offers market participants a variety of videos, podcasts and live seminars throughout the year, all free of charge. To learn more about the work OIC does on behalf of the exchange-listed options industry to educate investors, visit OptionsEducation.org for more information.


OCC and Nasdaq to Host 36th Annual Options Industry Conference

The 2018 Options Industry Conference will be held on May 2-4 in Amelia Island, Florida. Mary Savoie, Executive Director of The Options Industry Council, and Kevin Kennedy, Head of U.S. Options in Nasdaq's Trading & Market Services business, provide information on what to expect from OIC 2018.

What is the role of the Options Industry Conference?

Mary Savoie: The conference, which is attended by representatives of the options exchanges and clearing firms, along with individual investors, financial advisors, institutions and policymakers, provides a forum to discuss important issues facing our industry and for attendees to work together on how best to grow the marketplace and serve the needs of our market participants.

Kevin Kennedy: The role of the Options Industry Conference is to bring together all market participants to debate new and current initiatives and to foster innovation for industry growth. Nasdaq's role as a host of OIC is in line with our goals as a valued exchange partner. We are committed to supporting and nurturing all facets of options trading – from risk management to investment strategy and beyond. We know that in order to complete our mission of rewriting tomorrow for the betterment of options everywhere, we need to foster an environment of collaboration and open communication. OIC is critical to making this happen.

How is this conference important for the exchange-listed options industry?

MS: It is the premier industry gathering and a unique opportunity where industry leaders, including competitors and clients, can share ideas and work together to ensure that the options market continues to grow and evolve in a manner that benefits investors.

KK: The conference has always served as a vital milepost for taking stock of how the industry is meeting the needs of our options market participants. We have a lot on our plate this year, and having the opportunity to collaborate and grow our knowledge base, along with those of our clients, is an invaluable tool and opportunity. Just being in the same space together facilitates the high-quality communications needed to effectively get to the bottom of what's top of mind in the industry.

How does it help the educational goals of the exchange-listed options industry?

MS: The sessions are designed to be informative and encourage an exchange of ideas that can be applied on both an organizational as well as an industry level. Attendees have an opportunity to learn from subject matter experts in a variety of areas, including regulations, product usage and technology trends.

KK: The Options Industry Conference is the keystone event of the year for the options industry, with an educational component bar none. One place, one time, one stop for all things current and forward-thinking in the options industry makes this the ideal resource for staying educated and abreast of all you need to be strategic.

What key topics are on the agenda?

MS: This year's conference is taking a forward look at what is shaping the industry and where growth opportunities are. There will be conversations on the impact of volatility on our market, including product development and investment strategies, the outlook in Washington, D.C., and the current regulatory environment.

KK: We have a full line-up of timely content this year. Thursday's Volatility Panel, moderated by Elinor Comlay of EQ Derivatives, will address the use of options in volatility funds, volatility products, the implications of low volatility and the recent inverse product meltdown. Also key on the agenda is the ETF Panel, moderated by Steve Oh, Nasdaq Director of ETF Product, Listings & Trading, which will address ETF construction and the use of ETF options.

Are there any expected highlights for the Options Industry Conference this year?

MS: Attendees will have an opportunity to hear directly from Nasdaq CEO Adena Friedman and OCC Executive Chairman and CEO Craig Donohue as they engage in a fireside chat about the importance of risk management and other key industry issues. Congressman Randy Hultgren, who serves on the Committee on Financial Services in the House of Representatives, will talk about the outlook for issues facing our industry. Findings from a new study on the institutional use of options conducted by Greenwich & Associates will be presented for the first time. A panel of financial advisors will discuss how they use options to meet their clients' investment goals. And of course there will be plenty of networking opportunities, including golf, backwater fishing, a cooking class, marsh kayaking and "voluntourism".

KK: Nasdaq is excited to be broadcasting our #TradeTalks series, hosted by Nasdaq Global Markets Reporter Jill Malandrino, live from the conference floor. Just over a year out of the gate, TradeTalks boasts a social reach to more than 77,000 viewers. Focused on news, trends and education, you will hear industry experts and thought leaders opine on topics across the options spectrum. Be sure to stop by to watch an episode or two.

To learn more about the 36th Annual Options Industry Conference, visit www.optionsconference.com.


An Example of How OIC Connects with Investors

OIC does a tremendous amount of outreach to investors and market participants on the benefits and risks of using exchange-listed options. In this example, Joe Burgoyne, OIC Director of Institutional and Retail Marketing, explains how investors can use options as versatile financial instruments to achieve their investment goals.

Exchange-listed options are versatile financial instruments that can help investors achieve various investment goals. Investors typically use exchange-listed options strategies to gain market exposure, generate income and protect their investments. The Options Industry Council (OIC) is celebrating its 25th anniversary as the leading educational resource for investors who use or want to learn how to trade U.S. exchange-listed options. Founded in 1992 by OCC, the world's largest equity derivatives clearinghouse, and the U.S. options exchanges, OIC works to increase the awareness, knowledge and responsible use of exchange-listed options globally among individual investors, financial advisors and institutional asset managers.

Every five years since 1995, OIC has commissioned a national survey designed to create a profile of the current retail options investor to better understand how and why they use options, and to compare options investors to non-options investors. The 2015 OIC Study of Investors found that options users are significantly more likely than non‐options users to consider themselves extremely knowledgeable investors; to be more passionate about investing; to consider themselves "investors" and not "savers;" and to be more willing to take risks in order to achieve financial rewards. The study also found that a lack of understanding or knowledge is the major stumbling block preventing non-users from currently trading options. The survey results help OIC better develop and direct its unbiased options education efforts with retail investors on behalf of the listed options industry.

Due in large part to OIC's educational programs and outreach in coordination with industry partners, investors' use of options has grown dramatically since 1992. In 1992, 202 million options contracts were traded. In 2017, options contract volume reached the third highest total volume ever with more than 4.3 billion options contracts traded – an increase of more than 21 times.

OIC offers something for every investor, no matter their level of market knowledge. One way to get started is through the MyPath online education program, where individual investors take a self-assessment that evaluates their knowledge level and suggests a starting point for beginning their curriculum. Investors can take a basic class online, as well as more advanced courses, listen to a webinar or a podcast or watch a strategy video. More experienced investors can also check out OIC's research area, which includes academic studies on the performance of various trading strategies.

With growing interest in digital education, OIC offers a video series to help investors better understand some of the more popular option strategies such as the Long Put, Covered Combo and Cash-Secured Put. Additionally, the Options Strategy Builders tool on the OIC website allows users to simulate the popular covered call, collar, cash-secured put and covered combination strategies. The Options Strategy Builders tool is easy to use because all you have to do is select the strategy, choose the stock or ETF symbol, and then select the expiration date. The tool builds the strategy and displays the potential results. OIC continues to offer live seminars and participate in investor conferences with live presentations that are also simulcast in order to reach investors interested in learning about options online. Some of the seminar topics include options fundamentals and popular options trading strategies. Most importantly, all of these educational offerings are available for free on the website, www.OptionsEducation.org.

OIC also works to help financial advisors understand how options can be a differentiator for their practice. A 2017 study sponsored by The Options Industry Council, How Financial Advisors Use and Think About Exchange-Listed Options sheds light on what financial advisors think about exchange-listed options and how they use them to help meet their clients' financial goals. The study found that approximately one-third of financial advisors currently use options in 20 percent of client portfolios, and that usage is expected to increase by 30 percent in the next three years. The study also helped to identify target audiences and educational tactics that may lead to increased adoption of exchange-listed options strategies among financial advisors.

At OIC we believe that providing unbiased education to market participants will continue to be a key factor in increasing the adoption of options strategies. Education on these flexible and complex financial instruments is important now more than ever as investors and financial advisors seek diverse solutions that generate income and protect their portfolios as they continue to navigate through uncertain economic environments.

Disclaimer: This article discusses exchange-traded options issued by The Options Clearing Corporation. No statement in this article is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (investorservices@theocc.com).


OCC Continues to Speak Out on Behalf of the Exchange-Listed Options Industry

OCC takes seriously its role as an advocate and influencer for the U.S. exchange-listed options industry, and continues to represent the industry at various high-level conferences and speaking opportunities.

On March 6, OCC Chief Risk Officer John Fennell and Mark Morrison, OCC Chief Information Security Officer, participated in separate panel discussions at the GARP Annual Risk Convention in New York City. On March 7, OCC President and Chief Operating Officer John Davidson gave the keynote presentation in London at the Market360 Post-Trade Conference. At the 2018 Futures Industry Association's annual international conference in Florida, OCC Executive Chairman and CEO Craig Donohue appeared on the keynote panel to discuss a retrospective view of the 2008 financial crisis. At the same conference, John Davidson participated in a discussion on global clearing issues, and Julie Bauer, OCC's Senior Vice President of Government Relations, represented the options industry in a panel discussion on issues in Washington, D.C.

OCC will be hosting the 2018 IOMA: The WFE's Clearing & Derivatives Conference in Chicago on April 11-13, which will include a conversation with Craig Donohue and Craig Phillips, Counselor to the Secretary of the U.S. Department of the Treasury. Also in April, Matt Wolfe, OCC Vice President of New Products, will be speaking at the Finadium Investors in Securities Lending Conference in New York City, and Dave Hoag, OCC's Chief Information Officer, will be talking about cyber security at the CIO 100 Symposium in New York.


Update from Capitol Hill

DC

Bank Capital Rules Impacting Listed Options Markets Discussed at Senate Hearing

On March 1, the Senate Banking Committee received testimony from Jerome H. Powell, Chairman of the Board of Governors of the Federal Reserve System. The purpose of this hearing was to provide the members of the Senate Banking Committee, who have oversight of the Federal Reserve System, the opportunity to question Chairman Powell on the Federal Reserve's monetary and regulatory policy positions on current issues affecting the economy.

At the hearing, questions were asked about the Federal Reserve's efforts to adjust the Current Exposure Method to measure the economic exposure of a listed options contract. Chairman Powell stated that the Federal Reserve is in the process of changing from the existing Current Exposure Method (CEM) to the Standardized Approach to Counterparty Credit Risk Exposure. Chairman Powell added that the Federal Reserve is also looking at changes to the Supplemental Leverage Ratio, which he said would help to address this problem.

2016 EU-CFTC Equivalency Agreement Discussed at Senate Agriculture Committee Hearing

On February 15, the Senate Agriculture Committee held a hearing entitled, "State of the CFTC: Examining Pending Rules, Cryptocurrency Regulation, and Cross-Border Agreements." The only witness was J. Christopher Giancarlo, CFTC Chairman. The purpose of this hearing was to provide the members of the Senate Agriculture Committee, who have oversight of the CFTC, the opportunity to question Chair Giancarlo on several issues, including the CFTC's oversight of virtual currency regulation, its budget and the 2016 equivalency agreements regarding cross-border clearinghouses.

Chair Giancarlo provided an update on the 2016 agreement between the CFTC and the EU on cross-border supervision of systemically important CCPs, and shared his concerns about proposed EU legislation that would impact the 2016 equivalency agreement between the CFTC and the EU regarding CCP regulatory regimes.

CFTC Meeting Discusses Virtual Currency and Distributed Ledger Technology Regulation

On February 14, the CFTC held a public meeting of the Technology Advisory Committee (TAC). CFTC Commissioner Brian Quintenz presided over the meeting. The members of the TAC discussed the Committee's agenda for 2018 and agreed to recommend to the CFTC Commissioners that the agency create subcommittees on Distributed Ledger Technology, Virtual Currencies, Automated Trading and Cybersecurity. There was no timetable provided as to when the CFTC would consider the TAC's subcommittee recommendations.

During the meeting, Commissioner Quintenz noted that the creation of a self-regulatory organization (SRO) for cryptocurrency exchanges may help formulate future regulation for virtual currencies. "I think a self-regulatory organization, or SRO, for cryptocurrency exchanges could spur the development of standards around cybersecurity policies, data retention, protection of customer accounts, trading practices, and other issues. Self-regulation has a long history in derivatives markets. In the 19th century, futures exchanges took the initiative to develop formal rules and disciplinary procedures to enforce fair trade practices and curb manipulation before comprehensive federal regulation was enacted. It is worth exploring whether an SRO model could assist cryptocurrency exchanges establish and enforce standards that protect investors and deter fraud. I look forward to hearing from the Committee about the possibility of such an SRO."


Editorial Team