OCC News

AUGUST/SEPTEMBER 2016

IN THIS ISSUE

OCC IN THE NEWS

Donohue Agrees to Stay on as OCC Executive Chairman for Three Additional Years

OCC announced that Craig Donohue has agreed to stay on as Executive Chairman and Chief Executive Officer for three additional years after his term expires in December. Donohue also announced the creation of an Office of the Executive Chairman and CEO and enhancements to OCC's leadership structure

» Read the press release

OCC Executive Chairman Craig Donohue talks to Business Insider about his thoughts on the evolution of electronic trading, blockchain, high frequency trading, and the role of OCC.

» Read more from Business Insider

Strengthening Resiliency Through Technology

Luke Moranda, OCC Chief Information Officer, explains how OCC is strengthening the resiliency of financial markets through technology in the latest issue of Securities Lending Times.

» Read more from Securities Lending Times

Using ETF Options To Generate Income And Manage Market Volatility

Frank Tirado, Vice President of OIC, discusses how investors and advisors are increasingly using ETF options to provide income generation and portfolio protection.

» Read more from Investor's Business Daily

OCC BLOG

Read the latest thought leadership from OCC's Blog!

» Gender and Pay Equality: We can and must do more

» Where Do Investors Go For Unbiased Education On How To Trade Listed Options?

» Strengthening Financial Market Resiliency through Technology

» OCC Weighs In On Leverage Ratio and Impact on Listed Options Industry

» How OCC Manages Third-Party Risk

» OCC: Moving from a Utility to an Influencer

» The Importance of Compliance for OCC

» Bringing Innovative Ideas to the Market

OCC ON SOCIAL MEDIA

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OIC VIDEO SERIES

OIC recently launched its online Video Series, which includes options webinars, the ETF Summit on Options and OIC's Quick Guide Gallery.

» View the full video series

The latest OIC Webinars:

» Managing the Covered Call

» How to Generate Income with Options

» Are Options for Me?

» Weeklys 101

» Understanding and Taming Contract Adjustments

» Using Option Strategies Effectively

» Making Sense of the Greeks: Applying Them to Your Trading Strategies

» Understanding Core Options Concepts

» Considering Butterflies and Condors for Your Options Strategies

» Using Implied Volatility in Changing Markets

OIC's ETF Summit on Options:

» How to Construct a Portfolio with ETFs

» Enhance ETFs with Options Strategies

» The Biggest Themes In ETFs Right Now

» Options Exchange Strategy Session

OIC's Quick Guide Gallery:

» Covered Calls

» Long Call

» Protective Put

VOLUME UPDATE

Interested in reading about what is happening with options volume? Click here for OCC's monthly volume press release.

OCC NEWS ARCHIVE

Click here for prior issues.

OCC EDITORIAL TEAM

David Prosperi, Executive Editor
First Vice President,
Communications, OIC,
Internet Services
dprosperi@theocc.com
(312) 322-4484

Angela Kotso
Senior PR Specialist
akotso@theocc.com
(312) 322-6267

Caroline Gillard
PR Specialist
cgillard@theocc.com
(312) 322-4529

OCC Named Clearinghouse of the Year

OCC Named Clearing House of the Year

On behalf of our entire team, we are honored that OCC was named Clearinghouse of the Year by Global Investor/ISF Magazine.

This award is tremendous recognition of the value the OCC team brings to financial markets and the broader economy. We take great pride in promoting stability by offering world-class efficiencies in our delivery of clearance and settlement services, and risk management practices, to market participants. The strength of our financial resiliency program is designed to protect the public interest by ensuring that OCC has the resources necessary to serve as the foundation for secure markets even during times of stress.

Our standards are high, and our team exceeds them often. This award is great validation of our team's hard work, innovation and creativity. Their spirit helps to keep OCC at the forefront of the financial services sector, and their efforts will continue to play a leading role in the growth of the U.S. listed options industry.

Sincerely,

Craig and Mike

Craig DonohueMike McClain

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OCC Helping to Promote Industry Growth Through Education and Thought Leadership

Joe Kamnik

Joe Kamnik, OCC Senior Vice President and General Counsel, participated in a recent Wide World of Options Podcast about OCC's role as an advocate for the listed options industry.

How does OCC view its role as an advocate for the listed options industry?

OCC views its role as helping drive industry growth by providing thought leadership and education to policy makers, market participants, and the public about products it clears. It's fundamentally important to educate investors so they understand the benefits and risks to better navigate these markets.

One recent example of OCC's advocacy was the Labor Department's proposed fiduciary rule. Why was OCC concerned about this rule?

We were concerned about the overall direction of the proposal, in particular the concept therein about creating different standards for brokers with respect to retirement and non-retirement accounts. We had two big concerns: the first that the proposed rule would prohibit the use of exchange-traded or listed options within IRA accounts, the second that the definition of fiduciary in the proposal included cases where the advisor made recommendations to the management of securities that are assets in the plan.

How did OCC respond to the proposal?

Our response was primarily along three lines. First, we worked with the U.S. Securities Markets Coalition, which is comprised of the listed options exchanges and other market participants, to eliminate the limited asset list from the best interest contract exemption. Second, we recommended that the final version of the proposal clarify that screening by a broker of the owner of a self-directed IRA account does not by itself constitute a recommendation in investments. The third recommendation was that firms shouldn't be considered fiduciaries under the proposal simply because they provide educational outreach to investors.

What could have been the impact to individual investors who traded listed options?

The proposal could have prohibited the use of listed options by self-directed investors in their IRA accounts. Individual investors, including IRA account owners, are significant participants currently in the listed options market. We estimate that nearly 15 percent of the volume on U.S. options exchanges can be attributed to individual investors. Given that OCC's 2015 cleared contract volume was around 4.2 billion, that's a little over 600 million options contracts traded by individual investors. It's also our understanding, from talking to brokers who cater to individual investors, that IRA account owners are increasingly using options in their IRA accounts primarily to manage risks associated with owning the underlying stock. So as you can understand, it could have done significant damage to the industry.

What was the outcome of the final rule in regards to listed options?

The Labor Department omitted the exempt asset list in the final rule which essentially means that options and other asset classes can continue to be used in IRA and other self-directed accounts. It was a huge win for investors and we're glad we were able to play a role in that success.

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OCC Continues to Advocate for Listed Options Industry on the Leverage Ratio


Leverage Ratio

On July 6, OCC signed onto a letter with 30 other exchanges and trading firms regarding the leverage ratio framework as proposed by the Basel Committee on Banking Supervision (BCBS). As a Systemically Important Financial Market Utility (SIFMU), one area where OCC works to help the options industry is international regulatory standards.

OCC, along with the letter co-signees, continues to believe that unless the Standardized Approach for Counterparty Credit Risk (SA-CCR) method is adopted as a replacement for the Current Exposure Method (CEM) in the leverage calculation for exchange-traded derivative exposures, the application of the leverage ratio will result in vastly increased capital requirements for general clearing members offering such services to market makers and liquidity providers. This action will fundamentally threaten their business models and impact the liquidity and stability of global financial markets, and would be contrary to the G20 commitments on central clearing.

The proposal from the BCBS, and specifically the CEM, fails to recognize the risk limiting effects associated with being long and short options of different strikes on the same underlying instrument. This creates the potential to move liquidity away from the listed and centrally cleared markets and ultimately back to the opaque bilateral over-the-counter markets, which is counter to the global mandate by regulators to bring more over-the-counter (OTC) volume into centrally cleared solutions mitigating systemic risk.

We are starting to see evidence of this as a number of general clearing members (GCM) have already ceased their operations while others are re-assessing their business models. There is also data from the U.S. Commodity Futures Trading Commission that shows a steady decline in the numbers of futures commission merchants, while at the same time, the number of total cleared client assets has increased significantly driven by new clearing mandates since 2009. Our fear is that a further reduction of GCMs will result in greater concentration risks and a decrease of available balance sheet capacity for clearing of derivatives transactions, which includes those that are expected to become subject to mandatory clearing.

We will continue to advocate for this position on behalf of the listed options industry, and we hope that the regulators adopt SA-CCR as soon as possible, or provide an exemption for options market makers, given the crucial role they fill in providing committed liquidity to these markets.

For more information, read OCC Weighs in on the Leverage Ratio and Impact on Listed Options Industry.

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OIC: Providing Options Education for Nearly 25 Years


Options Education Program

Mary Savoie, Executive Director of OIC, talks about OIC program objectives and successes, as well as upcoming events.

What is the Options Industry Council?

Created in 1992, the Options Industry Council (OIC) has been a leading source for unbiased, educational information for investors looking for ways to manage their risk. Our mission is to increase awareness, understanding and responsible use of exchange-listed options among a global audience of investors.

What resources are available to investors through OIC?

In 2015, the OIC Study of Investors found that options users are more passionate, active investors who are more likely to increase their trading of options than their trading of either stocks or bonds over the next year. The major stumbling block that keeps non-users from trading options currently is lack of understanding or knowledge of options trading, thus emphasizing the importance of OIC's resources.

OIC has increased the availability of our educational content by enhancing our digital distribution strategy. So far in 2016, OIC has launched its Video Series, has hosted 14 webinars and has presented options education with partners including Fidelity, ETF.com, Inside ETFs and Saxo Bank. Our webinars have covered topics like market volatility and the upcoming election, how to trade high and low volatility as well as a panel to debate whether or not volatility is the most important pricing component of an option's price. OIC's webinars have reached over 4,700 attendees, which is an 80 percent increase over program participation in the first half of 2015. Along with webinars, OIC recently launched its OIC Quick Guide videos, which help break down options strategies like Protective Puts, Covered Calls and Long Calls. OIC also has the Wide World of Options radio program in conjunction with the Options Insider Radio Network, which has received more than 55,000 downloads so far in 2016.

What is the Options Education Program?

The Options Education Program (OEP) features online courses, podcasts, webcasts and videos. OEP allows participants to tailor their learning experience at their own pace. Additionally, OIC offers live seminars, mobile tools and one-on-one investor services support from knowledgeable options professionals.

What kind of events does OIC host for investors looking for more information?

OIC hosts a variety of live webinars, seminars and forums. On May 12, 2016, OIC hosted a Financial Advisor Forum in L.A. for more than 100 top financial advisors including representatives from 46 companies with over $15 billion in managed assets. Attendees learned about trends in ETF options as well as managing market volatility. OIC also recently hosted its Market Volatility and the Election online summit, where attendees listened to presentations from Sam Stovall of S&P Capital IQ, Jeff Hirsch of Stock Trader's Almanac and OIC representatives.

This fall, OIC will continue to be well represented at a variety of industry events. Our Director of Financial Advisor Education, Eric Cott, will be moderating a panel discussion at FA Magazine's Inside Alternatives Conference September 19-20. OIC Vice President of Education, Frank Tirado, will present “Using Options in a Client's Portfolio” at the Financial Planning Association (FPA) of Ohio Symposium on October 11 and Joe Burgoyne, Director of Education, will speak at an OIC sponsored options event at the Chartered Financial Analyst (CFA) Society of Philadelphia in November. Then, on December 6, you can join OIC for our online summit “The Election is Over, Now What?” We also just announced our fall webinar and seminar schedule, so be sure to visit OIC's Registration Page.

For more information, visit www.OptionsEducation.org and follow OIC on social media:
Facebook  Twitter  LinkedIn  YouTube  Google+

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How Pension Funds Can Benefit from Exchange-listed Options

Frank at forum

Frank Tirado presents at the 2015 NYSE OIC Thought Leadership Forum. Picture courtesy of the New York Stock Exchange.

Frank Tirado, OIC Vice President of Education, explains how pension funds could benefit from exchange-listed options.

How are current global economic conditions affecting pension funds?

The realities of current global economic conditions, characterized by ultra-low to negative interest rates and slow growing economies, plus a widening liability gap, are putting pressure on pension funds to meet their obligations. In fact, in a recent article in the Financial Times “Pensions: Low yields, high stress”, it was noted that the amount of U.S. assets held by pension funds have grown 105 percent since 1999 while the cost of their liabilities to pensioners has almost quadrupled, up 278 percent over the same time period.

Traditional low-risk methods used by pension funds to generate returns are proving to no longer be practical. As bond yields keep falling, more pension funds are broadening their investment scope and looking at new strategies to better meet their funding obligations, and that includes the implementation of income-generating and risk-mitigating exchange-listed options strategies. In another recent article in the Wall Street Journal “In Scramble for Yield, Pension Funds Will Try Almost Anything”, representatives from the retirement systems of Hawaii and South Carolina were featured as examples of pensions that have decided to implement exchange-listed options strategies.

Why are institutional investors increasingly using options to manage risk?

Most institutional money managers are rooted in the realities of current economic conditions which are challenging their return assumptions and requiring new solutions that mitigate risk and generate income. Public pension funds like the New Jersey Public Employees' Pension Plan, the State of Wisconsin Investment Board, Texas Tech University System, Ontario Teacher's Pension Plan and Employees Retirement System of Texas are using exchange-listed options to mitigate risk and generate income. This year, the Hawaii Employees' Retirement System, the South Carolina Retirement System Investment Commission and State University Retirement System allocated a combined $3.4 billion to exchange-listed options strategies for the same reasons. Based upon these examples, and Morningstar's decision in April to launch a new “options writing” category, we believe this is a growing trend.

How is the Options Industry Council engaging the institutional investor community?

The Options Industry Council (OIC) meets with institutional investors and participates in industry conferences where we are seeing a growing interest in how exchange-listed options can help market participants achieve their investment goals. In March I presented to the Ohio Police & Fire Pension Fund (OP&F) Board Members and staff. OP&F do not currently use exchange-listed options, but asked OIC to help them understand how these risk management instruments are used by institutions.

In April, I attended “Navigating the Prolonged Low Yield Environment,” a Pensions & Investments conference, where pension fund managers, consultants and other institutional industry professionals were in attendance and several discussions led to the topic of using exchange-listed options strategies to help pensions meet their obligations.

What is OIC's role in industry education?

For nearly 25 years, OIC's mission has been to provide compelling educational content to increase the responsible use of exchange-listed options among individual investors, financial advisors and institutional investors. We have strong partnerships with market participants including institutional investors via the OIC Roundtable and we will soon create an Institutional Leadership Council to keep open the lines of communication and hopefully attract more users to our markets. OIC will continue to keep its focus on the evolution of the institutional segment and on their educational needs.

For more information and research on how to use exchange-listed options please visit the News & Research Tab on www.OptionsEducation.org.

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OCC Helps Children at Risk Through Sponsorship of ALTSO

For the second consecutive year, OCC, as part of its charitable strategy to support organizations that help people at risk, will be one of several industry sponsors at ALTSO's annual Rocktoberfest in Chicago on October 6th. ALTSO (A Leg To Stand On) is a 501c3 non-profit organization that provides free prosthetic limbs, corrective surgery and rehabilitative care to children suffering from traumatic or congenital limb disabilities in the developing world.

This year's Rocktoberfest-Chicago will unite over 400 professionals from the trading and related financial services industries, including several OCC partner exchanges and clearing firms, for a night of rock and roll and acoustic music performed by friends and colleagues from our industry.

OCC is proud to support the good works of ALTSO in partnership with the Chicago financial services community.

For more information, visit www.ALTSO.org.

OCC Roctober Fest

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From Capitol Hill

From Capitol Hill

In July, House Financial Services Committee Chairman Jeb Hensarling (R-TX) unveiled a summary of his Financial CHOICE Act to amend the Dodd-Frank Act to reduce regulatory burdens on the financial services industry. A discussion draft of the proposal containing the legislative text can be found here.

On July 15th, OCC submitted a comment letter to Chairman Hensarling on the discussion draft. The letter recommends that the Committee clarify that the provisions of Title VI of the discussion draft that refer to “regulations” and “rules” are not intended to apply to rules of self-regulatory organizations. The letter also provides a brief overview of the potential unintended consequences of repealing Title VIII of the Dodd-Frank Act given the rules, regulations and market evolution currently in place based on provisions in that legislation. Title VIII of the Dodd-Frank Act includes the provision under which OCC was designated as a systemically important financial market utility. You can read the comment letter here.

The committee staff will review comment letters and meet with specific trade associations and other stakeholders impacted by the discussion draft. Sometime in mid-September, the committee will likely consider the CHOICE Act. While the legislation could be considered by the full House of Representatives this fall, we understand there is little current appetite in the Senate to consider such a measure. We will continue to keep you updated on this legislation.

In July, the Republican Party finalized their party platform. At the request of the Trump campaign and to the surprise of many Republicans, a plank was inserted into the party platform which includes a call for the restoration of the Glass-Steagall Act, which was enacted in 1933 to separate the business of investment banking from commercial banks and was repealed in 1999 by the Gramm-Leach-Bliley Act with bi-partisan support. We understand that Republicans in Congress continue to mostly support the repeal of Glass-Steagall and have instead focused on undoing certain parts of the Dodd-Frank Act, which they feel is more of a threat to economic growth. Chairman Hensarling has not endorsed reinstating Glass-Steagall, which would likely impact reforms he has proposed in his CHOICE Act. A link to the Republican Party platform can be found here.

Also in July, the Democratic Party voted to ratify their party platform. The platform received significant media attention as it was drafted by representatives of both Hillary Clinton and Senator Bernie Sanders (D-VT) and has been interpreted as the future policy of the Democratic party. Of interest to the U.S. Securities Markets Coalition is a call to implement a financial transactions tax (FTT) on transactions involving stocks, bonds and other financial instruments. The Democratic platform states, “We support a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets. We acknowledge that there is room within our party for a diversity of views on a broader financial transactions tax.” A link to the Democratic Party platform can be found here.

The idea of a FTT is not new and there is a wide range of views about the utility of such a tax, including within the Democratic Party as indicated by the above statement about the “diversity of views”. In the current Congress there are several proposals to levy a FTT. Representative Keith Ellison (D-MN), a member of the House Financial Services Committee, has introduced H.R. 1464, the Inclusive Prosperity Act of 2015. A link to the bill can be found here. Senator Sanders introduced companion legislation, S. 1371, and a link to the bill may be found here. On July 13th, Representative Peter DeFazio (D-OR) introduced H.R. 5745, the Putting Main Street FIRST Act, which would impose a tax on the trading of stocks, bonds and derivatives, including listed options. A link to that bill can be found here.

While we do not anticipate any action will be taken on these bills this year, we will continue to monitor whether the FTT is gaining wider support among Democratic members of Congress. At this time, however, there is no support from Republicans to impose such a tax. In addition, the Obama Administration continues to oppose a FTT, though it supports the goals of such a tax.

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The information contained in this newsletter is for general information purposes only. Although every attempt is made to ensure the accuracy of the information, OCC assumes no responsibility for any errors or omissions. All materials pertaining to rules and specifications are made subject to and are superseded by the By-Laws and Rules of OCC.