OCC News




Scot Warren Explores the Role of Central Clearing and its Potential Impact on Securities Lending

Scot Warren, Executive Vice President, Business Development and OIC, sat down with Securities Lending Times to explain the role of central clearing and how it could be applied to securities lending in the future.

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OCC Declares Clearing Member Refund

OCC, the world's largest equity derivatives clearing organization and the foundation for secure markets, announced the declaration of a refund, dividend, and fee reduction under its approved capital plan.

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

For OCC’s 2015 volume, visit OCC’s 2015 At-A-Glance Infographic.


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Options Industry Conference in Terranea

Join your colleagues at the 34th Annual Options Industry Conference May 11-13 at the beautiful Terranea resort in Rancho Palos Verdes, California! Early Bird discounted rates end February 12.

Options Industry Conference


Scot Warren, Executive Editor
EVP, Business Development,
Communications & OIC
(312) 322-6214

David Prosperi, Editor
FVP, Public Relations
(312) 322-4484

Angela Kotso
Senior PR Specialist
(312) 322-6267

Caroline Gillard
PR Specialist
(312) 322-4529

OCC 2015 in Review

OCC’s 2015 priorities on behalf of the U.S. listed options industry were organized to enhance the resiliency of our organization, to continue to stay ahead of new regulatory requirements and expectations, and to strengthen the infrastructure necessary for OCC to achieve our mission of serving as the foundation for secure markets.

In 2015 we significantly enhanced our resiliency and sustainability by accelerating the closure of legacy regulatory examination findings and by strengthening our internal risk and controls environment across the firm. We also successfully implemented changes needed to comply with new requirements under Regulation SCI and the Covered Clearing Agency rules. Additionally, the U.S. Securities and Exchange Commission approved OCC’s capital plan and issued an order discontinuing the automatic stay, allowing us to begin implementing the plan. The SEC specifically noted that strengthening the capitalization of OCC is a compelling public interest and that the concerns raised by the petitioners did not justify the continuation of the stay. All of these steps ensure that OCC has the risk management capabilities, internal controls, and capital adequacy to serve market participants and protect the public interest.

During the year, we also completed a comprehensive review of our existing pricing strategy and structure, and began the process of developing a long-term technology roadmap and strategic plan that will ensure our continued success in the rapidly changing and increasingly challenging environment in which we operate.

We also further enhanced our governance framework and leadership at OCC. We recruited two high caliber public directors with substantial expertise in quantitative risk management, and added two member directors with significant expertise in information technology and operational risk. We also enhanced board oversight of technology and cyber-information security risks through the creation of the Technology Committee, a leading practice adopted by only eight percent of S&P 500 companies. Finally, we strengthened our leadership team by bringing onboard a new Chief Financial Officer, Chief Human Resources Officer, Chief Risk Officer and General Counsel, and integrating these new leaders into our organization. We also began implementing a firm-wide culture re-shaping initiative to reorient our entire OCC team towards a high performance culture with increased emphasis on industry leadership.

We also invested meaningful time and effort to strengthen OCC’s leadership role in Washington, D.C. By doing so, we continue to establish a stronger leadership role in industry legislative and regulatory issues such as the Department of Labor’s fiduciary proposal and its potential impact on the ability of investors to trade listed options in their retirement accounts. This has led to increased confidence in our efforts on behalf of the industry.

As we enter 2016, we remain committed to delivering to market participants a low-cost, customer-driven organization that provides world-class risk management, clearance and settlement services in our role as a Systemically Important Financial Market Utility. We continue to strengthen our resiliency as an organization, and we remain focused on exploring innovative solutions that will serve our industry.

We wish you good luck and success in 2016!


Craig and Mike

Craig S. Donohue     Michael W. McClain

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OCC Hosts First Options & Exchange Traded Fund (ETF) Summit with iShares & ETF.com

2015 proved to be a record-breaking year for ETFs, with BlackRock Inc. reporting $347 billion in exchange-traded funds globally. Bloomberg reported that in 2015 the market had about $250 billion in money flows, 276 new ETF launches, 20 new ETF issuers, $19 trillion in ETF trading over the year and a record $98 billion trading in SPY on August 24.

To capture the moment in the ETF market OCC, through the work of The Options Industry Council (OIC), hosted its first Options & ETF Summit on December 1. The online summit, which included speakers from iShares, ETF.com, NYSE, Nasdaq, CBOE and OIC, highlighted how market participants can enhance returns and risk management of ETFs with listed options. OIC and exchange representatives, inclcuding Bill Ryan from NYSE, Peter Lusk from CBOE and Barry Nobel from Nasdaq, touched on topics that included reasons for growth in the listed options industry and how investors can get started with options.

OIC engaged some of its strategic partners in order to provide more compelling content and reach a larger target audience. iShares, BlackRock Inc. and ETF.com provided speakers and content, and iShares marketed the event to its customer database. The Certified Financial Planner Board of Standards and the Investment Management Consultants Association (IMCA) approved all four sessions for CE credit, increasing the program’s appeal to financial advisors.

Partnering with other organizations allowed OCC to reach a very broad audience, which included 978 who participated live and an additional 313 accessing the on-demand version of the summit. The engagement with our exchange and industry partners, as well as using an on-line format, reflects OCC’s enhanced strategic approach to delivering educational content to promote increased education and informed use of listed options.

Educating market participants on how to trade listed options has played an important role for the industry. As noted in the Harris Poll 2015 Study of Investors, lack of understanding or knowledge is the major challenge why more investors do not trade options. With the help of OIC, prospective options investors have access to a variety of online content, videos, webinars, guides, glossaries and more to broaden their level of understanding.

For options beginners, the goal is to become familiar with a few strategies. Protective/married puts and covered calls are the most popular among new options users, however there are a variety of strategies available. “As a beginner, don’t try to learn 18 strategies,” said Bill Ryan of the NYSE. “Pick two bullish, two bearish and two neutral strategies. Get comfortable.”

OCC’s 2015 total cleared options volume was just over 4.2 billion contracts, making it the third-highest year on record. With more than 800,000 options series on over 4,200 stocks, ETFs and indexes, individuals, advisors and institutions have many choices to enhance returns and manage risk in their portfolios.

Options on ETF Annual Volume 2006 - 2014

For more information about OIC, visit www.OptionsEducation.org.

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OCC’s View on the Future of Blockchain Technology

Blockchain technology is a hot topic in the financial services industry because of its disruptive nature and the recognition of its most popular implementation, Bitcoin. During the FIA Expo 2015 conference in Chicago, Matt Hughes, OCC Vice President of Strategic Planning, discussed the concept of blockchain and what it means for the listed options industry.

OCC's Matt Hughes discusses blockchain technology at FIA Expo 2015
OCC's Matt Hughes discusses blockchain technology at FIA Expo 2015

What is blockchain technology?

There’s no formal definition for blockchain, but you can think of it as an overall solution for creating a distributed ledger. There are three primary layers to consider. The top is an actual application – for example, Bitcoin. The middle includes protocols, including the use of cryptography. The bottom is the technology implementation or infrastructure.

What impact does blockchain technology have on businesses and market participants that use it?

Blockchain offers an opportunity to connect interested parties in a single, immutable ledger system. This means you don’t have to create many independent verifications of the same information, and can now reference a shared, single source. To the extent that protocols or implementations are compatible, one or more ledgers can interact to serve complex transactional business cases.

What are the benefits of using blockchain? What are the risks?

The long-term promised benefits include stronger financial ecosystems, with improved efficiency in transaction processing and the ability to manage contract-based risk, including credit and settlement.

The risk, as with any new technology or innovation, is fitting blockchain within your existing business. There’s no guarantee you will lower your operating cost or increase your value proposition to your customers.

Any new items or developments to look for in 2016?

There are a few questions that will unravel over time. For example, will the commercial Bitcoin experiment continue or face serious obstacles? Do market innovators figure out how to represent major asset classes and build ecosystems around them? And of course, will this happen over a short period of time, say 12-18 months? Or over a longer amount of time, like 5-10 years?

How is OCC looking at or evaluating the issue of blockchain technology?

OCC has a relentless focus on operational excellence, and developing models and relationships that promote efficiency for market participants. This enables us to evaluate ways in which we can win with this technology. Building a “better mouse trap” will not be enough. Strong partnerships must be formed with regulatory authorities, and stakeholders that specialize in turning technical solutions into capital efficient ones.

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OCC Weighs in on Impact of SEC Clearing Rules on EU Clearing Members

In a November 30 story in Risk Magazine, Joe Kamnik, OCC Senior Vice President and General Counsel, weighed in on the transatlantic dispute over clearing house regulation that could leave 18 European banks affiliated with OCC clearing members facing an estimated $30 billion increase in capital requirement, and limit access to equity options traded in the U.S.

Kamnik told Risk Magazine, “If the current transitional period expires and we are not yet recognized –and those 18 members were to continue to clear through OCC – based on our evaluation their capital charges would increase in aggregate by slightly less than $30 billion. Our members tell us they would have to refresh their analysis on whether it’s cost-effective to stay in the game.”

The approval process in Europe has two steps: first, the EC must adopt an implementing act determining that the legal and supervisory arrangements of a third country ensure its CCPs comply with legally binding requirements equivalent to those laid out by the European Market Infrastructure Regulation. Only after this can the European Securities and Markets Authority (ESMA) recognize an overseas CCP. Trades handled by these qualifying CCPS are granted rock-bottom risk weights by Europe’s version of Basel III.

Four other U.S. CCPs are dually regulated by the CFTC and the SEC, but OCC is the only dually-regulated CCP to have the SEC as its supervisory agency. “We’re unique in that 97 percent of our business is on the securities side, and just a sliver on the CFTC side,” Kamnik told Risk Magazine. “It’s also worth pointing out we’re the only options clearing house for U.S.-listed options in the world; there’s no other CCP banks can port their business to. In other asset classes there are natural competitor CCPs, so if one is not recognized you can port to another one to avoid a charge. But for U.S.-listed options you cannot do that.”

According to Risk Magazine, the potential increase in capital requirements falls under the Capital Requirements Regulation (CRR), which states that European banks will only be given a 2% risk weight for cleared trades if using a qualifying CCP following expiration of the current extended grandfathering period, while clearing at a non-qualified CCP could amount to risk weights of more than 1,250%. If the deadline passes and OCC isn’t recognized as a qualified CCP, OCC members that are parts of wider consolidated groups, that include European banks, will still be able to trade US listed options and have them cleared at OCC, but either with the higher capital charge or as clients of other members through a foreign subsidiary that is not guaranteed by the European parent.

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OCC Supports Charitable Organizations Where Employees Live and Work

OCC is committed to supporting the communities where its employees live and work. As part of this effort, OCC donated employee-raised funds to two charities during its quarterly Town Hall meeting on December 2, 2015.

The two organizations; The Chicago Metamorphosis Orchestra Project (ChiMOP), and the Court Appointed Special Advocates (CASA) of Collin County, Texas, were selected by a group of OCC employees in both the Chicago and Keller, Texas offices as part of the company’s overall charitable endeavors.

"OCC believes it has a responsibility to play an important role in the communities where our employees live and work," said Craig Donohue, OCC Executive Chairman. "We have an obligation as an organization to be good corporate citizens, and our values of stewardship and integrity should carry over from the financial markets to our employees' neighborhoods."

"I am very proud of the work by the members of our employee charitable contributions committee to select two very deserving organizations," added Mike McClain, President and Chief Operating Officer of OCC. "One of our goals in 2016 will be to combine our growing financial support of targeted charitable organizations with increased employee engagement with those groups to hopefully serve our communities."

Since 2013, ChiMOP has been providing Chicago’s West Side communities with free and intensive orchestra training. The founders, Thomas Madeja and Slyvia Carlson, are local Chicago musicians and community activists.

“We at the Chicago Metamorphosis Orchestra Project are honored, humbled, and extremely grateful to have been chosen as the 2015 OCC Charity Project recipient," said Madeja. "The funds raised by the dedicated team of OCC employees will help us continue to serve communities in need by empowering youth through music with greater impact than ever before. ChiMOP strives to provide high quality music programming and access to the arts for Chicago's vulnerable youth. Thank you, OCC, for your generous support of this important work!"

OCC's Chicago team presents $30,000 check to ChiMOP
OCC's Chicago team presents $30,000 check to ChiMOP

CASA of Collin County promotes and protects the best interests of children, by training volunteer advocates to help those children who have been abused or neglected, improve the child's quality of life, and serve as their voice within the court system to ensure they are placed in a safe, permanent and loving home.

"CASA of Collin County is thrilled to have been designated as a 2015 charitable partner by the employees of OCC," said Susan Etheridge, Executive Director. "CASA provides a caring and compassionate adult to advocate for every child in Collin County who find themselves in foster care through no fault of their own. It's up to us to help make certain that these most vulnerable children find a safe, loving and permanent home. We are grateful for OCC's support."

OCC's Chicago team presents $30,000 check to ChiMOP
OCC's Keller team presents $20,000 check to CASA of Collin County

For more information about these organizations, visit www.chimop.org and casaofcollincounty.org.

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Internal Controls Play an Important Role for OCC

At the latest OCC Academy event, several members of OCC’s leadership team made a presentation to OCC colleagues to reinforce the importance of internal controls. Here is a summary of the topics.

What are internal controls?

As the Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines it, internal controls are any actions taken by management, the board or other parties to manage risk and increase the likelihood that established objectives and goals will be achieved. Controls are either manual (performed by individuals) or automated (performed by a system). For OCC, common controls are approvals, balance checks, access control over OCC systems and our policies and procedures.

Why is control important?

Internal controls are important for several reasons. They help manage the risks OCC faces from either external or internal sources. Along with risk management, internal controls, if designed and operated effectively, provide reasonable assurance to our stakeholders, including regulators, that our processes are sound and working effectively.

What happens when internal controls fail?

Failures in internal control can make the headlines because of its importance to organizations and the overall industry. Failures in internal control expose a company to risk, and could damage the reputation of the organization. This became particularly evident in the financial services industry during the recession, and was the impetus for the Dodd-Frank Act. As a Systemically Important Financial Utility (SIFMU), OCC has the responsibility to its market participants to uphold its internal control procedures and provide a secure environment.

What does OCC do to maintain its internal control?

OCC employs the three lines of defense model for its risk management and control structure. The first line of defense includes the management and staff of OCC’s business units and has direct responsibility for the management and control of their risk. The first line of defense executes OCC’s business strategy and adheres to the parameters set forth in the risk appetite framework. The second line of defense coordinates, facilitates, and oversees the effectiveness and integrity of the controls in the business units and includes the Enterprise Risk Management Department, the Model Validation Group, and the Compliance Department. The second line of defense designs and deploys the overall risk management framework, verifies, validates and evaluates the assumptions built into the models and testing procedures used as part of the risk framework, and identifies and monitors compliance risks. The third line of defense is the Internal Audit function. The Internal Audit Department provides independent testing and verification of the efficacy of corporate standard and business line compliance with the risk appetite framework, validates the overall risk framework, provides assurance that the risk management and compliance processes are functioning as designed and identifies improvement opportunities.

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OCC Leaders Represent Options Industry at FIA Expo 2015

OCC’s industry knowledge and thought leadership was well represented at the FIA Expo 2015 on November 3-5. Four of OCC’s senior leadership team participated in a variety of panels during the conference and touched on a wide range of topics that affect the financial industry and market participants.

Mike McClain, OCC President and Chief Operating Officer, discussed the future of clearing on a panel of industry leaders. “Options are being sucked into unintended consequences of the leverage ratio and it affects liquidity,” McClain said. "The coming technology, like blockchain, is good but it is also the catalyst to drive change." Noting OCC's role as a SIFMU and as a foundation for secure markets, McClain said OCC is focused on getting the probability of default management down to zero. He noted that OCC tests every step of its sophisticated waterfall processes so that any extreme event becomes an extremely uncommon event. McClain took advantage of a conversation on business continuity to highlight OCC's efforts to diversify its credit liquidity sources with the innovative CalPERS initiative announced in 2015.

Additionally, John Fennell, OCC Executive Vice President of Financial Risk Management, spoke on equity options and the impact regulatory changes are having on liquidity. OCC’s Luke Moranda, Senior Vice President and Chief Information Officer, discussed innovation and stability on FIA’s CTO Panel. Matt Hughes, Vice President of Strategic Planning, explained the idea of blockchain technology and what it means for the financial industry.

More information on OCC executives can be found here.

OCC's Mike McClain discusses the future of clearing at FIA Expo 2015
OCC's Mike McClain discusses the future of clearing at FIA Expo 2015

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From Capitol Hill

On December 18, the Senate passed the Omnibus Appropriations Act, and President Obama signed the bill into law the next day. The $1.1 trillion bill will keep the federal government funded until September 30, 2016. For OCC and the Securities Industry Coalition, the bill included the first comprehensive cybersecurity bill enacted into law in several years.

In April, the House of Representatives passed H.R. 1560, the Protecting Cyber Networks Act, sponsored by Representative Devin Nunes (R-CA), and H.R. 1731, the National Cybersecurity Protection Advancement Act of 2015, sponsored by Representative Michael McCaul (R-TX). At the end of October, the Senate finally passed a cybersecurity bill called the Cybersecurity Information Sharing Act (CISA). Each of these bills is intended to encourage the sharing of cyber threat data between the public and private sectors. A critical component of each bill is that they would limit liability for companies that share information with the government.

In November, the House and Senate entered into a “conference committee” to reconcile the House and Senate cybersecurity bills, and ultimately were able to do so in time for a compromise cybersecurity bill known as the Cybersecurity Act of 2015 to be included in the Omnibus spending bill.

Since the passage of the Senate CISA bill in October, OCC, on behalf of the Coalition, has worked with other industry trade groups to encourage the final passage of cybersecurity legislation and we expressed our concerns about Section 407 of the Senate bill, which arguably would have given the Department of Homeland Security new regulatory authority over critical infrastructure (including such infrastructure in the financial services industry).

We are pleased to report that Section 407 did not make it into the Cybersecurity Information Sharing Act of 2015. During the conference negotiations on the bill, OCC met with House and Senate staff, as well as worked with other trade groups, to express our strong support for cybersecurity legislation as well as our concerns about Section 407. We are very pleased with this outcome on behalf of the industry, and will continue to monitor further legislative proposals in the House and Senate on cybersecurity for the remainder of the 114th Congress.

On another note, efforts to include language in the Omnibus spending bill to address the fiduciary proposal by the Department of Labor (DOL) were not successful. For several months, there was an educational effort from the financial services industry to include language in the Omnibus bill to prohibit the DOL from spending funds on finalizing, implementing, administering, or enforcing the proposal. Such a provision, however, was not included in the Omnibus spending bill.

The financial services industry, including OCC on behalf of the Coalition, will continue to work to support efforts led by Representatives Peter Roskam (R-IL) and Richard Neal (D-MA) on a bill that would outline a series of legislative principles that would ensure brokers protect their clients’ best interest regarding investing advice, and move away from specifying the types of assets that can be held in retirement accounts. We will continue to keep you updated on this legislative effort in the coming months.

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One North Wacker Drive, Suite 500, Chicago, IL 60606     (312) 322-6200     Email OCC

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.