July 2017

Q&A with John Davidson

John Davidson, OCC President and Chief Operating Officer, shares his insights on the listed options industry.

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Q&A with John Davidson, OCC President and Chief Operating Officer

John Davidson joined OCC on May 8 as President and Chief Operating Officer. He shares his insights on the listed options industry and his new responsibilities at the world's largest equity derivatives clearing organization.

John Davidson headshotYou have over 35 years of experience in financial services. What is the biggest change you have seen in that sector?

The biggest change that I have observed is the application of technology to the sector. In 1980, trading floors, both on an exchange and "upstairs," were characterized by people shouting at each other. "Voice brokers" ruled the OTC fixed income and FX domains. There were legions of people working "out-trades" just after and before the floor opened or in the "Q.T. Room" four levels below ground at the NYSE. Everyone spoke fractions rather than decimals, and the "Greeks" were restaurants in Astoria in New York or on Halsted Street in Chicago.

How has the role of a central counterparty changed since the 2008 economic crisis?

Central counterparty clearing was invented in 1872 by the Minneapolis Grain Exchange. The fundamentals have changed very little since then, but the understanding of the relevant risks and the sophistication of the tools and techniques to manage both the expected and particularly unexpected outcomes have improved dramatically. Since 2008, the focus on the value of central counterparties in risk mitigation of standardized financial instruments across a broader range of asset classes has taken hold. Concomitant to that has been a much greater emphasis by regulators and supervisors on the design and operational effectiveness of the financial safeguard systems of these clearing houses.

With volumes being relatively flat for listed options for the last five years, where do you see any growth opportunities?

The happy news about OCC's systems and operations is that they are largely volume-insensitive. And while volumes may have been relatively flat over large units of time, we have certainly seen significant spikes in day-to-day transaction volume. Clearly growth will come from product innovation. Much of that is the province of the 20 exchanges and trading venues for whom we provide clearing services, and our ability to support innovation-generated growth is not what it needs to be. An exception to this general rule is our work providing central counterparty intermediation in the securities lending business. As demand for more efficient and effective collateral and liquidity management increases, clearing stock borrow/stock loan transactions will be an area of significant growth and benefit to the entire industry.

You have served as a member of OCC's Board of Directors. What attracted you to come back as President and COO?

I have been involved with central counterparties and settlement systems throughout my career. I am a bit of a nerd but do not have the psychological makeup to be a trader. Listed derivatives generally and options in particular are products about which I have a great deal of intellectual curiosity. The opportunity to manage the technology, operations and transformation of the entity that sits in the center of the U.S. options universe is very exciting. I bring the leadership skills and vision that will help get OCC to the next level in its quest to be the "gold standard" for central counterparty financial intermediation

What is the biggest opportunity facing you at OCC?

OCC was "present at creation" of the exchange-traded options markets initially in Chicago and soon thereafter in New York and Philadelphia. Today, along with that history is some very legacy technology that while highly resilient and volume-insensitive, really limits our ability to support the product innovation of our exchanges and market venues or to take advantage of new areas for the provision of robust clearing, settlement and risk management services. The biggest opportunity for me and my team is to timely replace that legacy system with something much more nimble and modular, while at the same time running the existing system with the highest levels of availability and customer service for our clearing members and exchanges until the transition is complete. That involves incremental risk, which we will carefully manage with the assistance of all our market participants, stakeholders and regulators. Opportunity only arises from intelligently managed risk taking.

Enhancing OCC's Stock Loan Program to Better Serve Market Participants

Matt Wolfe, OCC Vice President of Product Development, discusses OCC's and EquiLend Clearing Services' partnership, and OCC's stock loan program.

EquiLend logoOn May 5, OCC and EquiLend Clearing Services (ECS), a leading provider of trading, post-trade and market data services for the securities finance industry, announced our partnership to bring greater access to central-counterparty clearing in the securities finance marketplace. We are excited about the opportunities this partnership can bring to market participants.

ECS developed a Middle Office platform to support the infrastructure for OCC's Market Loan Program by maintaining outstanding loan information for the program; processing post-trade functions including mark-to-market, returns, recalls and other trade lifecycle events; and interacting with OCC's proprietary system to facilitate settlements. ECS also developed the ECS Gateway, which offers straight-through processing between trade and post-trade services to OCC. EquiLend has offices in New York, London, Hong Kong and Toronto and is backed by BlackRock, Credit Suisse, Goldman Sachs, J.P. Morgan, Bank of America Merrill Lynch, Morgan Stanley, Northern Trust, State Street, and UBS.

As the only U.S. clearinghouse that provides central counterparty services for stock loans, OCC's programs promote market stability and integrity through a framework that delivers prompt and accurate clearance and settlement and robust risk management services. As Brendan Eccles of Scotiabank said in Global Investor magazine in February; "OCC's securities lending program has made it much more attractive for broker-dealers to face each other."

Stock loan is an essential and substantial component of the global financial market, with the largest part of this market conducted through un-cleared, bilateral transactions lacking the recognized benefits of clearing services with central counterparty substitution. Since OCC's introduction of CCP services for the stock loan market in 1993, the volume of stock loans cleared by OCC has increased steadily. From January 1 through June 30 of 2017, OCC processed just over 1.1 million new stock loan transactions, a 20 percent increase over the same period in 2016, and had a daily average of $77 billion dollars in equity securities on loan.

OCC currently operates two distinct stock loan programs: Stock Loan/Hedge (Hedge) and Market Loan. Stock loans in the Hedge program are bilaterally negotiated between clearing members, usually through the facilities of a service provider, prior to being transmitted for settlement. If the borrower and lender are OCC clearing members that have elected to clear the stock loan, OCC is substituted as the central counterparty after initial settlement. Daily mark-to-market payments are settled through OCC, and OCC guarantees the return of loaned stock (including any non-cash dividends and distributions) to the lender and the return of the collateral to the borrower. Payments in lieu of cash dividends are generally effected through DTC but are subject to a limited guaranty by OCC. However, stock loan rebates remain bilateral rights and obligations between the lender and borrower.

In the Market Loan Program, lending and borrowing clearing members submit orders to an electronic trading platform known as a loan market. The loan market transmits resulting matched loans to OCC, and OCC sends settlement instructions to DTC where the loaned stock is transferred to the borrower against the payment of cash collateral to the lender. These matched transactions are maintained on an anonymous basis. Alternatively, a lending and borrowing clearing member may negotiate the terms of a loan bilaterally and submit the transaction to a loan market for affirmation. The loan market transmits the transaction to OCC, and OCC sends settlement instructions to DTC. In either case, OCC guarantees not only the return of the loaned stock (including any non-cash dividends and distributions) and the cash collateral, but also guarantees payments in lieu of cash dividends and rebates, which are paid through OCC's cash settlement system.

To provide greater capital efficiencies for its clearing members, OCC is implementing a number of enhancements to its stock loan programs in order to reduce systemic risk, enhance transparency and, allow more efficient use of capital, which lends to our mission of promoting stability and market integrity through efficient and effective risk management, clearing, and settlement services.

As the marketplace continually evolves and regulatory change creates a tailwind for cleared solutions, OCC remains committed to our role as the foundation for secure markets, and to enhancing its stock loan clearing program.

Learn more about OCC's Stock Loan Program.

OIC's Online Summit Promotes the Topic of Exchange-listed Options and Your Portfolio

On Thursday, June 15, OCC, through the work of the Options Industry Council (OIC), hosted a four-part webinar series titled "Exchange-Listed Options and Your Portfolio: Strategies for Income and Protection." The educational webinar focused on how investors can use options to potentially improve risk-adjusted returns.

The first session was moderated by Eric Cott, OIC Director of Financial Advisor Education, and included an experienced panel of experts: Sheri Redford from RCB Wealth Management, Nicholas Rygiel from Merrill Lynch Wealth Management, and Stefan Rosuck from Intelligent Investment Strategies. The panelists examined how advisors help clients reach their financial goals with the use of exchange-listed options, and discussed how exchange-listed options can help advisors and their clients build strategies that can protect their portfolios and generate income.

Ed Modla, OIC Manager of Investor Services, presented the second session which focused on using options for income generation. He explained how exchange-listed options can provide investors with a way to generate income in up, down, and sideways markets while potentially reducing portfolio risk.

The third session was moderated by Joe Burgoyne, OIC Director of Retail Marketing, and included Peter Lusk with CBOE and Bill Ryan with NYSE to talk about options protection strategies every investor should know. As one of the toughest challenges for investors is to learn how to manage risk in their portfolio, this panel of OIC instructors reviewed three risk-reducing strategies that can help almost all investors in uncertain times.

To conclude the webinar, Joanne Hill with CBOE Vest Financial LLC presented as the keynote speaker. She discussed the performance features of indexes combined with options as a means to reduce risk, enhance income, or provide an alternative to "smart beta" strategies based on stock selection.

OIC will be hosting a variety of educational events for investors throughout the rest of the year. For more information, visit OptionsEducation.org.

OCC Supports Charitable Organizations Where Colleagues Live and Work

As part of its ongoing commitment to support charitable organizations in the Chicago and Dallas communities where its colleagues live and work, OCC was proud to be a sponsor of this year's Chase Corporate Challenge on May 25 in Chicago. Over 40 OCC employees participated in the 3.5 mile race that was attended by more than 27,000 participants from over 680 companies. This is the largest number of entrants for a single-night, U.S. event in the 40-year history of the Corporate Challenge Series. The funds raised from the event were donated to Get IN Chicago, an organization that works to identify, fund, and evaluate evidence-based programs that lead to a sustainable reduction in violence for individuals and communities most affected by violence and poverty.

OCC also is committed to supporting charitable organizations who help people at risk. As part of this effort, OCC donated colleague-raised funds to two charities during its June Town Hall meetings in Chicago and Keller, Texas.

A donation of $10,000 was presented to Metrocrest Services, whose mission is to provide programs for individuals, families and senior citizens that lead to self-sufficiency and foster independence. Our colleague Jayme Wright, Manager, Risk Examinations, is leading this effort on behalf of our Keller colleagues.

OCC was proud to present a donation of $12,500 to Marillac St. Vincent Family Services, which is committed to embracing and caring for infants, children, teens, adults and seniors living in Chicago who are the city's most vulnerable citizens. Sam Angileri, OCC Clearing Member Representative, is leading this effort on behalf of our colleagues in Chicago.

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

OCC Continues to Advocate for U.S. Listed Options Industry

In its role as an industry advocate, OCC continues to maintain a visible presence at relevant conferences and events to provide thought leadership on key industry issues. On June 18, Craig Donohue, OCC Executive Chairman and CEO, talked about OCC's role as a systemically important financial market utility at the SIFMA Financial Management Society Regional Conference in Chicago. Joe Adamczyk, OCC Chief Compliance Officer, spoke on a panel that discussed effective testing and monitoring through digitally-enabled approaches at the Compliance Week Conference on May 22 in Washington, D.C. Additionally, Amy Shelly, OCC Chief Financial Officer, participated in a panel discussion on the role of a chief financial officer in the financial services sector at the June 7 Crain's Chicago Business 2017 Chief Financial Officers Conference, and represented OCC at the Wall Street Journal CFO Council meeting on June 12 and 13 in Washington, D.C.

Chip Dempsey, OCC Chief Commercial Officer, talked about the growth of OCC's stock lending solution at the Chicago Federal Reserve CCP Symposium on June 23, and moderated a panel on June 28 at the first-ever Chicago Trading event hosted by Futures & Options World and John Lothian News. The panel included Euan Sinclair, Partner at Talton Capital Management, Paul Jiganti, Managing Director Options Business Development at IMC Financial Markets, Steve Crutchfield, Head of Market Structure at CTC, and Peter Maragos, CEO of Dash Financial Technologies. The conversation centered around the current structure of the U.S. options market and how recent events have impacted it.

In July, Amy Shelly will be speaking at the MarketsWiki Education Series in Chicago. John Fennell, OCC Chief Risk Officer, is scheduled to speak at a Financial Stability Institute conference in Basel, Switzerland on September 18 on the topic of policy changes in market infrastructure. In October, Tracy Raben, OCC Chief Human Resources Officer, is addressing the 2017 SHRM Diversity and Inclusion Conference and Exposition in San Francisco on the issue of advancing diversity of thought as a competitive advantage.

From Capitol Hill


U.S. Department of Labor Fiduciary Rule

On May 22, the U.S. Department of Labor (DOL) announced that there would be no further delay of the June 9 applicability date of the Department's fiduciary rule, and that the final rule would not be enforced until January 2018 for firms that are acting in good faith to comply with the rule. In April 2016, the DOL issued a final regulation that would significantly expand the types of conduct that will cause a person or entity to be considered a "fiduciary" for purposes of the Employee Retirement Income Security Act of 1974 (ERISA) and the prohibited transaction provisions of the Internal Revenue Code of 1986. OCC and the U.S. Securities Markets Coalition educated Members of Congress and the DOL on the impact this proposed rule could have on the listed options industry, and were extremely pleased that under the final rule, investors are able to continue to use listed options in their IRA and ERISA plan accounts.

On June 1, 2017, SEC Chairman Jay Clayton issued a press release seeking comment on the DOL fiduciary rule and the potential adoption by the SEC of a uniform fiduciary rule for broker-dealers and investment advisers.

Potential Dodd-Frank Changes

On Thursday, June 8, the U.S. House of Representatives passed "A Legislative Proposal to Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs," also known as the Financial CHOICE Act. The measure passed the House along party lines with a vote of 233 Republicans in favor and 186 Democrats opposed. The Financial CHOICE Act would reform significant parts of the Dodd-Frank Act, including the repeal of Titles I, II and VIII of the Act. Title VIII is the provision under which OCC was designated a systemically important financial market utility by the Financial Stability Oversight Council. Language included in a previous version of the CHOICE bill which would possibly extend cost-benefit analysis requirements meant for regulatory agencies to include exchanges and clearing agencies was deleted from the final version of the bill.

While the House has passed the CHOICE Act, it is unknown at this point whether the Senate will approve the House-passed bill as currently drafted. The Senate may take up certain provisions, but will not consider the bill as a whole.

Jay Clayton Sworn-In as SEC Chair

On May 4, Jay Clayton was confirmed by the Senate and sworn in as the 32nd Chairman of the SEC. It is anticipated that Mr. Clayton will focus on seeking ways to ease regulatory burdens that might hinder companies from raising capital and participating in the initial public offering process. With Chair Clayton's presence at the Commission, it will make it easier for the SEC to pass its regulatory agenda, now that it has three members. President Trump has yet to nominate the other two commissioners to fill out the five-member panel, but it is anticipated that he will nominate additional SEC commissioners in the coming weeks.

Brian Quintenz and Dawn Stump Nominated for CFTC

On Friday, May 12, President Trump nominated Brian Quintenz, a former fund manager, consultant and congressional policy adviser, to serve as commissioner on the Commodity Futures Trading Commission (CFTC). Mr. Quintenz, who was managing principal at Saeculum Capital Management LLC, was nominated to serve the remainder of a five-year term ending on April 13, 2020. This is Mr. Quintenz's second time being nominated for a commissioner post at the CFTC. In March of 2016, Mr. Quintenz was nominated by President Obama to serve as a CFTC commissioner; however, his previous nomination, which required confirmation by the U.S. Senate, was not voted on before the 114th Congress ended its session in 2016.

On June 9, President Trump nominated Dawn DeBerry Stump to serve as Commissioner of the CFTC. Mrs. Stump currently is president of Stump Strategic, a consulting firm. Mrs. Stump also served as executive director of the Americas Advisory Board for the Futures Industry Association and as vice president at NYSE Euronext. Mrs. Stump served on the staff of both the House and Senate Agriculture Committees, focusing on derivatives policy issues.

Editorial Team