OCC News

JUNE/JULY 2016

IN THIS ISSUE

OCC IN THE NEWS

OCC Named Clearinghouse of the Year

OCC was named Clearinghouse of the Year by Global Investor/ISF Magazine. The award was presented to OCC on June 30th in London as part of the publication's celebration of its 30th anniversary.

» Read the press release
» View the list of award winners

Make A Plan: How OCC Is Forging Change In The Options Industry

Craig Donohue, OCC Executive Chairman, discusses OCC's successful implementation of its capital plan, its most recent work as an advocate for the listed options industry on the fiduciary rule, the current state of the industry, and what lies ahead for OCC in this video interview with John Lothian News.

» Watch the video

EU, U.S. Race to Spare Banks $5 Billion Clearing Capital Hit

Craig Donohue discusses the importance of clearing equivalency for OCC and its market participants.

» Read more from Bloomberg

Compliance Week Top Minds 2016

Compliance Week Magazine named OCC Chief Compliance Officer Richard Wallace as a Top Mind in 2016.

» View the Top Minds 2016 list

OIC 2016: Options Industry Leaders Panel

Scot Warren, OCC Executive Vice President of Business Development, moderates this panel with representatives from Bats Global Markets, BOX Options Exchange, CBOE, MIAX, NASDAQ and NYSE. Topics included liquidity, industry regulation, new innovations in technology and more.

» Listen via the Options Insider Radio

OCC BLOG

Read the latest from OCC's Blog!

» An Advocate for the Listed U.S. Equities Options Industry

» Extension of QCCP Deadline Shows EC and SEC Are Working Together To Achieve Common Approach on Equivalency

» Strengthening Financial Market Resiliency through Technology

» The Role of Central Clearing and How it Could be Applied to Securities Lending

OCC ON SOCIAL MEDIA

Follow OCC:

Facebook  Twitter  LinkedIn  YouTube  Google+

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

Scot Warren, Executive Editor
Executive Vice President,
Business and Product Development
swarren@theocc.com
(312) 322-6214

David Prosperi, Editor
First Vice President,
Public Relations
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 Commends European Commission Extension of Qualified CCP Deadline

At OCC, we take seriously our role as a Systemically Important Financial Market Utility (SIFMU), and we advocate on behalf of the U.S. listed options industry to provide our exchanges and clearing firms with a strong and competitive marketplace.

In February, the U.S. Commodity Futures Trading Commission (CFTC) and the European Commission (EC) announced an agreement on a common approach for the regulation of cross-border central counterparties (CCPs). In March the EC released its equivalence determination for the CFTC's CCP regulatory regime. OCC submitted its recognition application to the European Securities and Markets Authority (ESMA) under the European Market Infrastructure Regulation (EMIR) process in 2013, and the application has been deemed complete by ESMA.

For OCC's application to be eligible for approval, the U.S. Securities and Exchange Commission (SEC) must reach an agreement with the EC regarding an SEC Equivalence Determination. We commend the EC for its recent decision to extend the transitional period deadline for CCPs such as OCC to be recognized as qualified central counterparties (QCCPs). We believe this announcement is an important indication that both sides are continuing to work through the issues and arrive at a common approach. We look forward to continuing to work with the EC, ESMA and the SEC as they endeavor to come to an agreement on a common approach for the regulation of cross-border QCCPs.

Recognition of U.S. CCPs subject to the SEC's jurisdiction is important to OCC and market participants for several reasons, foremost among them that it would allow EU banks' and EU bank affiliates' exposure to those CCPs to be subjected to a lower risk weight in calculating their regulatory capital. Without such recognition, a CCP cannot admit firms established in the European Union (EU) to membership. It cannot clear for trading venues established in the EU, nor can it clear products subject to the clearing mandate for market participants established in the EU. OCC's EU affiliate clearing members' risk weighted asset exposures to OCC would increase to over $75 billion from approximately $924 million, requiring them to maintain additional capital of approximately $5.25 billion.

There are currently 18 OCC clearing firms classed as EU-affiliated firms that potentially would be impacted by the lack of QCCP recognition for OCC. They represent about 17 percent of OCC cleared volume and 21 percent of open interest. These firms also contribute significantly to OCC's financial safeguards framework: about $9.5 billion (25 percent) in initial margin held by OCC, and about $3 billion of our clearing fund (25 percent). Outside of OCC's equities options business, about 50 percent of all VIX futures volume that is cleared by OCC members would be impacted.

As the only CCP in the U.S. for the listed equity options markets, the imposition of punitive capital charges on OCC's EU-bank affiliate clearing members will trickle down to exchanges and market participants, and would adversely impact the entire marketplace. For example, if certain of these EU-bank affiliates could no longer serve as an OCC clearing member, other market maker clearing members of OCC would not be able to absorb the impacted market makers. Liquidity provisions in the options markets could be significantly impacted, resulting in increased spreads, greater volatility, and higher trading costs for investors.

Final rules from the SEC that align the regulatory regime for CCPS that are systemically important with the standards that are in place by other U.S. regulators, as well as with international regulatory regimes, would be beneficial to U.S. financial markets. In addition to avoiding the potential market disruptions, these rules also would pave the way for impacted CCPs to further enhance their resiliency.

Sincerely,

Craig and Mike

Craig DonohueMike McClain

OCC released its official statement on June 9, 2016.

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How OCC Supports Financial Market Resiliency through Technology

Luke Moranda

Luke Moranda, OCC Senior Vice President and Chief Information Officer, discusses how OCC promotes market resiliency through technology and innovation.

How has OCC been impacted by the regulatory changes from the 2008 financial crisis?

OCC, along with the other designated Systemically Important Financial Market Utilities (SIFMUs), are stronger today because of the improvements that regulators have made to the regulatory framework for CCPs. As an industry leader in risk management, we understand the need to help safeguard our markets and contribute to maintaining equilibrium in a mutualized system.

How is OCC proactively managing its technology framework?

We have been focused on improving our resiliency and meeting heightened regulatory standards such as Dodd-Frank. We have improved the comprehensiveness of our STANS margining system by implementing additional risk factors, most notability implied volatility. We’ve enhanced our capabilities to proactively identify challenges to our financial resources by implementing rigorous stress testing modules to OCC’s risk framework. Our ability to promptly respond to exposures has been enhanced by adding the authority to collect additional Clearing Fund contributions intra-month to ensure that we continuously have the adequate resources available to calibrate risk.

What are OCC’s top priorities for safeguarding the listed options industry?

Cyber security and system safeguards remain a top focus for OCC. Our team has made further investments to ensure that we are prepared for any cyber risks and we stress our commitment to system resiliency as part of our efforts to implement SEC Regulation SCI. Specifically, we completed a comprehensive survey of our systems to identify critical systems within OCC’s infrastructure. This information aided us in making system enhancements as necessary and aligning policy and controls to the new regulation.

What is Regulation SCI and what is its role?

In November 2014, the SEC published a detailed new rule called Regulation Systems Compliance and Integrity (Reg. SCI). It was intended to replace and supplement the SEC’s current voluntary Automation Review Policy (ARP) and the two policy statements that comprise ARP. By doing so, Reg. SCI is designed to strengthen the technology infrastructure of the U.S. securities market and to reduce the occurrence of systems issues in these markets by preventing potential IT problems that could create crippling financial losses for investors. Reg. SCI is important to OCC because this rule further supports our resiliency by enhancing internal operations.

What steps is OCC taking to ensure the future strength of its technology framework?

OCC will continue to implement additional enhancements to its Clearing Fund approach to further enhance the comprehensiveness and resiliency of its model. This continuous refinement of our risk management tools is evidence of OCC’s commitment to managing risk with the overall objective of reducing systemic risk, especially during extreme market events. We will also continue to make significant investments in cyber-related and system projects that will further improve OCC’s alignment with Regulation SCI.

For more information on OCC’s technology infrastructure, read "Strengthening Financial Market Resiliency through Technology".

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OCC Hosts Summit on Managing Market Volatility in 2016 Election Cycle

As a leading source of educational resources for the listed options industry, OIC hosted a summit on market volatility on Tuesday, June 21. The summit consisted of three individual webinars and a panel discussion over the course of the afternoon.

100 Years of Volatility

Sam Stovall, U.S. Equity Strategist of S&P Global Market Intelligence and author of The Seven Rules of Wall Street, presented the Election Year Outlook and what history reveals when it comes to market performance during election years. Joe Burgoyne, OIC Director of Institutional and Retail Marketing, led the second session that covered the different types of volatility and how to manage the associated risks. Jeff Hirsch of Stock Trader’s Almanac presented the third session, where he showed how to navigate the market’s dangerous currents and what to expect in the next few years.

The last session was a panel discussion moderated by OIC. The panel of professionals talked about the importance of implied volatility for options positions and how to track options premiums that may expand or contract leading into the November election.

Visit OIC's Webinar Registration page for more information about upcoming events.

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Options Industry Conference and Financial Advisors Forum 2016

This year’s Options Industry Conference was held at the Terranea Resort in California on May 11-13, hosted by the ISE Exchange and OCC. The conference included notable keynote speakers, panel discussions, breakout sessions and a variety of networking opportunities for over 400 attendees to enjoy.

Panel discussions covered various important topics that impact the options industry such as regulatory and legislative outlooks and the overall impact of the political environment on financial services, market structure, and the future of the industry.

The Options Industry Leaders Panel, a conference favorite, was moderated by OCC’s Executive Vice President of Business and Product Development, Scot Warren. Representatives from Bats Global Markets, BOX Options Exchange, CBOE, MIAX, NASDAQ and NYSE discussed liquidity, industry regulation, new innovations in technology and more. The podcast is available courtesy of The Options Insider Radio.


Scot Warren moderates the Options Industry Leaders Panel at OIC 2016

Keynote speakers included Stephen Luparello, the SEC's Director of Division Trading and Markets, Professor Lynn Vavreck from UCLA, who discussed the 2016 election, and comedian Tom Arnold.


Closing keynote comedian Tom Arnold at OIC 2016

In collaboration with this year’s conference, OIC held its 3rd Financial Advisors Forum at the Terranea Resort in California on May 11-12. The Forum’s 104 attendees enjoyed presentations and discussions on options strategies, mega trends in ETFs, as well as a presentation by Professor Vavreck on the Road to the White House in 2016.

Next year’s Options Industry Conference will be held in Scottsdale, Arizona. Visit the 2017 Options Industry Conference website for more information.

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OCC Leaders at Industry Events

The U.S. listed options industry has been well represented by OCC thought leaders at various industry events. Craig Donohue, OCC Executive Chairman, spoke to students at University of Chicago Law School for the Doctoroff Business Leadership Program on May 9. Mike McClain, OCC President and Chief Operating Officer, offered opening remarks at the 3rd Annual OIC Financial Advisors Forum on May 12, as well as for the Chartered Financial Analyst Chicago event at CBOE on June 8. Scot Warren, OCC Executive Vice President of Business and Product Development, moderated the Options Industry Leaders Panel at the 34th Annual Options Industry Conference on May 13 in California. Luke Moranda, OCC Senior Vice President and Chief Information Officer, discussed post-trade opportunities at the NASDAQ Technology Conference of the Future in Stockholm, Sweden on May 24.

Craig Doctoroff program
Craig Donohue speaks to law students at the University of Chicago

On June 8, Matt Wolfe, OCC Vice President of New Products, spoke at the RMA Securities Lending Ops Tech Conference in New York. Kim McGarry, OCC Senior Vice President and Chief Financial Officer, co-chaired a panel discussion on FinTech at The Wall Street Journal’s CFO Network on June 13 in Washington, D.C. William Eineke, OCC Vice President of Risk Management, spoke at the SIFMA Credit & Margin Annual Conference in Nashville on June 23.

In July, Tracy Raben, OCC Senior Vice President and Chief Human Resources Officer, will be speaking at the MarketsWiki Education Series in Chicago.

Visit OCC’s Executive Biographies page for more information.

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OCC Employees Represent at Chase Corporate Challenge 2016

OCC was a proud sponsor of this year’s Chase Corporate Challenge on May 26 in Chicago. A total of 65 OCC employees participated in the 3.5 mile race that was attended by a record-breaking 27,000 participants from 680 companies.

OCC's tent at the Chase Corporate Challenge
OCC's tent at the Chase Corporate Challenge

Chase Corporate Challenge
OCC employees at the Chase Corporate Challenge

Chase Corporate Challenge
Employees hang out at OCC's tent after the Corporate Challenge

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From Capitol Hill

From Capitol Hill

On June 7th, House Financial Services Committee Chairman Jeb Hensarling (R-TX) unveiled details of the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act, his legislative initiative to replace the Dodd-Frank Act. Chairman Hensarling said his proposal would reduce the regulatory burdens of the financial services industry and end the possibility of taxpayer bailouts of America’s largest financial institutions should they become insolvent. The proposal would include an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital requirements for banking institutions that desire to maintain high levels of capital. The proposal also would include the repeal of the authority of the Financial Stability Oversight Council (FSOC) to designate firms as systemically important through the repeal of Titles II and VIII of the Dodd-Frank Act. Title VIII gives FSOC the authority to designate clearinghouses, including OCC, as systemically important financial market utilities (SIFMUs). The Chairman notes that his proposal also would retroactively repeal all previous SIFMU designations and would include eliminating the access to the Federal Reserve discount window for SIFMUs.

Capitol Hill observers believe there is little chance of this proposal becoming law this year. Democrats were swift in their opposition to the proposal, with Senator Elizabeth Warren (D-MA) strongly opposing the plan. An adviser to Hillary Clinton, Gary Gensler, said the proposal from Chairman Hensarling was “ill-conceived” and that Hillary Clinton “strongly opposes” any efforts to repeal reforms put in place after the financial crisis. It has been reported that Chairman Hensarling met with the presumptive Republican nominee, Donald Trump, to brief him on his proposal. Mr. Trump has previously gone on record as opposing the Dodd-Frank law and would prefer to replace it. We will keep you updated as to the progress of this initiative moving forward.

Also on June 7th, Senator Richard Shelby (R-AL), Chairman of the Senate Banking Committee, held a hearing on bank capital and liquidity regulation. The focus of the hearing was an examination of recent capital and liquidity rules and whether banks have enough capital to withstand a liquidity crisis, with specific attention on whether Dodd-Frank and Basel III regulations were effective at mitigating banks’ risk of failure. Chairman Shelby asked whether U.S. regulators are looking at the cumulative impact of their regulations on the entire financial services industry. He questioned whether regulators are too concerned with adding more regulatory capital requirements for the banking industry rather than looking at the impact of those regulations on the banking industry as a whole and whether they are actually reducing systemic risk. Committee Ranking Member Sherrod Brown (D-OH) cited the recent “living wills” rejected by the Federal Reserve and the FDIC as evidence that the nation’s largest banks have capital and liquidity shortcomings.

On June 14th, the Senate Banking Committee held an oversight hearing of the SEC and Chair Mary Jo White was the only witness. In her written testimony, Chair White discussed the topic of clearinghouse oversight, noting that the SEC had proposed the Covered Clearing Agency Rules to enhance the oversight of systemically important clearinghouses, and that “[c]ompleting these rules is a priority this year in order to guard against systemic risk that can arise in the clearance and settlement system, and provide certainty to market participants, especially those engaged in cross-border activities.” OCC views this statement as a positive development in connection with our QCCP application, and will continue to keep you updated on this issue.

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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.