February/March 2017

A Note from Craig Donohue, OCC Executive Chairman and CEO

Craig Donohue, OCC Executive Chairman and CEO, discusses tax reform proposals that could impact the listed options industry.

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A note from Craig Donohue, OCC Executive Chairman and CEO

Last November's national election results brought dramatic change to Washington, D.C., not only in the White House, but also on Capitol Hill. One of the areas that OCC and the U.S. Securities Markets Coalition has been paying close attention to is the issue of comprehensive tax reform and its potential impact on the U.S. listed equity options markets.

Over the past three years, policymakers from both parties have proposed a variety of financial product tax reform proposals that could impact listed equity options and other derivatives. These proposals could make the use of listed equity options much less attractive than under current law.

Since the election, both President Trump and Members of Congress leading the congressional tax committees have indicated that tax reform is a priority for 2017, and proposals are being drafted to ensure early introduction of bills to reform the tax code. House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Finance Committee Chairman Orrin Hatch (R-UT) will be leading congressional consideration of tax proposals in the 115th Congress. OCC and the Coalition are meeting with Members and staff of these committees to reiterate our deep concerns on behalf of the options market about the previous proposals, on which we submitted extensive comments and held many meetings.

While the House Republican blueprint for tax reform does not include mention of specific proposals that would impact listed equity options, it is likely that legislators and staff will refer back to prior financial products tax proposals drafted by former House Ways and Means Committee Chairman Dave Camp (R-MI) or current Senate Finance Committee Ranking Democrat Ron Wyden (D-OR).

These proposals would treat all listed options as sold at the end of the year, treat appreciated stock as sold if a taxpayer enters into an option to manage risk associated with owning the stock, and radically alter the tax treatment of stock while a related option position is outstanding. Enacting these proposals would adversely affect individuals and other taxpayers using listed equity options to manage risks associated with investments in publicly traded stocks. It would discourage use of options - distorting rational economic and risk management decision-making and replacing the well-established and relatively simple tax rules for listed equity options with a burdensome and overly complicated regime.

In addition to the broader efforts being spearheaded by Chairmen Brady and Hatch, Congressman Tom Reed (R-NY), a member of the Ways and Means Committee, is leading the development of a financial products draft. OCC and the Coalition are working with Congressman Reed and his staff to explain the issues raised by previous financial product tax proposals and to advocate for a different approach in the forthcoming package.

OCC understands the importance of these issues to our participating exchanges, clearing firms, and market participants. We remain committed to working with the Coalition to educate key Members of Congress on the importance of having a viable U.S. listed equity options market that functions efficiently and effectively on behalf of investors.


Craig's Signature

Q&A with Jim Pribel, OCC's New Treasurer

Jim Pribel, OCC's new Treasurer, discusses his key responsibilities and the new role at OCC.

Jim Pribel

You have a new role at OCC as Treasurer. What are your primary responsibilities?

My key responsibilities are to safeguard the assets and to manage the financial resources of OCC. In that role, I establish and manage relationships with banks and other liquidity providers to meet OCC's operational and credit needs. Our Treasury department invests OCC and clearing member funds on a daily basis. I also manage our relationship with the rating agencies and work with our insurance providers to make sure that our assets and our liability exposures are addressed and protected.

Why is this role important for OCC?

On a daily basis, OCC Treasury is responsible for as much as $10 billion of cash. We keep track of where every penny of that cash is, and invest as much of it as possible in accordance with our investment policy. OCC currently has $3 billion of credit facilities with 20 banks and pension funds, and a AA+ credit rating with S&P. These relationships need to be actively managed. Given OCC's reliance on technology, addressing our business and cyber exposures with our insurance providers is also important in terms of managing to OCC's risk appetite. These varied responsibilities have grown to the point within OCC where full time responsibility and attention is warranted.

What do you see as the biggest challenge facing Treasurers in the financial services sector?

Responding to the increasing number of global regulations and assessing the impact on our business and on our trading partners is our biggest challenge. Banks are rationalizing their business models and are either re-pricing their products and services or choosing to exit certain businesses altogether. New businesses and new product offerings are being created in an attempt to provide new solutions to address our needs. Evaluating how they might be used by OCC is one of the areas where Treasury adds value.

Before joining OCC, where did you work?

Before joining OCC as Treasurer in December, I was a consultant for OCC on treasury and finance projects. Prior to that, I was with CME Group for 13 years, including serving as its Treasurer for the last 11 years. During that time, I had the opportunity to provide significant amounts of financing and structuring in support of CME's acquisitions of CBOT, NYMEX, Dow Jones Indices, and the exchange's international expansion. Before joining CME, I was the Treasurer of a publicly-traded wholesale distributor of business products.

What do you like to do during your spare time?

I spend a fair amount of my spare time serving as a crewmember on a race car team. Our team road races (which means left and right turns on tracks like Road America, Watkins Glen and Indy), and we have raced both professionally and at the amateur level. I also enjoy riding my motorcycle, including at the Sturgis Rally and the Laughlin River Run. Beyond that, scuba diving and spending time with my family take up the rest of my time away from OCC.

What should be on Top of a Beneficial Owner's To-do List for 2017

Chip Dempsey

Chip Dempsey, OCC Chief Commercial Officer, discusses OCC's enhanced stock loan program and what beneficial owners should be looking for in 2017.

At OCC, we see that stock lending is becoming less profitable for the borrowing banks that facilitate such transactions, which has diluted their incentive to provide clients with better service.

There are three drivers to the benefits of a central counterparty (CCP) like OCC for stock lending transactions:

• Central clearing affords more favorable capital treatment, with the CCP as counterparty or trade performance guarantor;

• CCPs that accept non-cash collateral create opportunities to optimize collateral pledging, using securities that are otherwise un-utilized, further preserving balance sheet; and

• CCPs process listed instruments in highly automated ways, which can be leveraged to the cost-efficiency of the stock loan post-trade processing flows.

Our traditional clearing members, many of which are bank-owned broker/dealers, were early adopters of our securities finance clearing. Basel III has had a very direct effect on their need to preserve their balance sheet by switching to lower risk-weighted assets. The competitive edge is always moving: the conversations we are having with agent lenders suggest that utilization, and maybe even rates, will reflect the borrowers' costs, and the borrowing banks are unequivocal about the relative costs of CCP versus higher risk-weighted counterparties. Understanding how CCPs effect their competitive position is worthy of being on a beneficial owner's to-do list.

How will higher interest rates affect your transaction choices?

It is all about collateral optimization. The opportunity cost of higher interest-bearing instruments is driving efforts to optimize the use of cash equities as collateral.

Will the current low-yield environment affect the shift to non-cash collateral?

The most significant driver towards non-cash collateral is more desirable balance sheet treatment, versus cash collateral, on the part of the borrower. If the lender is sufficiently collateralized and comfortable with that collateral then they may find better pricing on non-cash loans, which can counterbalance shrinking returns under the current low-yield environment.

Is President Trump and the economic/regulatory changes he will likely bring forth be a good thing for the securities lending market?

OCC supports the idea of efficient and effective regulation that enables a diversity of innovative investment strategies without increasing systemic risk. Our focus on developing safe and secure markets through effective risk management aligns with the goals of Dodd-Frank to reduce systemic risk and ensure confidence in the financial markets and the broader economy.

It is too early to tell whether there will be any economic or regulatory disruption for the securities lending market until President Trump announces his economic policies.

However, based on what we have seen and heard, his platform appears to be more focused on freeing up capital for small business loans. Some of his potential nominees for the Federal Reserve and other relevant policy positions in his administration have been calling for higher liquidity ratios in lieu of tighter regulation. If such actions were to occur, that could portend tighter access to balance sheets, more expensive bilateral credit, and an enhanced need to reduce risk weightings. This could pose a challenge to OCC's clearing member firms and could cause us to provide novation for a wider range of the stock loan market in order to afford our member firms our two percent risk weighting as opposed to twenty percent or one hundred percent with other counterparties. OCC estimates, supported by industry research, a clearing model reduces a clearing firms' cost of capital by 71 percent.

To learn more about OCC's thought leadership on industry issues, visit OCC's Blog.

OCC Welcomes MIAX PEARL Options Exchange

OCC, the world's largest equity derivatives clearing organization, welcomed MIAX PEARL on February 7 after its successful launch on February 6th. The addition of MIAX PEARL brings the total number of U.S. options markets to fifteen.

"OCC congratulates the Miami International Securities Exchange on the successful launch of MIAX PEARL," said Craig Donohue, OCC Executive Chairman and CEO. "We are pleased to provide central counterparty clearing and settlement services to our newest participant exchange. As a Systemically Important Financial Market Utility and the foundation for secure markets, we look forward to the continued success of MIAX PEARL and the continued growth of the U.S. exchange-traded options industry."

With the addition of MIAX PEARL, OCC provides central counterparty clearing and settlement services to 20 exchanges and trading platforms for options, security futures, financial and commodity futures, and securities lending transactions. In 2016, OCC cleared volume was 4.17 billion contracts, its fifth-highest annual total ever.

Visit OCC's website for more information on our clearing services.

2017 Inside ETFs Conference

The Options Industry Council (OIC) was an exhibiting sponsor at this year's Inside ETFs conference in Florida. Inside ETFs, which was celebrating its 10th anniversary, is the world's largest ETF conference, and this year's event drew in over 2,500 financial advisors, ETF strategists, and representatives from the leading ETF institutions.

OIC's Executive Director Mary Savoie was joined by the conference's first ever all-women panel, "Redefining Risk: Solving Your Clients' Biggest Challenges with Options Strategies". The 50 minute fireside panel discussion included Stacy Gilbert from Susquehanna International Group, Fariba Ronnasi from Elite Wealth Management, and Donna Walton with Raymond James Associates. The panel covered topics like options statistics from OCC, income and hedging solutions, options education, and as well as other strategies and issues in the marketplace, and concluded with a Q&A session.

Based on OCC data, options on ETFs accounted for nearly 41% of all U.S. options volume in 2016, a 6.7% increase from 2015. Looking at the volume growth of options on ETFs over the last 11 years, 2016 was the second highest year for growth, with more than 1.6 billion options on ETFs contracts cleared by OCC. Since 2006, U.S. volume for options on ETFs has more than quadrupled.

This growth reflects U.S. ETF assets under management. According to ETF.com, U.S.-listed ETFs closed out the year with $2.56 trillion in assets, an 11% increase over 2015. The fastest growing ETF segment in 2016 was Alternatives with a 62% growth rate in assets. Alternatives is the segment in which ETFs that use options are included. Also, according to PwC, ETF assets under management are expected to exceed $7 trillion by 2021.

The OIC is an industry cooperative supported by OCC and the options exchanges that is celebrating its 25th anniversary this year. As the leading provider of unbiased educational content, the OIC continues to focus on major industry trends and on its mission to increase awareness and responsible use of exchange-listed options among global investors.

For more information, visit OptionsEducation.org.

OIC Continues To Promote Responsible Use of Listed Equity Options by Investors

OIC kicked off 2017 with several educational webinars. In January, OIC's team of experts presented two options basics webinars that covered 'must know' concepts investor should know when using options: "Options Fundamentals for the New Year" and "Your Options Questions Answered." The experts— OIC's Joe Burgoyne, Ed Modla, Mark Benzaquen and Bill Ryan— discussed options trading terminology, basic strategies and OIC's various online educational resources. OIC also was well represented at the Security Traders Association of Chicago (STAC) Mid-Winter meeting on January 11th, with OIC Director of Institutional Education Kevin Baldwin participating on a panel discussing the use of derivatives as possible solutions for income and alternative risk management.

In February, OIC hosted two back-to-back webinars, "Tax Advantages to Trading Index and Non-equities Options" and "Covered Call Writing—Tax Traps and Opportunities", featuring Bob Gordon, President of Twenty-First Securities Corp., as the guest speaker. During these webinars, Bob discussed in-depth the taxation of options on indices, gold, master limited partnerships (MLPs) and other non-equities, and discussed the unique, yet sometimes cumbersome, opportunities that arise when investors write covered call options. Institutional educational efforts started off strong with an OIC-sponsored options event with The CFA Society of San Francisco where Frank Tirado and Joe Burgoyne led the program on February 8th. Kevin Baldwin also led a panel discussion entitled "The next five years in institutional investing" at the Sovereign Wealth Fund Institute conference in Arizona on February 22nd. The panel covered macro and micro investing trends plus the growing use of exchange listed options among institutional investors.

On March 15th, Dan Gramza, president of Gramza Capital Management Inc., presented "Choosing an Options Strategy Using Behavioral Japanese Candlestick Trading". During this webinar, Dan explained how his simplified method can help traders look at the markets in a new way to help choose their next options strategy. On March 22nd, OIC's team of options experts will be presenting "Options Strategy Selection: What You Should Think about before You Trade". This webinar will cover considerations that can assist investors in choosing their optimal options strategy.

In addition, OIC has partnered with DyMynd to co-host DyMynd's "All Women Want Options" webinar series in March. OIC is proud to bring the "options" side of this webinar series and collaborate with a firm whose mission is to increase the level of financial education for women. The three webinars focus on options fundamentals through simple definitions of terminology and storytelling, and introduce income generation strategies and option pricing components. The first session was hosted on March 14th, with two additional webinars scheduled on March 21st and March 28th. DyMynd is a financial empowerment firm that equips women with the financial tools and resources they need to manage their money and investments. OIC will also be participating in the Interactive Brokers for an Advisor webinar on March 28.

DyMynd Logo

More information on upcoming OIC events and registration can be found here.

From Capitol Hill

With the inauguration of President Donald J. Trump, issues such as confirming the President's cabinet nominations, comprehensive tax reform and potential changes to the Dodd-Frank Act received increased attention in early 2017.


U.S. Department of the Treasury

President Trump nominated Steven Mnuchin to lead the Treasury Department, and on February 1st, Senate Finance Committee Republicans used a rare procedural motion to temporarily suspend a committee rule requiring at least one Democratic committee member to be present to conduct committee business. Committee Republicans then voted to move Mr. Mnuchin's nomination to the Senate floor. On February 13th, the Senate voted to confirm Mr. Mnuchin as Treasury Secretary by a vote of 53-47.


On January 23rd, Jay Clayton, a lawyer with the law firm of Sullivan & Cromwell, was nominated by President Trump to be the next SEC chairman. While at Sullivan & Cromwell, Mr. Clayton represented several financial services firms and helped several companies raise money through the initial public offering process. A confirmation hearing for Mr. Clayton before the Senate Banking Committee has been scheduled for March 23rd.

Also on January 23rd, after the resignation of previous agency Chair Mary Jo White, SEC Commissioner Michael S. Piwowar was designated Acting Chairman by President Trump. Dr. Piwowar was first appointed by President Obama to the SEC for a term that expires in 2018.


Following the resignation of U.S. Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad, President Trump announced that Commissioner Christopher Giancarlo would assume the role of Acting CFTC Chairman as of January 20th. A permanent candidate for CFTC Chair has not been nominated. As Acting Chairman, Giancarlo recently announced several personnel changes at the CFTC. Amir Zaidi is the new Director of the Division of Market Oversight, Vincent McGonagle is the Acting Director of the Division of Enforcement, Jeffrey Bandman is Advisor on FinTech issues, and John Lawton serves as Acting Director of the Division of Clearing and Risk.

Potential Dodd-Frank Changes

In September of 2016, House Financial Services Committee (HFSC) Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act of 2016, which was passed by the HFSC but was never considered by the full House of Representatives. Chairman Hensarling's bill would reform significant parts of the Dodd-Frank Act, and includes a repeal of Title VIII of the Act. Title VIII is the provision under which OCC was designated a systemically important financial market utility ("SIFMU") by the Financial Stability Oversight Council. We anticipate that a new version of the Financial CHOICE Act will likely be introduced soon with much improved chances of becoming law with a Republican-controlled Congress and White House.

Editorial Team