OCC News

MARCH/APRIL 2016

IN THIS ISSUE

OCC 2015 ANNUAL REPORT


OCC Annual Report

» Read the full report

OCC IN THE NEWS

OCC Commends D.C. Circuit Court Ruling Regarding Capital Plan

OCC applauded the order by the U.S. Court of Appeals for the D.C. Circuit denying a motion intended to restrict OCC from continuing to implement its capital plan.

» Visit OCC's Newsroom

John Fennell, OCC Executive Vice President, Breaks Down OCC's role as a CCP

Participating in the John Lothian World of Opportunity Summer Intern Education Series, John Fennell, OCC's EVP of Financial Risk Management, breaks down OCC's role as a CCP with regard to settlement and guarantee and how clearing provides strength and confidence to the financial markets.

» John Lothian News

Failure is Not an Option

In an interview with Compliance Week Magazine, Richard Wallace, OCC’s SVP and Chief Compliance Officer, discussed the importance of OCC’s designation as a Systemically Important Financial Market Utility (SIFMU), and what it means to market participants and the listed options industry.

» Read the interview

OIC's Gary Delany Discusses Using Options in Portfolio Management

OIC's Gary Delany addresses the popularity of U.S. equity options among wealth managers in an interview with Professional Wealth Management (PWM). He offers insight about the different products and strategies available for managing risk with options as well as OIC's focus on education and the responsible use of exchange-listed equity options.

» Read the PWM Article

» Watch the PWM Video

Comments Regarding Final Section 871(m) Regulations

OCC and the U.S. Securities Markets Coalition submitted a letter to the Department of the Treasury and the Internal Revenue Service addressing certain issues raised for listed options by the final section 871(m) regulations issued on September 18, 2015.

» Read the comment letter

Box Spreads: Exchange-listed Options Strategies for Borrowing or Lending Cash

In this white paper, OCC reviews how market participants can use exchange-listed options to borrow or lend cash through the use of the options box spread strategy. It explains the box spread; discusses its use as a form of secured financing; and demonstrates how listed-options can be a competitive marketplace for borrowing and lending cash.

» Read the white paper

THE OPTIONS INDUSTRY COUNCIL (OIC)

Don't miss OIC's upcoming webinars:

» March 15: 5 Options Greeks for Next-Level Traders

» March 22: Panel: What Greeks Can Teach You About Options

» April 19: 3 Ways to Generate Income with Options

» April 26: Options and Income Strategies: What You Need to Know

Listen to the latest Wide World of Options Podcast:

» Risk Management and Listener Questions

OCC ON SOCIAL MEDIA

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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.

REGISTER FOR OIC 2016

Options Industry Conference in Terranea

OCC EDITORIAL TEAM

Scot Warren, Executive Editor
EVP, Business Development,
Communications & OIC
swarren@theocc.com
(312) 322-6214

David Prosperi, Editor
FVP, 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

Mike McClain on OCC Development & Strategy 2016

Mike McClainMike McClain, OCC's President and Chief Operating Officer, outlines some of his thoughts on the challenges and opportunities facing OCC in 2016.

What is OCC's view of the landscape as we move into 2016?

Just as we are facing heightened regulatory expectations, our clearing members are facing increased capital requirements to participate in the markets we clear. Capital efficiency is more important now than ever, and we are exploring alternatives to maintain our financial resiliency without significantly increasing the capital needed to participate. At the same time, there are significant issues we are tracking with regulatory equivalency that will impact our European-based clearing firms along with disruptive technologies like blockchain that can significantly alter the way we deliver value to the marketplace. By staying on top of these issues, we can mitigate any potential problems they may cause and even turn them into opportunities to deliver more value to our stakeholders. In either case, our value proposition is evolving away from that of a transaction processor to being a leading risk and capital manager.

Can you outline some of OCC’s strengths that it plans to build upon for this year and beyond?

By virtue of our effective and efficient low-cost utility model, OCC is positioned to be a preferred partner for industry solutions. We bring industry-leading equity risk management capabilities, an established clearing fund and pool of collateral, and we have a strong ecosystem of clearing members. Our capital plan, which was just reaffirmed by the SEC and is supported by a AA+/Stable credit rating from Standard & Poor’s, is a vital component to our goal of providing world-class service to market participants and ensuring the resiliency of an important market utility. Most importantly, we have a team of people with a vast wealth of knowledge and desire to serve the needs of our market.

What are some of the major threats facing the exchange-listed options industry?

We see capital, regulatory and tax threats facing our industry. Increased capital requirements could lead to lower profitability of clearing for a bank holding company’s clearing firm. On the regulatory front, the Department of Labor fiduciary proposal could impact the use of options in retirement accounts, causing firms to curtail option trading activity in self-directed IRA accounts. Higher capital charges for European market participants clearing in a non-equivalent jurisdiction could cause a potential 1,200 percent increase in capital charges and reduced activity from Europe. This is critical as 10 to15 percent of non-market maker option flow is from European participants. There also are tax threats, such as what the IRS is considering for dividend equivalent withholding for non-U.S. investors. The cost and complexity of compliance with changes to Section 871(m) could result in clearing firms not taking business from non-U.S. investors. All of these threats could lead to lower customer volumes and revenues.

How does OCC plan to address those threats?

As a CCP with scale and efficiency, OCC is well positioned against such threats. We are working in partnership with exchanges, clearing member firms and other market participants to deliver solutions to mitigate threats to our industry. One example is expanding our securities finance business to provide market participants with capital-efficient solutions. We are working to provide thought leadership and advocacy on the issues that are most impactful to our industry. We also are working with our regulators, Congress and federal agencies to make sure OCC’s position and that of our market participants on these challenges is well understood, and we need to insure that OCC is prepared to comply with CCA and other global standards. We also need to make sure that our infrastructure has the flexibility to respond to new demands from the marketplace. This includes positioning our technology capabilities as an enabler of progress.

What value will OCC bring to market participants this year?

We are making significant strides to enhance our risk management capabilities that will have a direct impact on our clearing fund and margins. Further, by expanding securities finance clearing, OCC can deliver capital efficiencies to market participants and diversify our offerings. We are taking a close look at blockchain, but just building a better mousetrap will not be enough. Strong partnerships must be formed with regulatory authorities and stakeholders that specialize in turning technical solutions into capital efficient ones. The firms that have a relentless focus on operational excellence and developing models that promote efficiency are best positioned to win with this technology. We also have the opportunity to leverage the education and marketing efforts of The Options Industry Council and our clearing members and exchanges to increase responsible use of listed products we clear. The latest OCC survey conducted by Harris Poll showed that a lack of understanding or knowledge is the major stumbling block as to why more investors do not trade options.

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John Fennell Discusses CalPERS Renewal of OCC’s Liquidity Program and Updates for 2016

OCC was the first clearinghouse to create a credit facility with a non-bank when it partnered with CalPERS, the largest U.S. pension fund in 2015. OCC’s innovative partnership with CalPERS was the first of its kind, and set the standard for liquidity resource diversification. As European regulators have started exploring the use of the buy-side as liquidity sources for CCPs in Europe, John Fennell, OCC’s Executive Vice President of Financial Risk Management, discusses the program and the updates to it for 2016.

Can you provide some background on OCC’s liquidity program with CalPERS?

OCC’s liquidity facility with CalPERS is a committed repurchase agreement where OCC can immediately draw on funds from CalPERS, during a default scenario. This ensures its continuous ability to facilitate timely settlement and eliminate market disruption. It was originally structured as a one-year agreement, which both parties renewed and updated for 2016. As a normal course of business, we continually assess the resources required to accomplish our goals, such as facilitating timely settlement and eliminate market disruption, for current as well as projected business needs as we serve industry participants and the greater public interest. As we looked forward, we identified a potential disruptive shift on the supply-side given the structure of our existing bank-based liquidity lines in conjunction with impending regulations requiring greater balance sheet to be reserved by banks against the types of lines utilized by OCC. As these bank reforms were implemented, we forecasted that the overall costs associated with the liquidity lines supplied by banks would become increasingly more expensive in addition to the supply diminishing dramatically. Given our reliance on committed forms of liquidity, it became critical for OCC to identify alternative sources of non-bank based liquidity. Furthermore, identifying a partner that had the opposite risk profile of OCC, such as pension funds, was important; that is, when OCC experienced stress, our liquidity partners were not also experiencing the same stress. That was attractive from a risk concentration perspective. CalPERS was that type of a partner and as a result our current liquidity is $3 billion in committed liquidity resources with $2 billion originating from banks and $1 billion from with CalPERS.

What’s new for 2016?

As part of our ongoing review we observed that the maturity of our lines, both bank-based and pension-based, occurred during the fourth quarter. This presented OCC with a new risk; the risk that a material portion of our committed resources could potentially not be renewed, and compromising OCC’s resilience. In January, we renewed the pre-funded committed repurchase facility with CalPERS, and eSecLending, an administrative agent, for a total of $1 billion. As part of that process we took steps to address some of these concerns by laddering the maturity schedule of that line; staging the maturity for $500 million of the resources with a renewal in June and the remaining $500 million maturing in January of 2017. As we move forward we plan to consider further diversification of the maturities of these lines thereby increasing the overall resilience of OCC.

Operationally, does the CalPERS arrangement work for drawing funds? Has it been tested?

Although we have not had to draw on it under a default scenario, we have tested it. In testing we have performed five test draws and form amounts totaling $600 million and we know it works and for substantial amounts. Operationally, the funds have always been available within an hour, as it is often the case with the other lines the timing for funding could take longer given it is a syndicated relationship with many more bank needing to execute for funding to be complete.

Are other pension funds and/or non-banks interested in similar arrangements with OCC?

This partnership serves as a proof of concept that this innovative relationship between a leading U.S. pension fund and a CCP critical to the functioning of the U.S. financial markets was resilient and sustainable long-term. I am proud to say that OCC has lead the way on this line of thinking and there has been interest from other funds to do something with us. When I spoke about this initiative with Dan Kiefer of CalPERS at last year’s eSeclending conference at Harvard, we garnered a lot of attention from the pension funds in the audience. This initiative is gaining traction in the marketplace and we were excited to find such a willing partners as CalPERS and eSeclending to share in this innovation.

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Taking Options Education to Capitol Hill: OCC Shares Industry Insight with SEC and House Financial Services Committee Staff

To increase the level of knowledge and education of exchange-listed options on behalf of the U.S. options industry, The Options Industry Council (OIC) conducted educational briefings for Securities and Exchange Commission (SEC) staff, and staff from the House Financial Services Committee, which has legislative jurisdiction over the SEC and the options industry. The briefings took place on February 4 and February 5 in Washington, D.C., and included panelists from Scottrade, Inc., Raymond James and TradeKing Securities along with representatives from OIC.

OCC's Matt Hughes discusses blockchain technology at FIA Expo 2015
OIC’s Vice President of Education, Frank Tirado, speaks to House Financial Services Committee staff members in a hearing room on Capitol Hill

The program offered information about options basics and the options industry, OCC’s role as a Systemically Important Financial Market Utility (SIFMU) and Central Counterparty (CCP), as well as insights into the interests of individual investors and how firms serve their needs. The sessions were well-received, with approximately 150 staffers attending the SEC program and 24 staffers from the House Financial Services Committee attending the legislative program. The retail firm discussion allowed the panelists to talk about how individual investors use listed options, and express concerns about the how the Department of Labor fiduciary proposal could impact the ability of investors to use listed options in their IRA and retirement accounts.

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Risk Management Webinar for Investors

Recent volatility in financial markets have investors searching for solutions, and OCC, through the OIC, responded with an investment risk management webinar on February 16 and a panel discussion on February 23 to provide investors with information on how to “play defense” with exchange-listed options. Both sessions were well-attended, with a total of 983 registrants and 340 live attendees.

When used correctly, options can help investors reduce risk with hedging strategies for portfolios, individual stocks, and exchange-traded funds. Joe Burgoyne, OIC Director of Retail Investor Education, discussed several defensive strategies for investors. "No question that when you get started with options it can be a bit challenging, because like any industry you have to learn the lingo,” Burgoyne said. “But options are wonderful financial tools that, with a little bit of homework and a little bit of stick-to-it-ness, can be easy to understand."

In 1973, when CBOE first introduced exchange-listed options to the market, and OCC was created, the annual cleared contract volume was 1,119,245 contracts. In 2015, OCC cleared more than 4.2 billion contracts. So far in 2016, OCC has cleared 710,171,056 contracts, with a year-to-date average daily volume of 18,209,514 contracts up seven percent from last year's average daily volume of 17,049,163 contracts.

For more information about upcoming OIC webinars, visit OIC's seminar registration page.

OCC Options Volume

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OCC Well Represented by Thought Leaders at Industry Events

To create greater awareness and understanding of the thought leadership OCC brings to the marketplace, some of OCC’s senior leadership has been visible at industry and other related conferences.

In February, OCC was well represented at various industry events throughout the country. Senior Vice President and Chief Information Officer, Luke Moranda, participated in the Wall Street Journal’s CIO Network Conference in California where many of the country’s leading chief information officers shared insights on some of the top technology issues facing business. Scot Warren, Executive Vice President of Business Development and OIC, spoke at IMN’s 22nd Beneficial Owners’ Institutional Summit in Arizona on OCC’s growing securities lending and collateral management initiatives, and shared a CCP perspective regarding what the future may hold for securities lending. OCC’s Executive Vice President of Financial Risk Management, John Fennell, spoke at the CBOE’s Risk Conference in Chicago where he gave an update on the tax, legislative, and bank capital issues impacting the listed options industry.


Scot Warren speaks at IMN's 22nd Beneficial Owners' International Summit on Securities Lending & Collateral Management (picture courtesy of Securities Lending Times)

In March, Scot Warren will be speaking at the Finadium Conference in New York regarding OCC’s stock loan program and future business initiatives. OCC’s President and Chief Operating Officer, Michael McClain, will be in Malaysia to participate on the World Federation of Exchanges’ leaders panel on April 18. He also will be moderating the Exchange Leader panel at the Options Industry Conference in California in May. That same month, Scot Warren and John Fennell will be speaking at the Securities Industry Financial Markets Association annual Operations Conference in Florida.

For more information on OCC executives, click here.

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OCC Welcomes ISE Mercury Options Exchange

OCC welcomed ISE Mercury as the newest OCC participant exchange. ISE Mercury, ISE’s newly launched options exchange began operations on February 16, bringing to 14 the total number of U.S. options markets cleared by OCC.

"We congratulate the International Securities Exchange on the successful launch of ISE Mercury,” said Mike McClain, OCC's President and Chief Operating Officer. "We are pleased to provide central counterparty clearing and settlement services to our newest participant exchange. As a Systemically Important Financial Market Utility and a foundation for secure markets, we are looking forward to the success of ISE Mercury."

OCC now provides central counterparty clearing and settlement services to 19 exchanges and trading platforms for options, security futures, financial and commodity futures, and securities lending transactions. In 2015, OCC cleared contract volume was over 4.2 billion, its third-highest annual total ever.

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OCC Employees Lend a Helping Hand at Ronald McDonald House Charities

As part of OCC’s ongoing efforts to be a good corporate citizen where our colleagues live and work, on February 11, 15 OCC employees lent a helping hand at Ronald McDonald House Charities (RMHC) near Lurie Children’s Hospital in Chicago to assist with making lunches for the families staying there. The team cooked a “Meal from the Heart”, which served over 40 individuals directly, and also contributed the leftovers and remaining goods to the families and RMHC.


The OCC team at the Ronald McDonald House near Lurie Children’s Hospital on February 11

Karen Glad, VP of Enterprise Portfolio and Project Management at OCC, chose the charity and arranged for her fellow employees to participate in the event. For Karen, Ronald McDonald House has made a significant impact on her life.

“About 17 years ago, when I was pregnant with my son, we found out that he had a severe heart condition and needed surgery,” Karen said. “I stayed at Ronald McDonald House while he was in the hospital. It was like a safe haven, and provided support during a difficult time.”


Part of the OCC team making lunch for individuals at the Ronald McDonald House near Lurie Children’s Hospital in Chicago

Speaking about OCC's overall charitable endeavors, Executive Chairman Craig Donohue said, "We believe we have a responsibility to play an important role in the communities where our employees live and work. As an organization, we have an obligation to be good corporate citizens and our values of stewardship and integrity carry over from the financial markets to our employees’ neighborhoods."

Founded in 1974 in Philadelphia, the Ronald McDonald House Charities aim to create, find and support programs that directly improve the health and wellbeing of children. The RMHC organization has been a previous OCC supported charity, as OCC donated washers and dryers for one of the laundry rooms, built out the kitchen and provided linen for the bedrooms. For more information about the cause, visit www.RMHC.org.

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From Capitol Hill

OCC, on behalf of the U.S. Securities Markets Coalition, has been working to include listed options in the fiduciary rulemaking proposal by the Department of Labor (DOL). While efforts at the end of 2015 to include language in the Omnibus spending bill to address the rulemaking were not successful, we continue to support other legislative efforts to address the rulemaking led by Representatives Peter Roskam (R-IL), Richard Neal (D-MA), and Phil Roe (R-TN).

On February 2, the House Education and Workforce Committee passed the Affordable Retirement Advice Protection Act (H.R. 4293), introduced by Representative Roe. H.R. 4293 would amend ERISA to change the definition of the term "investment advice" and would require an affirmative vote by Congress before any final rule by the DOL goes into effect. If Congress fails to approve the department’s regulatory proposal, the new fiduciary standard proposed in H.R. 4293 would take effect. On February 3, the House Ways and Means Committee passed a companion bill to H.R. 4293 called the Strengthening Access to Valuable Education and Retirement Support (SAVERS) Act (H.R. 4294), introduced by Representatives Roskam, Neal, and John Larson (D-CT). This bill would amend the Internal Revenue Code to expand the definition of “fiduciary” and requires investment advisors to act in the best interests of their clients when providing investment advice.

The next step in the legislative process for these companion bills is the House floor. Currently, there are ongoing discussions as to whether the full House will vote on these two bills within the next few weeks or wait until the DOL releases the final rule, which is expected to occur in March or April. Several House Democrats have indicated that they are unwilling to support any legislation that would make statutory changes to ERISA or the Internal Revenue Code before the DOL releases its final rule, so it is unclear at this point when a full House vote might occur. We will continue to keep you updated on these two legislative efforts and on the DOL proposal.

On December 11, the SEC proposed a rule that would impose limits on notional exposure of registered investment companies (“registered funds”) arising from derivatives transactions. While we continue to gather information on this proposal, it appears based on several conversations that the proposal would have minimal impact on registered funds that currently use listed options.

On the tax reform front, OCC and the Coalition continue to focus on the proposal by former House Ways and Means Chairman Camp to mark all derivatives to market. While we do not expect comprehensive tax reform to be considered in 2016 by Congress, new House Ways and Means Chairman Kevin Brady (R-TX) has stated that he would like the Committee to vote on an international tax reform plan later this year. Chairman Brady hinted that this vote would be aimed at laying the groundwork for possible comprehensive tax reform in 2017. We continue to educate members of the House Ways and Means Committee about our concerns with the proposal as well as continue the dialogue with those members of the Committee who support of the Coalition’s position on this issue. We will keep you updated on these efforts.

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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.