November 2017

Q&A with Dave Hoag

Dave Hoag, Chief Information Officer, shares his insights into the impact technology has on the exchange-listed options industry.

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Q&A with Dave Hoag, OCC's Chief Information Officer

Dave Hoag joined OCC as Chief Information Officer (CIO) on May 8th. He shares his insights into the impact technology has on the exchange-listed-options industry as well as his responsibilities at the world's largest equity derivatives clearing organization.

Mark Morrison headshotHow has the role of the CIO in financial services changed with the ever-evolving technology trends?

In many institutions the CIO was responsible for operational technology with a focus on reliability of systems. Financials services, however, has come to recognize that this is an applied technology business and a firm's ability to harness technology trends to drive incremental value for customers, operational cost savings, or the creation of new markets has made the CIO a critical participant in shaping the business.

What do you see as the biggest technology challenge facing OCC today?

OCC relies on tried, reliable, proven technology and successfully manages the risk for the world's largest equity derivatives CCP. This same technology, however, is impacting our agility and ability to fulfill our commitments to our customers. Our technology platform and processes need to be completely reimagined to capitalize on the latest technology trends and deliver solutions that enable rapid fulfillment of customer requests while retaining the high standard for reliability that defines OCC as the foundation for secure markets.

How is OCC transforming itself to be more agile?

We are seeking to adopt the core concepts from cloud computing in that everything is software, even the resources you need for running your applications. This provides tremendous agility for on-demand computing, on-demand environments, near zero time deployments and rapid fallback options. We also need to address our internal processes to support this approach through adoption of lean methodologies and a core principle of automate everything.

How important is information security for a Systemically Important Financial Market Utility like OCC?

Security is not something we do in addition to our business of clearing; it is core to how we accomplish everything in our business. Our core business is founded on OCC being the trusted participant who insures the integrity of the market and any compromise to our systems would devastating to our reputation and to our ability to serve our customers.

Does OCC have "the cloud" in its future technology plans?

"The cloud" is in our present! We are working with several vendors in this regard. By now you know that infrastructure as a service is also in our future, but don't confuse this with the idea that we will be shutting down the data centers anytime soon. I expect we will live in a multi-cloud hybrid infrastructure state for some time if for no other reason but to mitigate risk and ensure we can always protect the integrity of our market.

OCC Celebrates 25 Years of OIC Educating Options Investors

OCC and OIC staff, along with members of the OIC Roundtable, celebrated OIC's 25th anniversary with a bell-ringing ceremony at Nasdaq.

Celebrating its 25th anniversary as the leading provider of unbiased educational content for exchange-listed options, The Options Industry Council (OIC) continues on its mission to educate individual investors, financial advisors and institutions about the benefits and risks of using exchange-listed options to manage financial risk. Mary Savoie, Executive Director of OIC, shares her insight from over 30 years in the exchange-listed options industry.

OIC is celebrating its 25th anniversary. As someone who has been a stalwart in the industry, what does this mean to you?

I am very pleased to be part of a broad industry coalition that is celebrating The Options Industry Council's 25th anniversary. I have spent my entire career in the exchange-listed options industry with OCC, including the last 20 years with the OIC where I currently serve as the Executive Director. This is the role that I am most passionate about because we focus on providing investors with unbiased education that helps them to better understand the benefits and risks of using options as risk management solutions.

To celebrate this milestone, OIC was invited to ring the Nasdaq Closing Bell on September 26. I spoke with Jill Malandrino, Global Markets Reporter at Nasdaq, about OIC's role and how we continue our mission today.

Why was OIC formed?

In 1992, the exchange-listed options industry was at a crossroads, because exchange-listed options had been lumped in with other financial derivatives products that were held responsible for the crash of 1987. This occurred despite the fact that the exchange-listed options market performed very well throughout that market turbulence. However, five years later, trading activity in the exchange-listed options market had yet to recover. This led industry leaders to recognize that the key to renewed investor interest and potential market growth was a stronger focus on education.

How has the options industry evolved since OIC was formed in 1992?

At that time there were five equity options exchanges, and each exchange ran its own marketing and education programs. But with low volumes and revenue, none of the exchanges could afford to run these programs on their own, precisely when they needed them the most. The idea to pool financial resources and create an industry-wide marketing and education program to promote the responsible use of exchange-listed options was suggested. The exchange heads turned to OCC, the world's largest equity derivatives clearing organization, as the natural leader for this initiative because of OCC's trustworthiness and independence, and the rest is history. Today, OCC serves approximately 107 clearing members and 15 options exchanges. In 2016, OCC cleared over four billion contracts, compared to 200 million cleared contracts back in 1992 when OIC was formed.

What does OIC offer for beginning, intermediate and seasoned investors as well as financial advisors?

At OIC, we have a little something for everyone, no matter where investors are on their knowledge spectrum. One of the ways to get started is to perform a self-assessment which assesses an investor's knowledge level and suggests a starting point. Investors can take a basic class online or listen to a webinar or a podcast. More advanced investors can also check out OIC's research area, which includes academic studies on the performance of various trading strategies. While OIC originally was focused on the needs of individual investors, we now have offerings for financial advisors as well as institutional investors.

We are working to help financial advisors understand how options can be a differentiator for their practice. We feel an educated advisor who understands how options work can use these risk management tools to benefit the portfolios that they manage. For those advisors who have not implemented a structured options overlay program, we can help them get started. We also plan to increase our institutional outreach in 2018 with the addition of new content for the website, including new market research.

The purpose of this research is to explore how institutional investors utilize exchange-listed equity options to achieve investment goals. Specifically, the segments of interest are public and corporate pensions that currently use options. The goal of this research is to provide institutional fund managers evidence that exchange-listed equity options are a viable tool to help achieve investment objectives and to provide a picture of what it takes to implement these strategies. Many public and corporate pension retirement systems worldwide are confronted with lower investment returns on current assets that presently underfund financial obligations of those plans. As a result, some pensions have progressively adopted exposures to increasingly riskier asset classes hoping that the hypothetically higher returns of such assets will help stem such funding shortfalls. Contrastingly, OIC maintains that exchange-listed equity options can provide a worthwhile alternative with sustainably lower risk, presenting a significantly unique value proposition for institutional investors.

What is OIC doing to continue growing its educational offerings?

OIC knows there is growing interest in digitally-delivered education. Earlier this year we launched a video series to help investors better understand some of the more popular option strategies. We have also added the Options Strategy Builders tool, developed by CBOE Vest, to the OIC website where users can simulate the popular covered call and collar strategies. We plan to continue our work with evening seminars and investor conferences with live presentations that we are working to simulcast in order to expand our reach even further. Most importantly, all of our educational offerings are available for free on our website.

Additionally, OIC has grown into a new role over the years in terms of industry advocacy. We help educate regulatory and legislative staff in Washington, D.C. on the importance of the exchange- listed options market for investors and the economy. We also are increasingly called upon as a respected source for financial media because of our industry knowledge and independence.

The OIC is an industry resource funded by OCC and the U.S. options exchanges. To access OIC's comprehensive website, go to

OCC and EquiLend Clearing Services Bringing Greater Access to Central Clearing in Securities Financing

Matt Wolf Matt Wolfe, Vice President of Product Development at OCC, and Dan Dougherty, Chief Operating Officer of EquiLend Clearing Services, discuss their companies' partnership and recent developments in the securities financing marketplace.

In May, OCC and ECS partnered to bring greater access to central clearing in securities financing. What does this mean for you and the marketplace?

Matt Wolfe: The partnership has the potential to bring many opportunities to market participants. OCC has a robust stock loan clearing program for broker-dealers called the Hedge program, with approximately $75 billion in equities on loan. Hedge participants enjoy the benefits of substituting their counterparty's credit rating for OCC's AA+ credit rating with S&P, and taking advantage of the favorable accounting treatment afforded to cleared stock loans.

The Hedge program has been live for almost 25 years and is experiencing strong growth, but there are some shortcomings that we intend to address through the partnership with EquiLend Clearing Services (ECS). New loans and returns for Hedge are submitted directly to DTC for settlement, and OCC is notified after settlement occurs.

This workflow frequently leads to participants' books and records becoming out of balance with OCC's version. Additionally, since the clearinghouse's books are based on settlement activity, OCC's guarantee is limited to the loaned stock and cash collateral. Loan terms such as the rebate rate, term, and dividends are direct obligations between the lender and borrower. OCC has a second stock loan program called Market Loan, which is facilitated through ECS's middle-office system.

OCC is working with ECS to enhance this system and provide additional connectivity into this program to allow Hedge participants to migrate towards the Market Loan program, where all transactions are automatically settled against OCC's DTC account, which dramatically reduces reconciliation breaks. This allows OCC to have a complete record of the loan terms and provide a broader guarantee that includes accrued rebate fees and cash dividend payments.

These enhancements will benefit OCC and the marketplace by providing a more operationally efficient and effective infrastructure with reduced risk for all. We're excited about the collaboration with ECS and look forward to the improvements it will bring to those who participate in this growing market.

Dan Dougherty: As evidenced by the continued growth in the OCC Hedge program there is a growing demand for industry participants to have access to centrally cleared venues. The partnership creates the ability for OCC to deliver a more robust, expandable solution to market participants. The Market Loan program and supporting ECS infrastructure have been in production since 2009 and continue to be run by ECS staff through a clearing agreement with OCC. By leveraging the ECS infrastructure, OCC has the ability to expand both controls and guarantees, while maintaining the advantages of its AA+ credit rating and favorable accounting treatment.

This partnership brings together two industry leaders to form a best-in-class central clearing solution for the securities financing market. ECS provides technical solutions for execution, messaging, settlement, position management and the management of all lifecycle events. Leveraging ECS technology allows OCC to bring the enhanced Market Loan program to market in the most timely, efficient and effective way possible.

There appears to be an evolving ecosystem for securities lending transactions. Can you explain why?

Wolfe: The ecosystem in which securities lending transactions take place continues to evolve for several reasons. Regulatory change has sought to reduce risk in the financial system by increasing capital requirements, improving risk management systems and processes, and by encouraging activity to be cleared. This has resulted in demand for central counterparties (CCPs) such as OCC to expand the solutions they provide to the market. As a result, our program has evolved over time from providing margin efficiencies to delivering capital and credit efficiencies, which makes OCC a compelling value proposition for market participants. We are working with an industry coalition to refine the clearing model to allow for expanded participation in our clearing solution.

The migration from non-cleared bilateral transactions to clearing will improve the resilience and profitability of market participants. This is consistent with OCC's mission of promoting stability and market integrity through efficient and effective risk management, clearing, and settlement services.

Dougherty: Driven by regulatory change and the increased desire for automation and controls, the ecosystem for securities lending continues to evolve. Market participants continue to look for improved infrastructure and the ability to optimize their book of business. As a result, demand for central clearing of securities finance transactions is steadily increasing. The ability to net securities lending positions against other transactions, lower risk-weighted assets (RWA) and achieve preferential accounting treatment are some of the reasons driving CCP use. These factors have led to a requirement for ways to execute and manage this activity in an efficient manner.

ECS has the ability to execute and manage centrally cleared securities lending trades in a non-disclosed or fully disclosed manner by leveraging flexible technology, including EquiLend's NGT and Post-Trade Suite. In addition, ECS has developed a standardized format for the facilitation of centrally cleared activity: the ECS Gateway. The ECS Gateway is open to all participants in the CCP and standardizes all communication to CCPs for trades and the corresponding lifecycle events.

OCC's monthly data reports show that securities lending volume are growing significantly. How do you explain this success?

Wolfe: Stock loan is an essential and substantial component of the global financial market, with the largest part of this market conducted through uncleared, 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 1 January through 31 October 2017, OCC processed just over 1.9 million new stock loan transactions, a 21 percent increase over the same period in 2016. The average daily loan value cleared by OCC in October was over $144 trillion.

Our goal is to provide greater capital efficiencies for our clearing members. OCC is implementing a number of enhancements to our stock loan program in order to reduce systemic risk, enhance transparency and, allow more efficient use of capital. Many clearing members appreciate these benefits and are encouraging their counterparties to engage through OCC, where borrowing is cheaper and larger balances can be maintained.

ECS is a relatively new division of EquiLend. Why get into the clearing space now?

Dougherty: EquiLend has always said it would be prepared to facilitate CCP flow as soon as the market is ready for it, and we will direct flow to any venue that our clients want us to, as well as any CCP. We have seen the demand for CCPs increase dramatically, with the growth of the OCC program in the US and other program globally as clear indications of that.

CCPs are an important part of our clients' trading strategies, so our objective is to offer our clients a best-in-class service to facilitate their business in the most efficient manner. By leveraging our experience and our established securities finance technology, our clients have the ability to manage all their securities lending activity for trade execution and the management of all lifecycle events.

OCC Leaders Continue to Advocate for the Listed-Options Industry

OCC's Scot Warren (far right) participated in the FIA Expo Clearinghouse Leaders panel on October 19th.

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 in support of the exchange-listed options industry.

Mark Morrison, OCC Senior Vice President and Chief Information Security, provided his thoughts on the changing cyber and information security landscape at the October 27th GARP Buy-Side Risk Managers Forum in New York. Scot Warren, OCC Chief Administrative Officer, spoke on the Clearinghouse Leaders Panel at the FIA Expo in Chicago on October 19th. On October 25th. John Fennell, OCC Executive Vice President and Chief Risk Officer, talked about the impact of the leverage ratio on the listed options industry at the Chicago Federal Reserve Bank Fourth Annual Conference on CCP Risk Management on October 17th. Tracy Raben, OCC Chief Human Resources Officer, addressed the 2017 SHRM Diversity and Inclusion Conference and Exposition in San Francisco on the topic of advancing diversity of thought as a competitive advantage. Joe Adamczyk, OCC Chief Compliance Officer, was on a panel at the Duff & Phelps General Counsel Symposium in Chicago on November 3rd. Frank Tirado, OIC Vice President of Education, participated on a panel about the liquidity landscape for ETF options at the Bloomberg Invest ETFs Summit on October 5th in London.

Craig Donohue, OCC Executive Chairman and CEO, attended The Wall Street Journal CEO Council on November 13th. John Davidson, OCC President & COO, will be speaking at the SIFMA Listed Options Symposium in New York on November 30th. Dave Hoag, OCC Senior Vice President and CIO, will participating in a panel discussion on December 13th at the SIFMA Operations and Technology Society meeting in New York.

To stay up-to-date on OCC Thought Leadership, visit OCC Views.

OCC Supports Charitable Organizations for Families and Communities at Risk

For the third consecutive year, OCC, as part of its charitable strategy to support organizations that help people and communities at risk, was one of several industry sponsors at ALTSO's annual Rocktoberfest in Chicago on October 5th. ALTSO (A Leg To Stand On) is a 501c3 non-profit organization that provides free prosthetic limbs, corrective surgery and rehabilitative care to children in the developing world who are suffering from traumatic or congenital limb disabilities. This year's Rocktoberfest-Chicago brought together professionals from the trading and related financial services industries, including several OCC partner exchanges and clearing firms, for a night of rock and roll and acoustic music performed by friends and colleagues from our industry.

OCC also was proud to once again be a sponsor of this year's Great Chicago Steak Out on October 19th. The Great Chicago Steak Out is an annual fundraiser that takes place as part of the Futures Industry Association's Futures & Options Expo in Chicago. As part of the FIA Cares program, the Great Chicago Steak Out gives companies and individuals in the financial derivatives industry the opportunity to provide financial support to The Greater Chicago Food Depository to help feed those in need.

Since 2008, the FIA Cares program has raised nearly $3 million for the Greater Chicago Food Depository. OCC is proud to support the good works of ALTSO, FIA Cares program and the Greater Chicago Food Depository in partnership with the Chicago financial services community. For more information on the charitable events mentioned above visit and

Boy Scouts of Chicago

For the last 20 years, OCC has proudly supported the LaSalle Street Tech Awards, which has directly shaped the lives of over 400 inner-city Boy Scouts in Chicago with important lessons focused in the areas of science, technology, engineering and math (STEM) as well as learning about Chicago's finance industry. The long-term goal of this program is that the industry will find their next generation of employees of character and Scouts will discover their calling in one of these fields. Due to the support of OCC and other financial services companies, the program has been so successful that it has grown beyond Chicago to New York and into new vertical markets including the medical industry. The LaSalle Street Trading Tech Awards event took place on November 9, honoring seven new Trading Tech partners and six Scouts with the Harlan Award for earning five merit badges or more through Trading Tech 300.

Update from Capitol Hill


House of Representatives Passes the "TAX Cuts and JOBS Act" for comprehensive Tax Reform: Mark-to-Market Proposal Not Included

On November 16, the House of Representatives passed H.R. 1, the Tax Cuts and Jobs Act by a vote of 227-205. The Tax Cuts and Jobs Act – the Committee's legislation to overhaul America's tax code, is intended to lower individual tax rates for Americans and would lower the corporate tax rate from 35% to 20%. OCC was pleased that in its review of the legislation, it is confirmed there is no mark-to-market provision for derivatives included in the bill.

OCC has been engaged with Members of Congress and their staff since 2013 to educate them about the harmful consequences of previous financial products tax proposals. OCC also has worked to advocate for a different approach in this tax reform package. We are pleased the House Ways and Means Committee chose to exclude any mark-to-market proposals from its final legislative package.

The House bill is the first important step in the overall tax reform process. The Senate Finance Committee continues to debate its version of the Tax Cuts and Jobs Act. While the current draft of the Senate bill does not contain a mark-to-market provision, there is a possibility that a mark-to market proposal could still be added to the Senate bill in Committee or on the Senate floor. It is anticipated that the Senate bill will receive a final vote at the end of November or early December.

Jerome Powell Nominated to Chair Board of Governors of the Federal Reserve

On November 2nd, President Donald Trump announced that he had nominated Federal Reserve Governor Jerome Powell to chair the Federal Reserve Board of Governors for the next four years. Governor Powell, who was nominated by President Obama to serve on the Federal Reserve Board in 2012, has worked with current Chair Janet Yellen, and her predecessor, Ben Bernanke, on the central bank's monetary and regulatory policy.

Mr. Powell, a lawyer by training, was a partner at the private equity firm of the Carlyle Group and served as a Treasury official during the administration of President George H.W. Bush. Mr. Powell also worked at the former investment bank Dillon, Read & Co. and spent time at the law firm of Davis Polk & Wardwell.

Governor Powell is expected to easily clear the Senate's 51-vote threshold for confirmation with anticipated bipartisan support.

Senate Banking Committee Approves Republican and Democratic Nominees for the Securities and Exchange Commission

On November 1st, the Senate Banking Committee approved the Security and Exchange Commission (SEC) nominations of Ms. Hester Peirce and Mr. Robert Jackson. The Committee approved the nominations by voice vote and recommended the nominations to the full Senate for consideration.

Mr. Jackson is a professor at the Columbia University Law School, and was nominated for a Democratic seat on the SEC in September. Ms. Peirce, a senior research fellow at the Mercatus Center at George Mason University, was re-nominated for a Republican seat on the SEC in July. The Senate Banking Committee previously approved her nomination for the position in 2016 when she was nominated by former President Obama, but she never received a Senate floor vote.

It is not clear when the full Senate will consider the Peirce and Jackson nominations, but is expected sometime in the next several weeks.

Editorial Team