OCC News

OCTOBER/NOVEMBER 2016

IN THIS ISSUE

OCC IN THE NEWS

Regulatory Pressure May be Weighing on Risk-Taking in the Markets

OCC Executive Chairman and CEO, Craig Donohue, talks to The Street about increased regulation following the financial crisis, how he wants to take the OCC from being a "market utility" to a "market influencer" and how the biggest challenge facing U.S. financial markets is promoting stability and market integrity to ensure confidence.

» Watch the interview on TheStreet.com

Mark on the Market
Craig Donohue, OCC Executive Chairman and CEO, talks to Securities Lending Times on how OCC is evolving from an important market utility to a leading market influencer.

» Read more here

OCC & EACH give feedback to FSB on CCP resolution planning

OCC provides comments on its concern that in providing guidance regarding resolution, the Financial Stability Board (FSB) and other policymakers should not prevent a CCP like OCC from fully implementing its recovery plan and should avoid suggesting steps or processes that undermine the CCP recovery process.

» Read more from FTSE Global Markets

How to Use Options to Take Advantage of Volatility

OIC’s Frank Tirado explains how investors and traders can use options as a defensive tool against big moves in the market, such as the upcoming US election.

» Read more from TheStreet.com

OCC BLOG

Read the latest thought leadership from OCC's Blog!

» Making the Case for Smarter Regulation of Centrally Cleared Markets

» Why A Resilient Risk Management and Internal Control Infrastructure Matters

» Financial Advisors Are a Crucial Part of the Investing Community

» The importance of business continuity in times of operational risk

» Blockchain could create efficiencies for markets

OCC ON SOCIAL MEDIA

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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

David Prosperi
Executive Editor

First Vice President
Communications, OIC,
Internet Services
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 Company Updates

As a Systemically Important Financial Market Utility, OCC promotes enhanced resiliency in everything we do to ensure confidence in the financial markets and the broader economy.

On September 21st, Standard & Poor’s (S&P) reaffirmed OCC’s AA+/Stable rating, saying “OCC has a credible plan to build the capital and liquidity resources to absorb the current default of its two largest members,” and that they expect OCC to implement the new financial safeguards in the course of 2017. Their decision is a positive recognition of our efforts, which had been underway prior to their May announcement, to strengthen OCC's financial safeguards framework in order to better conform to international standards. The S&P decision also reflects favorably on the outstanding work by OCC's management and employees to strengthen the resiliency, risk management, and capitalization of our company.

Additionally, on September 28th, the U.S. Securities and Exchange Commission (SEC) approved the clearing agency rules, ensuring that clearinghouses will maintain a capital buffer to allow them to meet their obligations in the case of a failure.

As the world’s largest equity derivatives clearing organization, OCC supports the SEC’s decision as this was an important priority for our organization and the U.S. listed options industry. It also is a critical step towards equivalency for central counterparties (CCPs) such as OCC who are subject to SEC regulation to be eligible for recognition by the European Securities and Market Authority (ESMA) and for attaining qualified central counterparty (QCCP) status for purposes of European capital regulation.

Recognition of U.S. central counterparties subject to the SEC’s jurisdiction is important for OCC and market participants because it would allow European Union (EU) banks and their affiliates’ exposure to those CCPs to be subject to a lower risk weight in calculating their regulatory capital. If OCC is not recognized before new capital regulation requirements in the EU kick in, based on data from June 2016, OCC’s EU-bank affiliate clearing members’ risk weighting for exposures to OCC as a result of their clearing fund contributions increases to over $38 billion from $1.9 billion, requiring them to maintain additional capital of approximately $2.9 billion.

As the industry continues to face strong economic and regulatory headwinds, OCC’s mission as the foundation for secure markets remains the same. We will continue to sustain our resiliency, foster innovation, and lead advocacy and educational efforts with global policymakers to ensure that OCC continues to drive industry growth and contributes to the reduction of systemic risk in the financial system.

Sincerely,

Craig

Craig S. Donohue

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The Importance of Proactively Managing Business Continuity for OCC and the Listed-Options Industry

John Fennell, OCC Executive Vice President and Chief Risk Officer, discusses the importance of business continuity for Systematically Important Financial Market Utilities (SIFMUs) like OCC.

How does OCC proactively manage its business continuity plan?

OCC conducts coordinated testing of its business continuity and disaster recovery plans with our partner exchanges and the clearing member firms that make up the top 80 percent of options trading volume. That being said, we expect that all of our clearing members, exchanges and Tier 1 service providers are maintaining their own business continuity plans.

How does OCC structure its business continuity plan?

OCC has built its business continuity plan on several key characteristics, including geographical separation between processing sites, a two-hour recovery goal for critical infrastructure, and working with third-party service providers, exchanges and critical clearing members to foster sector preparedness.

Why is a cohesive business continuity plan important for SIFMUs and the industry in general?

OCC provides clearing services to 14 U.S. options exchanges, four futures exchanges, one stock loan alternative trading system and approximately 115 clearing firms. As we saw with the 2003 blackout, where a lot of financial services companies had their primary sites in Manhattan and their backup sites in New Jersey, it’s important for the industry to be more dispersed geographically. It’s also important to have the ability to function remotely. For example, in 2011 a big ice storm hit Dallas and at the same time Chicago experienced a snow blizzard that had people abandoning their cars on Lake Shore Drive. Fortunately for OCC, 85% of our team was operating remotely in both locations and we were able to provide uninterrupted service for market participants.

How does OCC demonstrate its focus on business continuity?

Every year, OCC develops a business continuity and disaster recovery test plan focusing on high-risk areas. We base it on the risk and control self-assessment results, critical areas of system processing, significant changes to the infrastructure, and industry exercises for OCC participation. We also conduct internal business continuity testing and we participate in industry-wide business continuity tests.

Along with disaster recovery tests and participation in industry-wide testing, we are adding additional employees to our risk function over the next two years to ensure that OCC has the resources necessary to develop policies, procedures, internal controls and testing and validation capabilities. Part of this increased headcount is attributable to our decision to adopt the three lines of defense model. This includes operational managers that own and manage risk, enterprise risk management and compliance functions to build and monitor the first line of defense controls, and internal auditors who provide the board of directors and management with independent assurance.

To learn more about OCC's thought leadership on industry issues such as the importance of managing business continuity, visit OCC's Blog.

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Blockchain Could Create Efficiencies for Markets

Blockchain Twitter Blog

OCC Executive Chairman and CEO Craig Donohue shares his thoughts on the future of technology, particularly blockchain, and developments in the world of fintech.

In its role as the foundation for secure markets, OCC is constantly looking at related activity in the post-trade world, and we are paying close attention to what other people are doing in the world of fintech.

We also are doing our own work internally to adopt 'use cases' where we can try to see into discrete parts of our business where distributed ledger principles could be beneficial to how we and our clearing member firms interface as one of the leading systemically important clearing houses operating in today's dynamic financial markets. Any kind of large-scale chain appears to be some number of years away, but it holds a certain amount of potential value, and efficiencies will certainly be created.

Anything that has the potential to create efficiencies for market participants must be examined. We see two main forms of value creation: 1) creating new ecosystems where cost previously has been prohibitive; and 2) creating new efficiencies in current ecosystems.

Through blockchain you can have an instantaneous confirmation and finality to a financial transaction as well as the funding and settlement of such a transaction. In futures and options markets we have daily or even twice daily settlements of financial derivative transactions. In cash equities markets however, we still have T+3, which means that securities transactions are settled three business days following execution of orders. In non-cleared markets, settlement may take even longer. Blockchain principles, if successfully applied, could create instantaneous settlement and funding of obligations with immutable records.

Today, financial markets are becoming increasingly complex, and they are wired together through many different systems. Blockchain has the potential to obviate that complexity and create an almost perfect and irrefutable record of every transaction that has occurred. And apart from efficiency gains, blockchain also has the potential to enhance regulators' understanding of complex market dynamics.

A good example would be the Flash Crash in 2010, where the futures markets had an almost instantaneous and perfectly demonstrable audit trail. However, the same could not be said for the cash equities market. Afterwards, the U.S. Securities and Exchange Commission (SEC) has invested significant resources to try and build an audit trail that would enable them to better understand what happens when such market disruptions occur. That is very expensive and very difficult to do, given our current financial infrastructure ecosystem. Over time, blockchain offers the potential to solve such problems for regulators.

One of the challenges facing this technology will be in striking a balance between innovation, security, and the current regulatory framework. Our regulatory system has been built around the existing business system and how it operates. So as blockchain or distributed ledger applications are implemented, our system of regulation will have to adapt. I am encouraged that we have forward-looking regulators at both the SEC and the U.S. Commodity Futures Trading Commission (CFTC) that already recognize the need to facilitate innovation in blockchain applications in our industry. If blockchain technology can ultimately change the way markets work, we will need a strong partnership between regulators and private sector stakeholders.

It is hard to predict how disruptive blockchain will be, but I believe it will become much more significant in financial markets and ultimately in the clearing and settlement arena. It is clear that those firms that have a relentless focus on operational efficiency will be best positioned to win with this technology. For OCC, our job is to be innovative and embrace change, so we will be looking for ways to be part of the blockchain movement, as we want to be a leader in that change.

For more information on OCC's thought leadership, visit OCC's Blog.

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The Options Industry Council Hosts LEAPS Options Webinars for Investors

The Options Industry Council’s (OIC) mission is to increase awareness, knowledge and responsible use of equity options products among a global audience of investors—including individuals, financial advisors and institutional managers— by providing unbiased education content across a variety of platforms.

In October, OIC hosted two webinars for investors to learn more about Long-term Equity AnticiPation Securities (LEAPS®) options and how they can be used on some stocks, indexes and ETFs as a longer-term risk management strategy. LEAPS are calls and puts with an expiration of over nine months when listed. LEAPS were created by The Chicago Board Options Exchange in 1990 and now trade on all of the U.S. options exchanges.

Over 500 attendees participated in the webinars in October. The first webinar, “Using LEAPS Options for a Long-Term Outlook” was held on October 18th. The second webinar “LEAPS: How Can I Use Them?”, featured a panel discussion with industry experts and was held on October 25th. OIC’s Joe Burgoyne discussed how some LEAPS can be used for many of the more actively traded options, as well as the risk and rewards of using this risk management tool.

OIC continues to educate investors by hosting a variety of webinars and live seminars. On Tuesday, November 15th, OIC hosted a webinar “The Importance of Put/Call Parity." To better understand options, investors need to know the principle of put/call parity. In this webinar, OIC explains the three-sided relationship between a call, a put and the underlying security that defines put/call parity. On November 22nd, OIC will host a follow-up panel discussion to further explore put/call parity, and how investors can use this principle to their advantage.

In addition to these webinars, OIC will be hosting an online summit “The Election is Over, What Now?” on December 6th. Attendees will learn how the election results could affect their portfolio and investments through discussions with and presentations from a knowledgeable group of thought leaders including Professor Lynn Vavreck from UCLA and Russell Rhoads, Director of Education at CBOE. They will discuss what the election result means to investors and how options could be used effectively to manage risk under different post-election scenarios.

More information and registration for the December Summit can be found here.

Follow OIC on social media:
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OCC Sponsorships and Industry Events

As part of its charitable strategy to support organizations that help people at risk, OCC was one of several industry sponsors at A Leg To Stand On’s (ALTSO) Rocktoberfest in Chicago on October 6th. ALTSO is a 501(c)(3) non-profit organization that provides free prosthetic limbs, corrective surgery and rehabilitative care to children suffering from traumatic or congenital limb disabilities in the developing world. The event featured rock and roll bands and acoustic music performed by friends and colleagues from the financial services industry.



OCC also was proud to be a sponsor of this year’s Great Chicago Steak Out on October 20th. The Great Chicago Steak Out is an annual fundraiser that takes place at the end of the FIA’s Futures & Options Expo as part of the FIA Cares program, and gives companies and individuals in the futures, options and cleared swaps industry the opportunity to provide financial support 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 the FIA Cares program and the Greater Chicago Food Depository in partnership with the Chicago financial services community.



Additionally, OCC was a sponsor and host to the 5th Annual Women in Listed Derivatives (WILD) Symposium on November 1st. WILD promotes networking and relationship-building among women in the listed and over-the-counter derivatives markets through mentoring programs, as well as social and educational events. OCC Executive Chairman and CEO Craig Donohue kicked off the event with opening remarks followed by a conversation with syndicated financial columnist and author Terry Savage. The second panel, moderated by Crain’s Chicago Business reporter Lynne Marek, discussed diversity on boards and in executive positions. On the panel was Maureen Downs, President of Rosenthal Group, LLC and Vice-Chair of the National Futures Association (NFA); Dorri McWhorter, CEO of YWCA Chicago; Bridget Gainer, Cook County Commissioner; and Cynthia Zeltwanger, Executive Director of Paulson Institute.

You can read Craig Donohue’s blog on gender and pay equality here.


OCC CEO Craig Donohue talks with syndicated financial columnist Terry Savage at the 5th Annual WILD Symposium on November 1st.

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From Capitol Hill

You may recall that OCC applied to be recognized as a Qualifying Central Counterparty (QCCP) in Europe to avoid punitive, uneconomical capital charges that would be imposed on OCC’s clearing members affiliated with European banks. On September 28th, the U.S. Securities and Exchange Commission (SEC) voted in favor of adopting its covered clearing agency (CCA) rules for systemically important clearinghouses like OCC. Adoption of the CCA rules is an important step toward an equivalency agreement between the SEC and the European Commission. These rules will permit OCC to be eligible for recognition by the European Securities and Markets Authority (ESMA) as a qualifying central counterparty (QCCP) for purposes of European capital regulation. OCC issued a press release commending the SEC decision, which you can find here.

Also on September 28th, the Senate Agriculture Committee unanimously approved two nominees to fill the two current Commissioner vacancies at the Commodity Futures Trading Commission (CFTC). The CFTC has been operating with only three Commissioners since August 2015. Chris Brummer, the Democratic nominee and a Georgetown University Professor, and Brian Quintenz, the Republican nominee and an aide to former Representative Deborah Pryce (R-OH), were nominated to serve as CFTC Commissioners in March 2016. Their approval by the Committee came less than two weeks after a confirmation hearing was held on both nominees in which no members of the Committee expressed any objections to their nominations. Both nominees still need full Senate confirmation to serve.

As we previously reported, House Financial Services Committee (HFSC) Chairman Jeb Hensarling (R-TX) has been working to reform the Dodd-Frank Act to reduce regulatory burdens on the financial services industry. On September 13th, the HFSC passed H.R. 5983, the Financial CHOICE Act of 2016, out of the Committee, without amendment, by a vote of 30-26, with all Democratic members opposing the legislation and 29 of 30 Republican members supporting the Chairman’s measure. Representative Bruce Poliquin (R-ME) was the sole Republican to oppose the Chairman’s bill. This legislation would repeal Titles I, II and VIII of the Dodd-Frank and make other substantial changes to the current statute, which was originally enacted into law in 2010.

OCC submitted a comment letter to Chairman Hensarling regarding a previously distributed discussion draft of his legislation. A link to OCC’s comment letter can be found here. The committee did not make changes to address OCC’s comments prior to voting on the bill.

We understand that the plan is to consider H.R. 5983 on the House Floor in November. At this time, due to other provisions included in the bill, we are not confident H.R. 5983 will have sufficient support from Republicans to pass the House of Representatives. We also understand there continues to be little appetite in the Senate by Republicans or Democrats to consider such a measure. We will continue to keep you updated on this legislation.

Finally, Julie Bauer has joined OCC as Senior Vice President, Government Relations. Julie brings more than 25 years of experience to this role, having served most recently as Senior Vice President of Government Relations and Chief of Staff Corporate Communications at FINRA. Prior to FINRA, Julie worked in the Government Relations Department at the Chicago Board of Trade. In addition to leading OCC’s efforts in Washington, D.C., Julie will be OCC’s point of contact with the U.S. Securities Markets Coalition. She takes over for Joe Corcoran, who contributed significantly to our achievements in Washington on behalf of OCC and the Coalition. Joe is transitioning to the OCC Legal Department where he will continue to focus on legislative, tax policy and regulatory issues.

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