April 2014 Newsletter

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In This Issue

Industry Insight: Michael Cahill

Michael CahillMichael Cahill, OCC President and Chief Executive Officer, shares insight on how the organization is adapting to its role as a Systemically Important Financial Market Utility with enhanced regulatory oversight. Read on to learn how OCC is responding to other changes in the business environment—namely the SEC’s clearing agency proposal.

Since being named a Systemically Important Financial Market Utility in 2012, OCC has been subject to new rules and heightened regulatory scrutiny. What has this meant for OCC?

At OCC, we are all unequivocally committed to achieving the highest standards in everything that we do. The process that we are going through with our regulators is extremely positive for OCC. The heightened expectations of being designated a SIFMU sharpen our focus on well-designed and effectively executed risk management and operational processes that benefit all OCC participants.

While we have had a strong track record of accomplishment for more than 40 years, we value the opportunity to continuously improve our capabilities and to ensure that we remain at the forefront of risk management in central counterparty clearing solutions.

Actions speak louder than words, and our actions evidence a strong commitment to meeting the heightened expectations of our regulators and the marketplace. The management and staff of OCC, with the strong support of our Board of Directors, have worked hard to undertake significant structural changes in our governance, management and operations to meet our regulatory objectives.

Specifically, we have separated the chairman and CEO roles, expanded our Board to increase the number of independent directors, and given top priority to meeting the more stringent regulatory standards that apply to us as a SIFMU. We also have significantly increased our budget and are moving forward with a workforce plan to ensure that we have the people and the resources to achieve these goals. We believe that these actions clearly reflect the commitment of our entire organization.

We are investing in our future, and we will continue working with regulators to ensure OCC remains the foundation for secure markets.

Most recently, on March 12, the SEC issued a lengthy rule proposal that would impose new standards on certain SEC-registered clearing agencies that are designated as “covered clearing agencies,” which include OCC. What is OCC’s response to this new proposal?

The rule proposal on covered clearing agencies is more than 400 pages and we are still assessing the impacts to OCC. However, it does appear similar to other rules and proposals seeking to prescribe risk-management standards to govern “financial market utility” operations related to payment, clearing and settlement activities. These standards generally are based on the Principles for Financial Market Infrastructures (PFMI) that were developed jointly by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (CPSS/IOSCO).

This rule proposal is the SEC version of PFMI and OCC will ultimately be subject to that version. As a SIFMU, we recognize our critical role in promoting financial stability and integrity in every market we serve. That’s why OCC always strives to achieve the highest standards possible in everything we do, including the risk-management solutions we provide to market participants. This is also why OCC has always treated the PFMI themselves as reflecting best practices by which we should be guided.

OCC has commented on related proposals, including, most recently, the Fed’s proposals regarding a Policy on Payment System Risk and on Financial Market Utilities. We will also comment on the SEC proposal when our review and analysis is complete.

Why did OCC recently change its fee schedule?

A common theme among the proposals, from the PFMI to the Fed and CFTC, has called for higher levels of surplus capital. Preparing for this likelihood, OCC’s Board of Directors unanimously approved the elimination of our discounted fee schedule and returned to its previously approved fee schedule, which took effect April 1, 2014.

This action will allow OCC to accumulate additional surplus necessary to meet heightened regulatory requirements, while keeping OCC’s fee schedule the lowest among major clearinghouses in the world.

OCC’s management and Board will closely monitor performance during the remainder of the year and the Board will determine prior to year-end whether to modify or suspend OCC’s refund policy. Throughout OCC’s 40 years of operation, we have routinely refunded fees paid in excess of operating expenses and surplus requirements. It is anticipated that any refund for 2014 would likely be significantly lower. The Board and OCC management will also continue to evaluate projected expenses and surplus requirements and determine, prior to year-end, a fee schedule for 2015.

It is worth noting, though, the previously approved 2013 refund will not be affected by these changes and will be paid prior to September 15, 2014.

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OCC Publishes Online, Interactive 2013 Annual Report

OCC recently posted its first ever html Annual Report on the company’s website. “Looking Back, Moving Forward: 40 Years of Innovation, Reliability and Growth” is the 2013 Annual Report’s title and opens with a thoughtful message from former CEO and Founder Wayne P. Luthringshausen, who retired at the end of 2013.

Click here to view an interactive timeline of events from the last 40 years, OCC’s 2013 year in review and more.

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From the Hill

We assume Ways and Means Chairman Dave Camp (R-Michigan) was aware that the new version of his draft comprehensive tax reform proposal, released in late February, would be a difficult undertaking. Tax reform is popular in theory, but gets a lot more difficult in practice when actual changes to the tax code are discussed, especially when the ultimate goal is to reduce individual and corporate rates to 25%. But Chairman Camp persevered, working hard with his staff to produce a 900-page comprehensive tax reform discussion draft.

While the Chairman’s goal when crafting his tax reform proposal may have been to simplify and flatten the tax code and make it easier for everyone, corporations and individuals alike, to pay their taxes, it is ironic that the proposal makes the tax treatment of exchange-traded options transactions significantly more complicated than their treatment under current tax law and would effectively deprive retail and other investors of common strategies they use to reduce risk and generate income.

"We plan to continue our campaign to educate Members of both parties about our concerns with the draft proposal."

In this respect, Chairman Camp’s most recent version of his draft uniform taxation of derivatives proposal, contained within his comprehensive tax reform discussion draft, did very little to address the Coalition’s concerns with his original version of the draft proposal. Accordingly, the Coalition sent a letter to him on April 2, 2014, that expressed in detail our continued concerns about the inclusion of listed options in the draft proposal.

While tax reform faces long odds in 2014, the Coalition remains concerned that Chairman Camp’s draft proposal could potentially be used as a “pay-for” down the road, with Members of both parties using the revenue generated under his draft proposal to pay for other legislative priorities. To address this, we plan to continue our campaign to educate Members of both parties about our concerns with the draft proposal.

Chairman Camp’s legacy may be as the person who got the ball rolling on comprehensive tax reform. Since his time as Ways and Means Chairman will come to an end at the expiration of the current Congress, he announced on March 30 that he will not seek another term in Congress. He can retire with the knowledge that he was able to begin the tax reform conversation, along with the understanding of how difficult it can be to create legislation that affects virtually every part of the American economy.

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Learn Options on the Go with OIC’s App

Earlier this year, The Options Industry Council (OIC) launched a mobile app for iOS devices with the goal of reaching as many people as possible with options education. The app takes information from OIC’s website and puts it in a more user-friendly format for people on the go.

"While we had our own goals for the app, we also wanted to make sure it met our customers' needs so we gathered information from them through an online survey asking what content and functionality they wanted if OIC created a mobile app," said Denise Knabjian, Vice President of Internet and Investor Services. "The overwhelming response was, ‘you need an app, specifically, an app for iOS (Apple).'”

The app has educational materials and resources including mobile courses; options strategies; and seminars and special events. Download it today for free.

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OCC Announces Board Appointments, Adopts Governance Enhancements

Appointments for OCC’s Board officers and committee chairs for 2014 include:

  • Felix Davidson, President, TD Ameritrade Clearing, Inc., was appointed Member Vice Chair and Chair of OCC’s Performance Committee
  • Craig S. Donohue was reappointed OCC Executive Chairman
  • Michael Cahill was reappointed OCC President and Chief Executive Officer
  • Richard Lindsey was reappointed as Chair of OCC’s Risk Committee
  • Patricia White was reappointed as Chair of OCC’s Audit Committee
  • Matthew Gelber was appointed as Chair of OCC’s Governance Committee

Additional changes to the governance structure also took effect. Such changes enhance OCC’s ability to ensure that OCC has the right composition of diversity, skills and expertise on its Board and Board committees. The Governance and Nominating Committees were combined into a single new standing committee of the Board. The new Governance and Nominating Committee will be chaired by a public director and be comprised of two additional public directors, as well as one member director and one exchange director. The number of public directors has been expanded from three to five, bringing the total number of directors to 21. These governance enhancements will be implemented upon receipt of regulatory approval.

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European Demand for U.S. Options Continues Strong, New Study Finds

The Options Industry Council (OIC) published results of the study, "Shifting Demand in a Changing Market Landscape," conducted by TABB Group and commissioned by OIC. The study found that European investors continue to be interested in using U.S. options while becoming more sophisticated, shown by an expansion in the use of directional and volatility strategies. There is also a greater use of sector ETFs and options on single stocks.

The findings indicate that European investors remain an important source of demand for U.S. listed options, with the magnitude of their U.S. equity holdings driving demand for premium and hedging strategies. One key finding shows private wealth managers have expanded their use of U.S. listed options, as electronic access and rising client assets under management are driving increased adoption. As U.S. demand grew in 2013, the overall proportion of flow from Europe declined marginally, but TABB's research clearly identified rising interest from a broad range of European investors.

Click here to access the full study.

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OCC Launches Clearing OTC S&P 500 Equity Index Options

OCC launched its over-the-counter (OTC) S&P 500® equity index option clearing services today, April 25, bringing capital and operational efficiencies and enhanced customer protections to the OTC equity derivatives marketplace. To learn more, click here.

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Clearing News & Resources


Volume Update
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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.