August 2014 Newsletter

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In This Issue

OCC Chairman Discusses Risk Appetite Framework

Craig DonohueOCC’s Board of Directors recently approved the adoption of OCC’s Risk Appetite Framework. Executive Chairman Craig S. Donohue shares insights on the framework’s design that ensures material risks impacting OCC are monitored, identified, analyzed and addressed in a timely and effective manner.

What is OCC’s Risk Appetite Framework?

Our Risk Appetite Framework, or RAF, is a tool that helps OCC achieve its risk management goals by communicating acceptable risk levels to employees and the Board. It allows OCC to articulate the level and types of risk that it is willing to assume to achieve the company’s strategic objectives. The RAF includes risk statements, risk metrics and an outline of the roles and responsibilities of those overseeing the implementation and monitoring of the risk at OCC.

How does this RAF help OCC in its critical role of promoting financial stability in the marketplace?

The RAF is designed to ensure that OCC monitors and takes action on situations in which limits set within the Board-approved risk appetite are breached. It is also expected of systemically important institutions like OCC because it is an excellent tool to help OCC identify acceptable limits in relation to taking and measuring risk. Having a clear understanding of the risk limits sets the tone for risk culture across the organization and helps ensure that business decisions are made within the limits set by the RAF.

What does the RAF look at, and what are the risk categories?

OCC’s Enterprise Risk Management team developed a risk universe to ensure that all material areas of risk are monitored by the RAF. There are six risk categories in this OCC risk universe: Financial, Operational, Technology, Legal/Regulatory, Strategic and Reputational. Each category has its own monitoring metrics and tolerances to ensure all of our business lines are within the limits of our risk appetite.

What is the reporting structure for identifying and reporting risks?

OCC monitors adherence to the RAF thresholds through the use of a detailed dashboard, follow-up analysis and other resources. Reports track performance relative to the metrics, highlight emerging risks within the overall market and business environment, and flag key issues detected. These metrics are used by the Enterprise Risk Management team, senior management, and the Board to monitor OCC’s risk exposure.

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OCC Proposes Limits on Equity Collateral Pledged as Margin

In an effort to align OCC’s collateral policy with guidance from the Principles for Financial Market Infrastructures, OCC is making changes to the amount of equity collateral it accepts, pending Securities and Exchange Commission approval. Equity securities represent a large portion of the collateral deposited by clearing members to cover margin requirements. In the event of a member default, OCC would liquidate this collateral to cover the obligations of the defaulting member.

To mitigate this liquidation risk, OCC chose to align the amount of any specific security it would accept as collateral to be consistent with the two-day horizon used in its System for Theoretical Analysis and Numerical Simulations (STANS) margin calculation. STANS charges margin to cover the potential loss from a position due to the likely price movements a security would see over a two-day period. Since this is all the margin OCC holds at any given time, it is imperative to be able to liquidate collateral in that same timeframe. Minimizing this risk ultimately benefits surviving members as they would have to make-up any liquidation shortfalls through their clearing fund contributions.

For more information contact the Member Services Help Desk at 800-621-6072 or

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Advisors’ Use of Options Up, New Study Says

The use of exchange-listed options by financial advisors is on the rise, according to the Financial Advisors’ Use of Options: A Benchmark Study, which was released in August 2014. The study found three out of five financial advisors have used options at least once in a client account over the past 12 months, a 13% increase since the inaugural study was conducted in 2011.

The survey was undertaken on behalf of The Options Industry Council and examined how, when and why advisors used options and compared the practices of advisors who use options with those who do not. The study also looked at how advisors implement options and the differences they find between clients with options in their portfolios and those who do not have options. 

Key Findings

  • Advisors are using options with more of their clients. In 2014 advisors were using options with 52% more of their clients than they had in 2010. In 2011 advisors reported using options with 37% more than they had in 2010.

  • Advisors expect their usage to accelerate. In 2014 advisors anticipated increasing their use of options by 45% in the next 12 months. In 2011 advisors expected to increase their usage by 33%.

  • Advisors are employing a broad range of investment approaches when it comes to implementing options strategies. They are almost as likely to outsource their options needs using a mutual fund, separate account or overlay strategy, as to do it themselves.

  • Advisors say clients who use options are among their most valuable relationships. Half of the advisors who used options said these clients provided more referrals, were more knowledgeable about investing and were more receptive to advice.

  • Advisors who use options have larger, more successful practices. In the 2014 survey 43% of users had books over $100 million compared with only 14% of non-users. Eighty-four percent of users earned over $100,000 versus only 50% of non-users.

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OneChicago, LLC Launches OCX.Weekly Futures

OneChicago, LLC launched OCX.Weekly futures on June 20, 2014. OCX.Weekly futures overlay the same underlyings as OneChicago’s OCX.NoDivRisk (‘1D’) futures. OCX.Weekly futures list each day of the week; each day there are expiring futures and a newly listed future that expires one week later. The expiring weekly futures physically settle next day at National Securities Clearing Corporation.

For more information contact the Member Services Help Desk at 800-621-6072 or

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OCC to Increase Number of Public Directors on Board

OCC received approval from the SEC to increase the number of Public Directors on its Board of Directors from three to five. OCC believes that Public Directors broaden the mix of viewpoints and business expertise that is represented on the Board.

Accordingly, OCC trusts that the input and expertise of two additional Public Directors will further benefit the company in the administration of its affairs in respect of the markets that it serves, and in the performance of its duties as a Systemically Important Financial Market Utility. The Governance and Nominating Committee is in the process of determining the desired skill sets to present to the Board for discussion and agreement. The Committee will then embark on its search, and as early as the end of 2014, candidates will be identified and brought to the Board for its approval.

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OCC Participates in FS-ISAC Cyber Threat Workshop

OCC’s Dan DeWaal and Chris Hankins (Security Services) recently participated as panelists at Financial Services Information Sharing and Analysis Center (FS-ISAC) Cyber Threat Intelligence workshops held in Chicago and Dallas. The panel sessions informed attendees of different challenges, types of work products and technological solutions that help companies build and mature their Cyber Threat Intelligence programs. OCC is an industry leader in business continuity planning and security through active participation in organizations such as FS-ISAC, which enhances the ability of the financial services sector to prepare for and respond to cyber and physical threats, vulnerabilities and incidents.

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OCC Seeks Modification to Proposed IRS Rules on Dividend Tax Withholding

OCC believes proposed new regulations regarding the imposition of withholding tax on dividend equivalents would be disruptive to the listed options markets and has asked for changes.

In a comment letter submitted on July 15, OCC urged the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) to more narrowly focus their target on dividend tax avoidance as the current “broad brush” approach would unnecessarily disrupt the markets and burden market participants.

In January of 2012, the IRS issued proposed regulations that would impose U.S. withholding tax on many options over U.S. equities when the option is held by a non-U.S. person and the strike price of the option is adjusted for a special dividend on the underlying stock. After receiving a number of comment letters criticizing those proposed regulations, including one from the U.S Securities Markets Coalition (Coalition), the IRS in December of last year withdrew the proposed regulations and issued a new set of proposed regulations. Under the new proposed regulations, all options with certain initial deltas would be subject to withholding tax if a dividend is paid on the underlying stock while the option is outstanding. Treasury believes that options at that level are economic substitutes for owning the stock and have a potential for tax avoidance because they give a foreign person the economic benefits of owning the stock while avoiding the withholding tax on dividends.

The Coalition filed extensive comments on the new proposed regulations in March of this year describing numerous problems raised by the proposed regulations. The OCC’s July letter, however, was much more focused on the technical aspects of the new proposed regulations.

Given the complexities of the new proposed regulations, particularly with respect to the administrative issues involved, OCC suggested the IRS and Treasury convene a roundtable of market participants. As far as specific comments on the new proposed regulations, OCC included a request that the IRS and Treasury provide clarity about who has the responsibility to determine if a transaction is subject to the proposed regulations and the amount of any dividend equivalents, which could potentially fall on clearinghouses under the new proposed regulations.

The full letter can be found here.

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Mark Your Calendar

The 2015 Options Industry Conference will take place in Miami Beach, Florida, May 6-8. More details to come!

Clearing News & Resources

Volume Update
Interested in reading about what is happening with options volume? Click here for OCC's monthly volume press release.

OCC News Archive

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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.