December 2014 Newsletter

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In This Issue

Chairman Discusses Growth of OCC Executive Team

Craig DonohueDuring 2014 OCC built out its executive team through the expansion of new talent and the promotion of existing leaders. Executive Chairman Craig S. Donohue discusses how meeting heightened expectations has fundamentally altered how OCC operates, requiring strong leadership and a keen focus on organizational structure and resources.

What has prompted OCC to build out its leadership team in 2014?

Heightened regulatory requirements stemming from the financial crisis of 2008 have prompted us to examine all aspects of our business, including management and personnel. We conducted a review of our leadership at OCC and as a result, are implementing organizational changes that are designed first and foremost to ensure that we are optimally structured to meet the heightened expectations that our regulators and market participants have of systemically important clearinghouses like OCC. These types of changes are a natural part of adapting, and allow us to bring in new skill sets that enhance and complement what we already have in place.

Who are the new members of OCC's executive team and what functional areas will they oversee?

We've had three recent additions. Kimberly McGarry, Senior Vice President and Chief Financial Officer will head finance and accounting. Tracy Raben, Senior Vice President and Chief Human Resources Officer will help us achieve a high level of employee engagement and strengthen our capabilities as we continue to grow. Laurie Flom, First Vice President and Head of Enterprise Risk Management will lead OCC's Enterprise Risk Management.

In addition to these new executives, OCC continues to develop leaders from within. What changes were made this year?

We are fortunate to have so many talented individuals who have made significant career investments in OCC and risen up the ranks. This year Mike McClain was promoted from Chief Operating Officer to President & Chief Operating Officer and oversees Financial Risk Management, Human Resources and Finance. John Fennell was promoted to Executive Vice President, Financial Risk and Jim Kustusch was promoted to Senior Vice President, Operations. Mike, John and Jim have a wealth of OCC and industry knowledge and long track records of contributing to this organization's success. Beyond the leadership team, we are also building up resources to enhance our resiliency. Over a two-year period, we've hired more than 100 employees to ensure that we have the resources to develop the kinds of policies and procedures, internal controls, and testing and validation capabilities that we need to achieve the highest standards possible as a systemically important institution. I believe all these changes will make us stronger and more resilient.

What is the long-term strategy for leadership and human capital development at OCC?

Building an effective team at the executive level is critical to creating a strong corporate culture. Our leadership team has placed a high priority on employee engagement. We are working to communicate new expectations, optimize our organizational structure in support of strategic goals and provide employees with opportunities to develop their skills and improve performance. Long-term business success derives from continuous development of leaders at all levels. We are increasing our investment in professional development and management training to ensure that our managers have the expertise needed to be effective leaders.

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Government Relations Year in Review

Joe Corcoran

In 2014, OCC's Washington office worked diligently on legislative and regulatory initiatives that would impact the listed options market and investors who use options. Joe Corcoran, First Vice President of Government Relations, shares insight on OCC's advocacy efforts with the U.S. Securities Markets Coalition and more.

What are some issues that the Washington office and the U.S. Securities Market Coalition partnered on this year?

A top priority this year involved OCC leading the advocacy efforts of the U.S. Securities Market Coalition. The Coalition lobbies on behalf of the options exchanges and OCC on issues of common interest. We started the year much like 2013 with a focus on a tax reform proposal by the Chairman of the House Ways and Means Committee that would, among other things, require options to be marked to market at the end of the year and treat all gains or losses as ordinary income or loss rather than capital gain or loss. The proposal also would treat an appreciated stock position as being sold if an investor enters into a related options transaction, including basic and beneficial risk-reducing options transactions that bear no economic resemblance to actually selling the stock.

How much importance does OCC place on educating key legislators and regulators about options and clearing?

OCC places great priority on education as part of advocacy efforts in Washington. Education about our market and products is critical to facilitating well-informed policy making. The tax reform proposal is just one example of how OCC and the options exchanges, through the Coalition, closely monitor Congressional activities that affect our industry and educate key legislators and regulators about the impact certain proposals would have on the use of listed options and the options market. In connection with the tax reform proposal, our educational efforts are directed toward facilitating a greater understanding among members of Congress and the Administration that the current tax rules governing options are simple, clear and straightforward, and that the proposal would introduce significant complexity and unfairness in the tax treatment of options and negatively affect investors. Another example of the Coalition's educational activities relates to a proposed rulemaking under section 871 of the Internal Revenue Code. We actively engaged with the Treasury Department and IRS to educate them about the potential impact of the proposal, which could have the effect of discouraging foreign investors from using listed options by subjecting certain of their options transactions to dividend withholding tax. In 2014 and each year, we also work with The Options Industry Council to conduct educational seminars for Congressional and Federal regulatory agency staffs.

Looking forward, are there any other issues OCC is working on?

In the final quarter this year, we have been working diligently to address the impact on the listed options market of certain provisions of the regulatory capital rules for banks adopted by the banking regulators last year. These rules may be interpreted to require a U.S. banking organization, when calculating its trade exposures to customers, to disregard risk-reducing properties of certain "spread" and similar positions in listed options and to impose capital requirements that are unrelated to economic risks entailed. This produces a dramatic increase in the capital required to support customer positions for many market making firms, despite the limited risk. While we face a number of pretty significant obstacles in obtaining relief for listed options, the efforts we have expended so far in educating banking regulators and legislators about the impact of the bank capital rules on the listed options market have been very valuable, particularly with regard to what we understand to be more favorable bank capital rules that are planned to be implemented two years from now.

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Volume Records Set in October

In October, OCC experienced its second highest monthly volume on record. OCC cleared 491 million total options contracts, up 22 percent from last October's 401 million contracts. October 15 marked the fifth highest volume day for total options and the eighth highest volume day for equity options. Year-to-date volume through October was up four percent with 3.62 billion contracts traded compared to 3.48 billion contracts at the same point last year. Futures also reached highs. OCC cleared 8.2 million futures contracts, a 49 percent increase from the prior year's monthly total. Securities lending CCP activity was up 10 percent in new loans from October 2013 with 107,000 transactions.

Cleared contract volume in November totaled 294,770,356 contracts, with year-to-date total cleared volume up 3 percent as of December 1. It is projected that over 4.2 billion options contracts will be traded for the year, making 2014 the second highest year on record. Robust trading volumes reflect the value that investors place in the products we clear and the confidence they have in the markets that OCC secures through sound clearing operations and effective risk management.

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OCC Introduces Chairman's Award to Honor Outstanding Achievements

On November 19, 2014, OCC honored seven employees with the Chairman's Award, which recognizes outstanding achievements that further corporate objectives, including enhancing resiliency as a Systemically Important Financial Market Utility. The Chairman's Award evidences OCC's renewed commitment to honoring the best performers and those who demonstrate a personal commitment to excellence and high achievement.

"OCC was pleased to present the Chairman's Award to employees who have gone above and beyond to achieve major accomplishments that exceed expectations and contribute to OCC's success." – Craig S. Donohue, Executive Chairman

The Chairman's Award recipients include: Karen Bilek (National Operations) and Tom Crider (National Operations) for their SIFMU resiliency efforts; Dan Busby (Project Office) and Bill Raczyk (Business Controls) for their contributions to remediation management; and Matt Hughes (Corporate), Tim Garver (Accounting & Finance) and Bethany Riesenberg (Accounting & Finance) for their work on the capital plan.

Standing with Mike McClain and Craig Donohue, 2014 OCC Chairman Award recipients: (from left to right) Bill Raczyck, Dan Busby, Tom Crider, Karen Bilek, Bethany Riesenberg and Matt Hughes. Not pictured: Tim Garver.
Standing with Mike McClain and Craig Donohue, 2014 OCC Chairman Award recipients: (from left to right) Bill Raczyk, Dan Busby, Tom Crider, Karen Bilek, Bethany Riesenberg and Matt Hughes. Not pictured: Tim Garver.

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SEC Approves RegSCI for 2015 Implementation

Since the May 2010 Flash Crash, the five-member Securities and Exchange Commission (SEC) has approved various initiatives to address technological issues, such as the revised market-wide circuit breakers and the limit up/limit down mechanism. Last month, the SEC approved Regulation Systems Compliance and Integrity, or RegSCI, a rule that requires OCC and other stock and options exchanges, clearinghouses and certain trading venues to implement procedures to safeguard computer trading systems.

RegSCI marks a significant addition to the recent initiatives undertaken by the SEC to address concerns about the reliability and resilience of U.S securities market infrastructure. Under the rule, designated SCI entities are required to have comprehensive policies and procedures in place for their systems categorized as SCI systems that are further designated as "critical" or "indirect." The rules provide a framework for these entities to, among other things, take appropriate corrective action when systems issues occur; provide notifications and reports to the SEC regarding systems problems and systems changes; inform members and participants about systems issues; conduct business continuity testing; and conduct annual reviews of their automated systems.

"OCC embraces continual improvements to our systems and procedures. Our implementation plan for RegSCI is well underway and new requirements will only bolster the resiliency of OCC and further safeguard our systems." – Dan DeWaal, First Vice President & Chief Security Officer

Most RegSCI rules are required to be in place by November 3, 2015. OCC is placing great focus on its implementation schedule with efforts tied to 10 key policies and procedural areas that will reduce potential systems risks and ensure compliance with standards set forth in the framework.

RegSCI Implementation: OCC Focuses on 10 Key Areas

1. SCI Industry Standards: processes related to capacity, integrity, resiliency, availability and security of certain systems in accordance with a set of minimum standards and consistent with current SCI industry standards.

2. Escalation Processes: identifying, designating and documenting responsible SCI personnel and escalation procedures related to the responsibility of those personnel.

3. Incident Response: to ensure appropriate corrective action, including mitigating harm and devoting adequate resources, to address SCI events as soon as reasonably practicable.

4. Regulatory Reporting: to include requirements for immediately notifying the SEC about material SCI events and subsequently provide updates to the SEC about these SCI events and the progress of any corrective actions.

5. SCI Event Notification: to disseminate information about material SCI events to members or participants who may have been affected or, in the case of a major SCI event, to all members or participants.

6. SEC Change Notification: to report to the SEC any completed, ongoing and planned material changes to SCI systems and the security of indirect SCI systems on a quarterly basis, and submit supplemental reports to notify the SEC of any material errors or omissions in the quarterly reports.

7. Business Continuity Testing: to assign designated members or participants to participate in the testing of, and test the operation of, business continuity and disaster recovery plans (and backup systems) at least once every 12 months, and coordinate the testing on an industry or sector-wide basis with other SCI entities.

8. Quarterly Reporting: to the SEC any completed, ongoing and planned material changes to SCI systems and the security of indirect SCI systems on a quarterly basis, and submit supplemental reports to notify the SEC of any material errors or omissions in the quarterly reports.

9. Annual Compliance Review: the conduct of an annual compliance review pursuant to RegSCI, and submission of a report of the review to senior management, Board of Directors and the SEC.

10. Records Management: to create and maintain books and records relating to compliance with the regulation; and, utilize a new form SCI to file notices and reports required under the rule.

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OIC Expands Options Education Program in 2014

For The Options Industry Council (OIC), 2014 was a busy year. Enhanced digital offerings and new partnerships have allowed OIC to reach more investors and advisors than ever before.

In January, OIC released its first mobile app for iOS devices, making educational content available on-the-go. The free app offers mobile options courses, an interactive strategy section and connection to the Investor Services live help center. In addition to new mobile offerings, OIC expanded its video library on YouTube with the Options Glossary Illustrated, an ongoing video series of short, animated clips that explain basic options terms and key concepts. Launched in 2013, OIC's YouTube channel continues to build channel views and houses more than 20 videos. The OIC Webinar Series, which is also available on YouTube, is averaging 600 registrants per event in 2014, nearly double 2013's turnout. OIC's social media platforms also saw significant audience growth this year, showing a 160% increase in total audience year-to-date.

Expanding the reach of the Options Education Program through international partnerships was also a key priority. In 2014, OIC entered into educational partnerships with The Shanghai Stock Exchange, China Futures Association and Saxo Bank. These partnerships will help OIC continue to grow its audience and more efficiently provide options education to the global marketplace.

Other program highlights included the founding of the Advisor Leadership Council to grow awareness of the use of exchange-listed options among financial advisors and to recognize leaders within the financial advisor community. Also on this front, OIC published new research on financial advisors' use of options. The study was conducted by Bellomy Research and found that options use by financial advisors increased 13% since the inaugural study in 2011. Results will be used to educate advisors on how options can better serve their clients and business.

For over 20 years OIC has been a leading source for options education. OCC recognizes the important role OIC plays in providing education for investors and advisors on the responsible use of options and will continue to support and lead its program.

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Register Now!

Register by February 13, 2015, to take advantage of the Early Bird discount for the 2015 Options Industry Conference. This premier event for top-level management and trading professionals takes place in Miami Beach, Florida, May 6-8. Sponsorship and Exhibitor opportunities are available!

Volume Update

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

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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.