July 2012 Newsletter

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In This Issue

Stock Loan Volume on the Rise

OCC's Stock Loan Program continues to witness remarkable growth. The Hedge program started in 1993 with just 10 clearing members and allowed market-making firms to offset their option positions with stock loan positions, thereby reducing their OCC margin requirement. Transactions numbered under a few hundred a day. Fast forward to today and membership has grown to 70 OCC clearing members conducting an average of 3,800 transactions per day with open interest measuring in excess of $32.5 billion.

Month over month, OCC has seen increased activity. 2011's transactions were a 42% increase over 2010, while YTD 2012 volume is already 14% higher than 2011. In 2009, OCC started clearing stock loan transactions for AQS, an automated, anonymous trading platform created specifically for the securities lending industry. With OCC acting as the central counterparty (CCP), the innovative AQS platform has attracted attention from numerous industry groups including broker dealers, banks, hedge funds and pension funds, all looking for price efficiencies combined with OCC's financial guarantee. Membership and volume continue to climb for AQS.

With CCP benefits as one of the most talked about issues in the industry, OCC, the only CCP clearing securities lending transactions in the United States, is in a unique position to see outstanding growth in the next few years.

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Industry Insight: Ray Tamayo

Ray Tamayo is Senior Vice President and Chief Information Officer at OCC. Tamayo sat down with OCC News to discuss his start in the industry, OCC's technology services and more.

How did you get into the technology field, and what led you to OCC?

I got into technology in the early 80s. I was doing back-office operations. I took an opportunity at a bank that used my back-office knowledge and combined it with technology. Many years into my career, OCC was looking for a CIO with larger bank experience. (Prior to OCC, Tamayo served as Director of IT development and infrastructure management for the Commercial Business and Leasing Group at Citigroup). My familiarity with the securities industry and running trading floors and finances was a good fit. At the end of the day, technology is technology. OCC wanted someone with big-company experience and that has been my background for 30 years.

You've spent your career in financial services. What makes this industry unique from a technology perspective, compared to other areas in which you have you've worked?

The securities industry is a lot more fun to work with than consumer banking. When I was with Citigroup, it took years to make a dramatic change in consumer banking. That is due primarily to the need to train and re-train customers, tellers and customer service staff. Only so much change can be absorbed. Working in the securities industry, things happen at a faster pace.

Who is someone who has been an influential mentor to you professionally?

I worked at a smaller bank for 20 years and became pretty good friends with the COO. Over the years I learned a lot from him about alternatives to doing all business internally. As a company you don't want to be constrained by the people you have, as that makes resources limited. Opportunities such as moving our Chicago data center to a location away from OCC's business center and to a building that provides critical infrastructure/facilities services is one example of a change we have made. Sometimes we need to look outside, especially where the staffing needs are relatively short term or it is more cost efficient to outsource, again, so that OCC can concentrate on what it does well as done on the Prices re-write project where we augmented OCC development staff.

Identify one or two trends in the technology field and how they are affecting the options industry.

Certainly low-latency trading. This impacts members who want to be located next to an exchange to get trades and prices faster than others. Another trend is IT compliance to new regulatory standards, especially in the area of information security. We are stepping up our game to meet the demands and rules that will come out of the SEC.

What are some challenges you see on the horizon?

Right now we are experiencing decreased volumes. Exchanges and clearing members are cutting expenses, and we have to work with third parties to get things done. At the end of the day our members rely on our refunds. We have to seek more efficiencies through technology.

Are there any exciting opportunities for OCC in the near future from a technology perspective?

For OCC, virtualization is the key to reduce costs. Virtualization is part of a trend in enterprise IT that includes autonomic computing where the IT environment will be able to manage itself based on perceived activity. It also includes utility computing, in which computer processing power is seen as a utility that clients can pay for only as needed. In the industry, most servers are used only 10% of the time. By virtualizing we get to run the same equipment at much higher rates. It reduces equipment, data center footprints, cooling and electric costs. Virtualization can also reduce desktop expenses and support as most people just need access to Outlook, Office and applications and not the compute power behind today's PC's.

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OCC Converts to FIXML for Risk-Based Haircuts

OCC is in the process of constructing a FIXML version of the RBH/CPM output files, that we anticipate will be available for nightly download beginning the first quarter of 2013 subject to applicable approvals. The FIXML transmission will ultimately replace the existing flat file, though OCC anticipates that it will continue to support the existing file distribution for a reasonable period of time (e.g. up to 18 months) following the release of the new format.

FIXML allows greater flexibility for adding new fields without requiring program changes to be made by all file users. This will facilitate new initiatives such as Foreign Marginable Securities and the OCC OTC Clearing effort. FIXML enables OCC to transmit the file using the Data Distribution Service (DDS) infrastructure, which is standard for nearly all other OCC data transmissions. The conversion also allows OCC to include additional data elements, such as Bloomberg ID to the output file where appropriate.

OCC is currently reviewing the proposed schema with FIX Protocol Limited and the appropriate FIX Committees; note that all tags should be considered TBD until formal approval is received.

Status updates for this effort will be distributed using the RBH Update e-mail alert. To subscribe, please visit www.optionsclearing.com/webapps/email-alerts. Address questions and comments to RiskSystems@theocc.com.

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New Clearing Fund Sizing Methodology in Effect

In May, OCC implemented a new methodology for its Clearing Fund. The formula sets the size of the Clearing Fund at a level required to permit OCC to sustain potential losses under a set of "worst case" default scenarios. The size of the Clearing Fund was previously set at 6% of average daily total margin requirements of the preceding month. Each clearing member's contribution was allocated on its share of overall open interest, subject to a minimum contribution of $150,000. The impact of the new, model-based methodology on the size of the Fund is dependent on several factors and changes from month to month.

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OCC Responds to DCO Margin Rule

The Commodity Futures Trading Commission's Rule 39.13(g)(8)(i) requires a derivatives clearing organization (DCO) to collect initial margin on a gross basis for each clearing member's customer account equal to the sum of the initial margin amounts that would be required by the DCO for individual customers within that account if each was a clearing member. The rule prohibits a DCO from netting positions of different customers against one another. The rule became effective January 9, 2012, and DCOs must comply with it by November 8, 2012.

Since OCC carries customer positions in an omnibus account and does not have the information necessary to calculate margins at the individual customer level, OCC coordinates with other DCOs to establish an industry solution in which clearing firms must submit a data file to identify positions by individual customers, allowing OCC to calculate margins customer by customer. This file is referred to as the Customer Gross Margin position file (CGM). The industry selected FIXML as a standard format for the CGM file.

Upon receipt of each clearing member's CGM file, OCC would perform a series of validations to ensure the correct margining of customer omnibus accounts and to verify that the firm is not underreporting its positions compared to what is held in clearing. OCC then calculates a margin requirement for each customer account.

The clearing member's customer margin requirement will then be the sum of all individual customer account requirements. Customer accounts that carry a margin credit will be excluded from the summation since the rule prohibits the netting of different customers against one another.

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From the Hill

Congress has not conducted much serious legislating lately, instead focusing on non-controversial issues and seeming satisfied to not debate any major issues until after the November elections. Most of today's focus in Washington is on the upcoming elections, and because of this, the opinions of respected political experts are in high demand.

One of the leading non-partisan political handicappers, Charlie Cook (The Cook Political Report), spoke to the attendees of the annual Options Industry Conference, May 4, in New Orleans, providing insight on the 2012 elections. His talk was well-received by the audience, largely because he has built a reputation as a reliable, independent source of election analysis and can explain his findings in a straightforward manner.

Cook's research indicates that President Obama is locked in a tight battle for re-election, with the election coming down to the results of 14 battleground states including North Carolina, Colorado and Pennsylvania. Governor Mitt Romney has run a respectable campaign so far and it is still too early to say which candidate has the better chance of victory.

Cook also thinks that Republicans will gain between two and five Senate seats, with the very real possibility of gaining the four seats necessary to give them a 51-49 majority. Ever the political scientist, he gives Republicans a 75 percent chance of keeping their majority in the House. He believes that between 5 and 15 House Republicans will not return in 2013 but that the Democrats will not gain enough seats to offset the potential Republican defeats.

Politics are viewed in a detached, methodical manner for Cook and his team. They see statistics instead of heated rhetoric and poll results instead of negative advertisements. It is quite interesting to read his analysis because every race has a specific level of probability, with patterns emerging as the campaigns continue toward Election Day. For more information on Cook's 2012 election analysis, check out www.cookpolitical.com.

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NASDAQ OMX BX, Inc. Options Exchange Joins OCC

NASDAQ OMX BX Options became an OCC participant exchange on June 29. The addition of NASDAQ OMX BX Options to the NASDAQ OMX exchange suite now brings the total number of options markets in the United States to 10.

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OCC Board of Directors Expands and Welcomes New Members

OCC welcomed the election of new members to its Board of Directors including two in newly created Public Director roles. The new Directors include: Steven G. Crutchfield, CEO, NYSE Amex Options LLC and Senior Vice President, NYSE Euronext, appointed Exchange Director; Elizabeth K. King, Head of Regulatory Affairs, GETCO LLC; Kevin G. Russell, Managing Director, Head of Equities Trading for the Americas, Citigroup Global Markets Inc.; and Jonathan B. Werts, Managing Director, Global Execution Services Bank of America Merrill Lynch. Mr. Crutchfield replaces Thomas F. Callahan as an Exchange Director and the new members replace Paul J. Brody, William D. Felder and Valar J. Mihan.

Gerald J. McGraw was appointed Board Vice Chairman. In addition to the new members above, OCC expanded its Board of Directors to include two new Public Directors for a total of 18 members from 16. Appointed to those positions were Matthew B. Gelber, President of Bitterroot Asset Management LLC, and an Executive-in-Residence with Technology Crossover Ventures, and Alice P. White, an economist.

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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.