July 2013 Newsletter

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In This Issue

Industry Insight: Gina McFadden

For 40 years, Gina McFadden, Executive Vice President of Industry Services at OCC, and President of The Options Industry Council (OIC), has lived and breathed options. In addition to her roles at OCC and OIC, she is a member of the OIC Roundtable, SIFMA's Equity Options Trading Committee, STA Options Committee, the Futures Industry Association and Women in Listed Derivatives.

Her four-decade service comes to a close on July 31, 2013, with her retirement. Ms. McFadden takes some time to reflect on her career as well as what she will do in her soon-to-be free time.

When you joined OCC 40 years ago, what was your first job here and how has your career progressed?

Not long after college graduation I accepted an entry level position with CBOE Clearing Corp. but expressed my interest in future opportunities. I was clearly in the right place at the right time. CBOECC became OCC and opportunities abounded. I moved on to start our HR function, then worked in Project Management, Marketing, and landed in Member Services after the 1987 crash. That turned out to be the turning point in my career as it gave me hands-on involvement in OCC’s core clearing business. In the early 90s, I left Member Services to be the Executive Director of The Options Industry Council (OIC), then moved back to the OCC side where I ran the Business Operations Group for several years. I’ve been President of OIC for the last six years with responsibilities that also include Communications and Internet Services.

Having been at OCC since its inception, how has the company developed from the early days?

Besides expanding from about 11 employees at the time I started to more than 400 today, OCC has grown from a small clearinghouse owned by one exchange to the world’s largest equity derivatives clearing organization, serving 17 exchanges and trading platforms and a wide range of customers across numerous product lines. OCC is also the recognized industry leader in risk management. As a utility clearinghouse, OCC is positioned to be customer focused and I’ve watched its services expand over the years to go well beyond clearing. To eliminate redundancy and reduce our members’ expenses, we’ve assumed programs and services that were supported by each options exchange. There are many examples but one of the best is OIC.

How has the evolution of the options industry over the years impacted your role at OCC?

The need for a unified industry cooperative to educate investors about the benefits and risks of using options led to the creation of OIC and a new opportunity for me. Even though options are now a mainstream product, the need for education is never diminished. New options products and newly targeted users make this a very dynamic industry.

You’ve been OIC President for the past six years. During your tenure, what were some of the core challenges you faced?

One of the key challenges has been expanding our focus beyond retail investors. While we had targeted financial advisors for some time, about three years ago we upped the effort by hiring a dedicated field resource who developed and implemented an aggressive marketing plan. The timing was right—advisors were looking to differentiate themselves and in need of strategies that would help their customers. We also expanded our efforts on the institutional side, working with pension fund managers and credit unions.

And how about some of the big successes?

Following up on the financial advisor and institutional programs, we’re seeing major success in these arenas. OIC organized the inaugural Wealth Advisors Summit just over a year ago, bringing successful practitioners to the stage to address brokers looking for help on how to incorporate and then manage options strategies in their clients’ portfolios. Variations of this program now include pension fund managers and are exchange-hosted and supported by OIC. We’ve learned that offering practical applications is a necessary enhancement to more theoretical-based training for professionals.

What is your take on the industry’s efforts to forge relationships on an international level?

From an OIC perspective, I’m personally very excited about our international partnerships. In addition to expanding our programs to include financial advisors and institutions, OIC’s reach now extends to all of North America, Europe and Asia. We have several educational Memorandums of Understanding in China. Options are expected to trade there in the not too distant future. There are 100 million retail accounts and OIC supports the Chinese exchanges’ educational efforts as we know that once allowed to trade outside of their borders, those educated investors will eventually turn to our options markets for their liquidity and transparency.

What are you going to miss most about OCC?

Easy answer—all of my colleagues here. Plus I’ve had the pleasure of being outward facing for most of my years at OCC, so I will miss my industry colleagues as well.

What’s next on the horizon for you?

Since I won’t have any employment restrictions I can finally practice what I preach and trade some call options! Other than that, take a deep breath and then think about new opportunities, including giving back to the community.

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From the Hill

While the OCC Washington, D.C. office has worked diligently to educate Members of Congress and their staffs about our concerns with the House Ways and Means Committee draft tax proposal, it is important to remember how difficult it is to enact any sort of major legislative overhaul, especially tax reform.

In fact, the only major revision of the tax code came in 1986, when President Reagan signed into law the Tax Reform Act of 1986. According to the General Explanation of the 1986 Act, the idea of comprehensive tax reform began with President Reagan mentioning it in his 1984 State of the Union address. His Treasury Department then spent most of 1984 examining the tax code and creating a reform package for Congress to consider. It was submitted to Congress in May 1985.

"Efforts to enact tax reform in 2013 have already faced significant policy disagreements between the parties."

Tax reform was first debated in the House, where 30 Committee hearings were held. After a marathon, 16-day markup, the final version of the Act was introduced and passed out of the Ways and Means Committee in December 1985. Similar to today, in 1985 the Senate was simultaneously working on its own version of comprehensive tax reform, holding 36 hearings on various proposals but never introducing formal legislation. Instead, the Senate used the House-passed bill as a vehicle for its own version of tax reform, passing it out of the Senate Finance Committee in May 1986 after a 17-day markup. The final version of the Act was hammered out by the Conferees and approved by both the House and Senate, but not without 136 Congressmen and 23 Senators opposing it. President Reagan finally signed the Tax Reform Act into law on October 22, 1986.

No legislation in recent memory, including Dodd-Frank and Obamacare, has been the subject of 66 Congressional hearings and 33 days of combined Committee markups. All that effort shows how serious many in Congress and President Reagan were about comprehensive tax reform. Back then, comprehensive tax reform had the support of Congressional leaders and President Reagan and still took about 2.5 years from start to finish. Efforts to enact tax reform in 2013 have already faced significant policy disagreements between the parties and several more-pressing issues taking up the time and focus of the House and Senate. It is clear that current supporters of tax reform have a high mountain to climb to accomplish what their Congressional predecessors did in 1986.

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OCC to Adopt a Policy to Restrict Exercises to Net Long Positions

The OCC Board of Directors approved the adoption of a policy that would require clearing members to restrict exercises in certain accounts, including market maker and joint back-office accounts to the extent each respective account is net long at the end of the trading day. The required netting would occur within each options series.

This policy was designed to address certain risks and concerns associated with dividend plays, a controversial but legally permitted options trading strategy that involves the capture of dividend income through the exercise of in-the-money call options on the day prior to the “ex-dividend” date. The strategy usually involves the buying and/or selling of call spreads where both option components are in-the-money and of the same series. Dividend plays represent approximately 8 percent of OCC-cleared options volume. The new policy will likely result in a significant reduction in dividend plays.

The policy is subject to regulatory approval and the further development of an implementation plan. Clearing members will need to make certain systems and other changes to ensure compliance with the policy, with which OCC will assist. OCC will also provide sufficient advance notice of implementation of the new policy to enable clearing members and other market participants to prepare for the change.

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Standard Options Now Being Processed on Friday

After receiving approval from The Securities and Exchange Commission (SEC), OCC transitioned the expiration processing of standard options from Saturday to Friday night, effective June 21, 2013.

The introduction of Weekly and Quarterly expirations created an environment in which all option contracts can be expired in a consistent and repeated process. Moving the monthly standard expiration back office process from Saturday to Friday night aligns the U.S. options market with other global options markets and streamlines processing for all options on the same system. OCC would like to acknowledge the industry efforts of the clearing members, exchanges and service bureaus to achieve this transformative goal.

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Taipei Foundation of Finance and OIC Sign Content Licensing Agreement

The Taipei Foundation of Finance (TFF) and The Options Industry Council (OIC) entered into a content licensing agreement to develop an educational program for financial industry professionals and investors in Taiwan and China.

TFF will now be able to deliver options education based on OIC’s content for financial industry professionals and investors mainly through live seminars in Mandarin and via access to website material, which TFF will translate into both Traditional and Simplified Chinese. This is the first time OIC has entered into a partnership resulting in the translation of its materials into Chinese.

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Mark Your Calendar

The 2014 Options Industry Conference will take place in Austin, Texas, April 30-May 2. 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.

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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.