June 2015 Newsletter

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Mike McClain Addresses OCC's Role in Enhancing Resiliency of the Listed Options Markets

In This Issue

Mike McClain, President and Chief Operating Officer of OCC, spoke May 7 at the 2015 Options Industry Conference in Miami, Florida. Here are some highlights of his remarks about enhancing resiliency of OCC and the U.S. options industry.

Mike McClain, President and Chief Operating Officer of OCC, at the 2015 Options Industry Conference.
Mike McClain, President and Chief Operating Officer of OCC, at the 2015 Options Industry Conference.

On the importance of listed options market:

"As the foundation for secure markets, it is important for OCC to ensure that the listed options markets remain vibrant, resilient and liquid in the eyes of regulators and the investing public. A strong education program contributes to better and more effective policy making, and fosters more knowledgeable and prudent investors. That is why OCC supports the work of The Options Industry Council as it relates to education programs and the development of powerful thought leadership, and we applaud the work of our OIC partner exchanges and member firms."

Working with OCC's exchange partners:

"Working with our exchange partners in the U.S. Securities Markets Coalition, OCC strengthened its presence in Washington as a leading advocate on important regulatory, legislative and tax issues affecting our industry. Even though OCC only clears for U.S. markets, OCC is actively engaged with European regulators to ensure that OCC is recognized as a Qualifying Central Counterparty, or QCCP, under the European Market Infrastructure Regulation regime. This recognition is crucial to our clearing members who are affiliated with non-U.S. banks so that they are not subject to penalizing capital charges for providing clearing services to U.S. options customers."

Embracing OCC's role as a SIFMU:

"OCC's highest priority in 2015 is accelerating our progress and improving our quality in adapting to new regulatory standards. In April we passed the halfway mark toward our specific goals in this area and our changes have been positive and well received by our regulators. We are meeting the aggressive regulatory goals we have set for ourselves along with several resiliency objectives that go beyond remediation. Our primary focus is getting it right the first time and implementing resiliency improvements that will benefit the industry rather than simply "check the box" on an examination report."

Investing to contribute to liquid, safe and secure markets:

"The majority of our investment in 2014 and 2015 went into several initiatives, including a stress testing framework to ensure that our margin and clearing fund are adequate in extreme but plausible market events; collateral management improvements that improve the quality of our collateral positions in a default; liquidity monitoring capabilities that guarantee our ability to step in and make settlement on behalf of any defaulting clearing member on-time, and; post-trade controls to stop obvious pricing problems before they create larger systemic issues."

What lies ahead for OCC:

"We have an opportunity to further leverage OCC's unique position in the industry to support market participants in their own risk mitigation efforts. For clearing members, we are working on enhancements to post-trade processing that will enable them to manage their own intra-day risk at OCC. For customers and other market participants, we are designing clearing solutions that would reduce the impact of regulatory capital charges on transactions that are not cleared today. For exchanges and liquidity providers, we plan to build on pre and post-trade controls by seeking ways to implement real-time credit checks and automated circuit breakers."

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OCC Names Joseph Kamnik as General Counsel

Joseph KamnikJoseph Kamnik, previously OCC Vice President and Chief Regulatory Counsel, was promoted to Senior Vice President and General Counsel, effective June 1. In his new role Kamnik oversees OCC's legal and regulatory affairs, and provides counsel on a broad range of legal matters to OCC's management and board of directors. Kamnik brings to the role more than a decade of experience in formulating regulatory policy and regulating systemically important financial market utilities like OCC.

Kamnik joined OCC in October 2014. Previously, he served as Assistant Director in the SEC's Division of Trading and Markets, Office of Clearing and Settlements where he developed and supervised teams responsible for overseeing securities and security-based swaps clearing agencies registered with the SEC, including four clearing agencies designated systemically important by the Financial Stability Oversight Council. Kamnik also developed and implemented the SEC framework to review proposed changes filed by systemically important financial market utilities pursuant to Title VIII of the Dodd-Frank Act. His regulatory experience will benefit OCC as the company works to meet the heightened expectations of regulators.

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John Fennell Elected to Executive Committee of the Global Association of Central Counterparties

John FennellJohn Fennell, OCC Executive Vice President of Financial Risk Management, was appointed to a new Executive Committee by The Global Association of Central Counterparties Committee, also called the CCP12, at a meeting in Sao Paulo, Brazil, on May 6. The CCP12 is a global association of the world's major central counterparties and works to further the industry's discourse on the adoption of best practices in clearing and risk management. The committee works to address issues of mutual interest, such as the strategic progress on regulation and enhancement of global standards. John's role on this industry-leading committee further illustrates OCC's position in the marketplace as one that delivers best-in-class risk management services. This appointment will allow for OCC to further contribute to industry developments and advance central counterparty and risk management awareness, which will grow the marketplace and benefit market participants.

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OCC Leaders Take the Stage at Annual Options Industry Conference

The 33rd Annual Options Industry Conference took place May 6-8 at the Fontainebleau Miami Beach. Hosted by BOX Options Exchange and organized by OCC, this year's conference focused on how market structure, technology issues and new regulatory requirements are impacting the industry. Several OCC speakers shared their expertise in the areas of Business Development, Government Relations and Financial Risk.

The conference opened with Exchange Updates followed by a Fireside Chat with industry representatives including OCC representatives Carolyn Mitchell (Business Development) and Joe Corcoran (Government Relations). Mitchell discussed the impact of Dodd-Frank and Basel III on the securities lending industry and emerging new business models such as OCC's Agent Lender project, a new clearing solution for agent lenders and their beneficial owner clients. Joe Corcoran gave an update on changes to bank capital rules, specifically the risk weighted asset calculation issue, and OCC's ongoing efforts with regulators to address the negative impact of these rules on market participants.

Andy Nybo of TABB Group presented the always popular State of the U.S. Listed Equity Options Industry report covering a variety of topics including liquidity, the shrinking pool of market makers and OCC's capital plan. OCC President and Chief Operating Officer Michael McClain delivered a keynote speech that addressed the actions OCC has taken to enhance its resiliency and that of the U.S. options industry. He also underscored the important role education plays in helping grow listed options markets.

OCC's Executive Vice President of Financial Risk Management, John Fennell, participated on the Managing Operational Risk in a New Era of Regulatory Oversight panel and shared his perspective on improving the resiliency of our markets and how OCC is identifying and providing for additional capital efficiencies to our members. Joe Kamnik, OCC's newly appointed Senior Vice President and General Counsel, served as moderator of the 2015: The Regulatory Roadmap panel.

The Managing Operational Risk in a New Era of Regulatory Oversight panel included from left to right: Andy Nybo, Moderator, TABB Group; J. Kevin McCarthy, Bank of America Merrill Lynch; Slade Winchester, Citi; James Radecki, Goldman Sachs; and John Fennell, OCC.
The Managing Operational Risk in a New Era of Regulatory Oversight panel included from left to right: Andy Nybo, Moderator, TABB Group; J. Kevin McCarthy, Bank of America Merrill Lynch; Slade Winchester, Citi; James Radecki, Goldman Sachs; and John Fennell, OCC.

On the right: Joseph Kamnik, OCC, moderated the 2015: The Regulatory Roadmap panel. Andrew Stevens, IMC Financial Markets, sits to his left.
On the right: Joseph Kamnik, OCC, moderated the 2015: The Regulatory Roadmap panel. Andrew Stevens, IMC Financial Markets, sits to his left.

Financial Advisors Forum

Contributing to the success of this year's conference was the Financial Advisors Forum. Top financial advisory professionals attended this one-day, invite-only Forum on May 8. Three of the sessions presented were approved for Continuing Education Credits from Investment Management Consultants Association and Certified Financial Planner. A new academic study conducted by Professors Michael Hemler, University of Notre Dame, and Thomas Miller, Mississippi State University, and supported by OIC, was also released at the Forum. The study found that some options-based portfolio strategies seemingly outperform long stock and improve the risk-return tradeoff of long equity portfolios over time.

Callie Bost of Bloomberg News (far right) moderated the Advisors Discuss Winning Clients and Assets with Options-Based Strategies panel. Panelists from left to right include: Donna Walton, Raymond James Financial; Dagny Maidman, Credit Suisse; and Michael Galantino, Boenning & Scattergood.
Callie Bost of Bloomberg News (far right) moderated the Advisors Discuss Winning Clients and Assets with Options-Based Strategies panel. Panelists from left to right include: Donna Walton, Raymond James Financial; Dagny Maidman, Credit Suisse; and Michael Galantino, Boenning & Scattergood.

The 2016 Options Industry Conference will take place May 11-13 at the Terranea Resort in Rancho Palos Verdes, California.

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OCC Appoints Three New Members to Board of Directors

George S. Fischer, Thomas A. Frank, and Eric W. Noll were appointed in May as new member directors to OCC's Board of Directors. They further strengthen and diversify the skills of the board and support OCC's work in providing risk management and innovative solutions to reduce systemic risk. The quality of OCC's board members reflects the vital role that OCC plays in the U.S. financial system.

George S. Fischer
George S. Fischer

George S. Fischer, Senior Vice President of Trading, Margin Lending and Cash Management for E*Trade Financial, brings over 12 years of experience delivering trading products and digital solutions to investors. Prior to joining E*Trade, Fischer founded the telecommunication software company NetAdvantage, and held management consulting roles with Navigant Consulting.

 

 

 

George S. Fischer
Thomas A. Frank

Thomas A. Frank, Executive Vice President and Chief Information Officer for Interactive Brokers, is a technology leader with extensive risk management expertise. He has been a driver of strategic value in building tools to make trading simpler, visual and automated.

 

 

 

 

George S. Fischer
Eric W. Noll

Eric W. Noll, President and Chief Executive Officer of ConvergEx Group, has an extensive background in equity derivatives. Previously, Noll was Executive Vice President of Transaction Services at NASDAQ OMX, Inc. in the U.S. and U.K., from 2009 to 2013. He also has held senior management positions at Susquehanna International Group, the Philadelphia Stock Exchange, and the Chicago Board Options Exchange.

 

 

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New OIC Research Highlights Potential for Listed Options

At the 2015 Options Industry Conference in Miami, Florida, OIC announced two new research studies that highlight the potential for the use of listed options.

A study conducted by professors at the University of Notre Dame and Mississippi State University called "The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks During 2003-2013," found that some options-based portfolio strategies seemingly outperform long stock and improve the risk-return tradeoff of long equity portfolios over time. The study, which was supported by OIC, is novel in that it compares the performance of several different options strategies, rather than a single strategy, using equity options. To read more about this study click here.

Also released at the conference was a study conducted by Structured Retail Products (SRP), which profiles recent trends in the European structured product market. The study, "Analysis on Structured Products and Listed Equity Options in Europe: An Industry Overview and Future Prospects," showed that many common structured products can be replicated using listed options, and that while the outlook includes rising structured product volumes in Europe, their issuances were expected to move to a listed environment. SRP is a research firm that provides market intelligence for the global structured products industry. To read more click here.

These studies highlight the opportunity for OIC and OCC to increase the level of awareness of the benefits and risks of exchange-listed options with key market participants, thus further promoting the possibility of continued growth of the options markets.

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From Capitol Hill

April and May were busy months on Capitol Hill with respect to the financial services industry. The U.S. Department of Labor (DOL) issued a new proposed regulation that would significantly expand the definition of the term "fiduciary," for purposes of the Employee Retirement Income Security Act (ERISA), and the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended.

The DOL also proposed various new and revised exemptions to the prohibited transaction rules that apply to ERISA plans, such as 401(k) plans, and individual retirement accounts (IRA). The Coalition is very concerned that the proposed changes would have the effect of depriving IRA and plan customers of their current ability to use listed options in their retirement accounts to save for retirement.

The Coalition is planning to submit a comment letter on the proposal, as well as solicit the support of several key members of the House of Representatives and the U.S. Senate. The Coalition is also working with other groups, including SIFMA, to jointly communicate the financial industry's concerns about this proposal.

On the issue of cybersecurity, the House of Representatives debated and passed two bills aimed at improving the cybersecurity information sharing between the private sector and the federal government. The House passed the Protecting Cyber Networks Act, sponsored by Representative Devin Nunes (R-CA), in a bipartisan vote of 307-116. The House also passed the National Cybersecurity Protection Advancement Act of 2015, sponsored by Representative Michael McCaul (R-TX).

Both bills would authorize the sharing of cyber threat indicators between the private sector and the federal government, as well as private sector-to private sector sharing. In addition, both bills provide liability protection for sharing of cyber threat indicators between the private sector and government as well as private sector-to-private sector sharing. The debate regarding cybersecurity policy now moves back to the Senate.

On March 13, the Senate Select Committee on Intelligence passed the Cybersecurity Information Sharing Act, sponsored by Senator Richard Burr (R-NC). OCC's Washington office is working closely with the Financial Services Sector Coordinating Council, monitoring developments in both the House and Senate on cybersecurity.

Finally, the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit held a series of hearings on reauthorizing the Commodity Futures Trading Commission (CFTC). The Committee heard from the perspectives of end-users and market participants and from several of the CFTC Commissioners. The CFTC was last reauthorized in 2008. In the last Congress, the House passed the Customer Protection and End-User Relief Act, sponsored by Representative Frank Lucas (R-OK), but time ran out in that Congress before it was considered in the Senate. Because of this, the House Agriculture Committee is again working on a new bill to reauthorize the CFTC. OCC is working with the House Agriculture Committee staff to ensure that this current reauthorization bill will not have any negative impacts on OCC or the U.S. options markets.

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OCC in the News


OCC Weighs in on MiFID II Market Impact

In the May 4 issue of Pensions & Investment magazine, a media platform that targets pension fund managers and asset managers, Scot Warren, OCC Executive Vice President of Business Development and OIC, weighed in on a story discussing how rules implemented by European market regulators to apply equity templates to trading in other asset classes will be felt by U.S. money managers and asset owners. Scot said the death of OTC markets isn't "a pre-ordained outcome. Those over-the-counter markets are evolving to meet regulations but also to meet the needs of the buy side and the sell side. The impetus is towards centralization, but if OTC trading can meet the needs of transparency, changes won't close all avenues to OTC." The story said that such changes could cause asset owners to move to more in-house management.



Craig Donohue Talks About OCC's Future

In the April issue of FTSE Global Markets magazine, OCC Executive Chairman Craig Donohue talked about the key strategic imperatives driving the company's business.

The story stated OCC has been recapitalized, its management team has been strengthened, and the corporation has undertaken a series of regulatory remedial objectives. Craig emphasized that the overarching strategy is "to extend our capabilities to securities finance and OTC markets. OCC is the only clearinghouse for securities lending transactions where we guarantee return of stock or cash to bilateral and exchange-traded stock loan participants. We also are working to introduce the same benefits to the equity repo markets," Craig said. The story concluded by saying "clearinghouses are just one element of that post-trade mix, but it is an increasingly important one and a business that will be increasingly interpolated into much of the capital and investment markets going forward."

 
Audio of OCC Leaders from Options Industry Conference


Listen to the panel, Managing Operational Risk in a New Era of Regulatory Oversight which includes OCC's John Fennell, discuss two risk management topics – risk weighted asset ratios under Basel III and risk controls. The audio coverage is taken from the 2015 Options Industry Conference and provided by The Options Insider.

The Fireside Chat includes OCC panelists Carolyn Mitchell, OCC Business Development, and Joe Corcoran, OCC Government Relations. They update the audience on recent developments in their respective areas including regulatory issues, capital efficiencies and education.

 
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.