November 2012 Newsletter

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Industry Insight: Gary Delany

Gary Delany is the Director of European Marketing and Education for The Options Industry Council (OIC). Stationed just outside of London, he develops options marketing and educational material for the European audience. Read about OIC's opportunities in Europe, the challenges of Delany's role and more.

You've been OIC's Director of Education in Europe for nearly four years. What led you here and what is your current role?

I started in "The City," London's financial district, in 1979. Since then my entire working life has been focused on options and futures in some shape or form. Either trading them, as I did in my formative years at a commodity broker, or working for an exchange that listed them (I worked for the Philadelphia Stock Exchange in Europe for 12 years), or supplying products to options and futures houses themselves, as I did when I worked for a leading vendor. I think that it is my interest in markets and what underlies the markets – of course, supply and demand but also people – that has sustained and developed my interest.

How does the European market compare to the U.S. market?

Europe is a much more fragmented market than the United States. The phrase "European Union (EU)" makes it sound more homogenous than it really is. European regulation, for example, is evolving from a national focus to a more EU-wide one. Just like in the U.S. there are multiple competing exchanges – some of them members of the same group as many of the U.S. exchanges. National preferences, however, continue to be important. Investors still tend to favor their "home" exchange. Just as in the U.S., the exchanges are publicly listed companies, but European exchanges continue to prefer the vertical clearing model in options and futures, whereby those instruments are cleared by a clearinghouse owned by the exchange. This is in stark contrast to the horizontal model used by OCC, where a single clearinghouse clears multiple exchanges, delivering probably the lowest cost clearing in the world, and allowing exchanges to focus on product innovation and fee structure.

Europe is also different in terms of customers. European investors are more likely to be indirect investors in the stock market, typically via a fund. European investors do not have the same history of self-investment as their counterparts in the U.S. Finally, stock, stock options and futures are not the only games in town. In Europe, competing products like warrants, contracts for difference, spread betting and foreign exchange trading are all readily available to investors.

It has to be a challenge, covering such a wide area with diverse investment products, regulations, etc. What is your strategy?

There's no single approach that works best, no "silver bullet." I like to see it as successive layers of market facing activity. Under the framework of a detailed budget we actively employ a wide range of market development and educational tools: one-on-one meetings with investment banks, brokers, exchanges and money managers; presentations to interested groups (e.g., high net worth individuals and trade associations); conferences (as speaker, exhibitor or delegate); educational content-sharing agreements; the development of marketing material; advertising; and targeted marketing campaigns.

To further enhance our profile there are meetings with the press; business trips to specific countries; and the sponsorship of market studies, for example the Tabb Group Study on European order flow into the U.S. equity option market, which found that about 10% of total business originates from Europe. In summary, there are many moving parts that are all focused on the same desired outcomes: sharing knowledge and promoting best practices.

Where do you see the most opportunity for OIC in Europe in the next 3 to 5 years?

It never ceases to surprise me that options continue to be mysterious to many people, either because of ignorance, or prejudice, which I like to call "derivaphobia." So there is a lot of work for OIC to do as we advocate the responsible use of options in investment portfolios. In my opinion, there continues to be a great deal of potential from fund managers, from pension funds and also from individual investors. The financial crisis that started in 2008 has also had some positive consequences in that regulators recognize the value of a clearinghouse – witness the move of over-the-counter contracts from a bilateral to a cleared model. The horizontal, cleared structure of the U.S. equity option markets continues to deliver flexibility, competition and innovation: highly attractive qualities to any customer.

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SEC Extends Review Period of Advanced Notice OTC Rule Filing

On Friday, October 26, 2012, the Securities and Exchange Commission (SEC) extended the review period of OCC's Advanced Notice OTC rule filing for an additional 60 days under Section 806(e)(1)(H) of Title VIII of the Dodd-Frank Act (Payment, Clearing, and Settlement Supervision Act). This extension provides the SEC more time to issue either an objection under 806(e)(1)(E) or a non-objection under 806(e)(1)(G) of the Payment, Clearing, and Settlement Supervision Act.

While the extension is 60 days, the SEC is not obligated to take the entire time to complete its review of the filing. The extension should not be construed as an indication of ultimate approval or disapproval, but rather reflects the SEC's view that added time for further analysis is warranted given this is OCC's first entry into OTC clearing and this is the first Advanced Noticed filing submitted to the SEC for review.

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Industry Move to Expiration Friday Processing

OCC is transitioning the standard monthly expiration processing from Saturday morning to Friday evening, beginning June 2013. The goal of Friday Expiration is to streamline the receipt of trades and post-trades to reduce the duration of the nightly processing cycle and thereby enable clearing members to move to trade date reconciliation. This will create the same standard process for all weekly, monthly and quarterly expirations. OCC will hold meetings with clearing members to discuss processing timelines, business needs and potential implementation issues.

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From the Hill

After winning re-election, President Obama will be in Washington for another four years. But there will also be at least 78 freshmen Congressmen and 12 freshmen Senators joining him here in 2013. The House of Representatives will remain in Republican hands, but the Democrats are expected to chip away at the current 25-seat Republican majority by about seven seats. The Senate will remain in Democratic hands with a surprising majority of 55 (53 Democrats and 2 Independents) to 45 Republicans, an increase of two seats from the current 53-47 majority.

Next year, the House Financial Services Committee (HFSC) will have about eight new Republican members and three new Democratic members. It will also have a new Chairman and Ranking Member, because Chairman Spencer Bachus (R-Alabama) is term-limited and Ranking Member Barney Frank (D-Massachusetts) is retiring. Reps. Jeb Hensarling (R-Texas) and Maxine Waters (D-California) are expected to assume the positions of Chairman and Ranking Member, respectively.

The House Republican leadership will remain intact, with Rep. John Boehner (R-Ohio) continuing as Speaker, Rep. Eric Cantor (R-Virginia) as Majority Leader and Rep. Kevin McCarthy (R-California) as Majority Whip. On the Democratic side, Minority Leader Nancy Pelosi is highly likely to return to her leadership position next year, along with Minority Whip Steny Hoyer (D-Maryland).

Over in the Senate, Chairman Tim Johnson (D-South Dakota) will remain chairman of the Senate Banking Committee. The Democrats will have two openings on the Committee because Senators Herb Kohl (D-Wisconsin) and Daniel Akaka (D-Hawaii) both retired. The Republicans will have one opening because Ranking Member Richard Shelby (R-Alabama) is term-limited as Ranking Member. Senator Mike Crapo (R-Idaho), the current Ranking Member of the Securities Subcommittee, which oversees the options industry, is projected to become the top Republican of the full Committee.Senator Jack Reed (D-Rhode Island) will likely remain Subcommittee chairman, but the new Ranking Member will not be known until next January.

Senate Majority Leader Harry Reid (D-Nevada) will keep his position next year, as will Minority Leader Mitch McConnell (R-Kentucky). Majority Whip Richard Durbin (D-Illinois) and the rest of the Democratic leadership team will likely remain intact, but, with Senator Jon Kyl (R-Arizona) retiring, the Republicans will need to find a new Minority Whip, their number-two leadership position.

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Changes to Customer Account Gross Margin Take Effect

As of November 5, 2012, OCC began calculating margin requirements based on the data provided on the Customer Gross Margin file. The Commodity Futures Trading Commission (CFTC) Rule 39.13(g)(8)(i) requires a derivatives clearing organization (DCO) to calculate initial margin requirements for customer positions so that the margin requirements are equal to the sum of requirements calculated for each customer account. This rule prohibits a DCO from netting positions of different customers against one another or allowing any risk offset between customer accounts. These rules only apply to positions carried in a CFTC-regulated segregated futures account.

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OIC Expands its Outreach Efforts, Partnerships

2012 marked OIC's 20th anniversary. For two decades, OIC has worked to increase the awareness of equity options. As the industry has insurmountably grown, so too has OIC in its ways of educating investors on the proper use of options and ensuring they understand both the benefits and risks of this financial tool.

This evolution has seen OIC expand from its original focus of individual investors to include wealth advisors and institutional investors. It has led to a geographical expansion resulting in OIC's educational efforts covering all of North America as well as reaching Europe and Asia. The growth is also reflected in OIC's live seminar program, interactive website and varying digital efforts.

Making Inroads in Asia

OIC delegates made their third trip to China and its first trip to Taiwan this past October to further develop investor education that will contribute to the development and responsible use of options in China. In Taipei, OIC and the Taipei Foundation of Finance co-hosted the International Conference on the Strategic Cooperation for Options. In Shanghai, OIC presented an options seminar hosted by the Shanghai Municipal Bureau of Foreign Expert Affairs. OIC signed Memorandums of Understanding with the Shanghai Association for International Exchange of Personnel and the Shenzhen Stock Exchange. These partnerships will continue to educate investors, professionals, regulators and industry organizations in China about exchange listed options. The significance of the trip is apparent, as additional partnerships with several Chinese organizations are in the works.

(Front right) Gina McFadden, OIC President, signs a Memorandum of Understanding with Shenzhen Stock Exchange in China on October 23. Also in attendance at the ceremony, Mary Savoie, OIC Executive Director (back row right).

Pension Funds and Credit Unions: New Audience for OIC

On September 27, NYSE Amex and OIC partnered to present a Thought Leadership Forum at the New York Stock Exchange. Two panel discussions, one focused on wealth advisors' use of options and the other on pension funds, were presented to nearly 100 pension fund managers and wealth advisors. This event evolved from the Wealth Advisors Summit that was held earlier this year in conjunction with the annual Options Industry Conference. In addition to working with wealth advisors, OIC is exploring ways to introduce options strategies to pension fund managers and credit unions.

Reaching out to Universities

OIC recently held its university outreach program, The Road to Wall Street: Analyze Your Options, in Chicago on November 2 at the Stuart School of Business at the Illinois Institute of Technology (IIT).

The Road to Wall Street program takes place at a partner university in order to educate students, primarily undergraduates, about careers within the options industry. The IIT event gathered close to 200 students. Features included keynotes by OCC President, Treasurer and COO Michael Cahill and OptionsCity CEO Hazem Dawani – who is an IIT alumnus – as well as panel discussions titled "How the Listed Options Markets Work" and "Getting Started in the Options Business." Panelists, who were noted speakers and professionals within the industry, spoke about their experiences, telling students where the options market is headed and how to get started in this business. Other schools that have previously hosted the program include Baruch University (New York), Drexel University (Philadelphia) and Rutgers University (New Brunswick and Newark)

For more information on OIC's outreach efforts or ways to partner with OIC, contact Mary Savoie at

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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.