October 2011 Newsletter

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In This Issue

  • Cleared Futures Volume
  • Update from The Hill
  • Industry Insight: Jean Cawley
  • Clearing News & Resources

A Record Year for OCC Cleared Futures Volume

The number of futures contracts cleared by OCC surpassed last year's record of 26.6 million contracts in mid August, and by mid September was already posting a 13 percent increase at more than 30 million contracts.

This volume surge is, of course, a result of the strength and competitive proposition presented by the five financial, commodity and security futures exchanges for which OCC provides clearing services.

Through June, the number of futures contracts cleared by OCC had outpaced the same period last year by 56 percent. Average daily volume last month was also up around 56 percent.

While OCC's experience clearing futures trades goes back to the 1980s, futures were not part of OCC's business mix for about a decade until the passage of the Commodity Futures Modernization Act in 2000. In 2002, OCC began its current era of futures clearing with security futures traded at OneChicago and NASDAQ-LIFFE (later NQLX and now defunct). In addition to OneChicago, OCC clears futures contracts traded on CBOE Futures Exchange, NYSE Liffe, NASDAQ OMX Futures Exchange and ELX Futures.

The last year and a half has seen a dramatic rise in the number of futures contracts cleared by OCC. For the seven year period 2002 - 2009, OCC cleared a total of 46.1 million futures contracts. Compare that to the 47.4 million futures contracts cleared since January 2010 through June 2011. In fact, 2011 alone is on pace to see more than 40 million futures contracts cleared.

Options continue to account for the vast majority of contracts cleared at OCC. Although futures contracts are a small percentage of total contracts cleared, their share has grown lately - up 98 percent in 2010 and already up 37 percent in the first half of 2011.

Update from The Hill

Last May, the House Financial Services and Agriculture Committees separately passed by a straight party-line vote H.R. 1573, a bill that would delay until late 2012 the implementation of most of Title VII, the derivatives title of Dodd-Frank. The majority Republicans on both committees argued that the agencies need time to properly implement the rules and the sheer amount of rules has made it difficult for stakeholders, such as end-users and clearinghouses, to participate. Democrats argued that Congress gave the agencies a mandate to reform Wall Street and that the timeline under Dodd-Frank is appropriate. In addition, they note that the regulators can simply miss the deadlines in question without any penalty, which negates the need for legislation.

H.R. 1573, which was passed by the House but is not expected to be considered by the Senate, came about in part due to the size and complexity of the undertaking. The Commissions were not able to complete a comprehensive regulatory roll-out by July 16, as required under Dodd-Frank. To solve this problem, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) agreed to delay the requirements under Title VII that were to go into effect 360 days after Dodd-Frank was signed in to law on July 16, which impacts many of those who use and trade derivatives. Provisions of Title VII that are self-executing or not subject to a July 16 implementation date are not affected.

In an effort to prevent legal uncertainty regarding the applicability of the rules in question, the SEC and CFTC have told market participants that they do not need to comply with the new regulatory framework for at least six months. Since the stakes are so high, both the House and Senate will be watching the SEC and CFTC very closely and will likely hold oversight hearings concerning this important issue in the coming months.

Jean Cawley, Senior Vice President, Deputy General Counsel and Chief Compliance Officer

Industry Insight: Jean Cawley, Senior Vice President, Deputy General Counsel and Chief Compliance Officer

Jean Cawley is Senior Vice President and Deputy General Counsel at OCC. This past January, Cawley was selected to also serve as the organization's Chief Compliance Officer. She recently sat down with OCC News to discuss her newly added responsibilities within the company and OCC's plans for building a compliance program from the ground up.

How did you get your start in the derivatives industry and then OCC?

It's probably more appropriate to say how I got started in the securities industry. My first job out of law school was with the local office of the Securities and Exchange Commission (SEC) and its enforcement group. My responsibility as a staff attorney was to investigate for possible violations of federal securities laws, which brought in several cases that dealt with listed options. At a time I was ready for a career change, a former SEC colleague told me about a position at OCC. I joined as an attorney, then over a 20-year period transitioned into my current role.

Along with your responsibilities as Senior Vice President and Deputy General Counsel, you were recently named OCC's first Chief Compliance Officer (CCO). Why was this role created?

It is a mandated role, a requirement that is now being imposed on registered clearing agencies and registered derivatives clearing organizations of which OCC is one of each. More specifically, the Dodd-Frank Act requires clearing organization registrants to have a CCO with certain designated responsibilities as specified by statue as well as by regulation. OCC holds a firm belief that it is entirely appropriate for a clearing organization's compliance function to be supervised by in-house counsel. Inside counsel are well qualified to manage compliance activities given their overall familiarity with statutory and regulatory requirements plus their organizations' own rules and procedures.

“OCC holds a firm belief that it is entirely appropriate for a clearing organization's compliance function to be supervised by in-house counsel.”

For an organization as complex as OCC, it's important for the compliance officer to have a strong insight into the by-laws and rules, while at the same time possessing a firm understanding of how operational and business systems, processes and procedures interrelate with one another. Even though compliance is a separate activity, it does need to be thought of as working hand in hand with the legal group.

What are your key responsibilities as Chief Compliance Officer and what steps have you taken to develop a Compliance program at OCC?

First and foremost, a key responsibility is to create and administer a program that is designed to assess compliance with legal and regulatory requirements. The compliance program will need to guide, monitor, test and report on our organization's progress in meeting both existing and newly imposed requirements. Critical to that mission is making sure OCC employees are educated so that they understand regulatory standards and expectations in order to ensure business conduct is aligned with them. Equally important is to continually test, evaluate and adjust, as needed, applicable procedures, processes and systems. Compliance is a never-ending activity that requires constant self-awareness and assessment.

Obviously, our program is still in the design phase, but one of the first things we did was to ask OCC's internal departments to conduct an inventory of procedures that are tied to regulatory or legal requirements. We want to see what processes are currently in place that supports compliance. As a company, I believe OCC is already doing a great job from that perspective, but looking at where we are at now and where we need to go will be crucial in developing a strong program.

“Compliance is a never-ending activity that requires constant self-awareness and assessment.”

As a dual registrant, OCC's compliance program also needs to account for the separate requirements imposed by our principal regulators. A primary goal as we build up this program is to reflect that awareness by developing two separate compliance matrixes. The first will focus on applicable SEC requirements and the second will address regulations that come under the Commodity Futures Trading Commission (CFTC) umbrella. Assisting OCC in this effort is our recently hired Compliance Director as well as outside counsel. Our compliance director is working with outside counsel on creating these matrixes and will also develop a company-wide compliance manual, among other projects. At the end of the day, we hope to have an overall outline of how OCC complies with regulations along with a manual specifically addressing how we will test and report on compliance, keeping in mind that it is going to be constantly changing and evolving process.

What are some of the hurdles, if any, that you have come across so far in your new role, and do you anticipate future challenges ahead?

The first hurdle was to understand and develop my own sense of what a Compliance program at OCC needed to be, then start to hire the right people to help me build the program. My initial thoughts were to bring in another lawyer, but I ultimately elected to expand our search criteria in order to meet with a range of qualified individuals who may not be attorneys, nevertheless, understand how to move this program forward.

If you look at the incredible number of regulations that have been proposed by the SEC and CFTC that affect clearing organizations, it shows the enormity and depth of what is involved with building a compliance department from scratch. Certainly getting this program up and running to point where it's going to be readily maintainable will be a challenge into the future.

“Certainly getting this program up and running to a point where it's going to be readily maintainable will be a challenge into the future.”

I am also learning to distinguish the subtle differences between acting as an attorney versus as the compliance officer. This difference becomes important because acting in a legal capacity may be subject to certain privileges - like attorney-client privilege - that are not in effect when acting in a compliance role. I continually try to maintain awareness of this difference by asking myself whether I am functioning purely as a lawyer in the context of giving legal advice or if I'm strictly wearing the Compliance hat. Many times I feel that I need to wear both at the same time.

How does the development of a Compliance department benefit OCC and the industry as a whole?

OCC has a critical role in the U.S. financial market. We have the day-to-day performance of what we do - clearing options and futures contracts, which is obviously very important. The industry comes to us for clearing services because we are cost effective, service-oriented and we excel at what we do. I think those who use our services - and you can add in the regulators as well - are our stakeholders. They are the ones who need to be assured that OCC is acting in a manner that is consistent with all applicable laws and regulations and that we are doing so with integrity.

A Compliance program at OCC serves as a way to uphold our longstanding reputation and further increase stakeholder confidence in what we do. Not only are we a clearing organization, but we are self-regulatory as well so that means we are suppose to do things right. A Compliance program definitely underscores the significance of that role.

Ground-Breaking Study on Advisors' Use of Options Released

In an unprecedented move, The Options Industry Council (OIC) recently commissioned Bellomy Research to interview more than 600 financial advisors throughout the U.S. regarding their use of options. The results of this benchmark study revealed some compelling findings including that options usage among advisors is on the rise and nearly half used options in the last year for their clients. Additionally, more than one-third of financial advisors who trade options increased their use over the past few years, and one in three say they intend to increase it going forward.

The study also showed that advisors with larger books of business are significantly more likely to use options than those with smaller books. Nearly all of the largest advisors use options for at least some of their clients. Financial advisors are using options primarily for income generation and hedging in response to market conditions, and they are very often doing so at the request of their clients. As OIC continues to move full steam ahead in its initiative with the financial advisor segment, the results of this study will certainly help shape the direction of OIC's educational efforts in the future.

To access the executive summary and full study findings, visit: http://www.optionseducation.org/press/files/fa-benchmark.pdf.

Mark Your Calendar

October 10-12, 2011

Look for OCC at this upcoming event:

FIA Expo - 27th Annual Futures & Options Expo
Chicago Hilton Hotel

Click here for more information.

May 3-5, 2012

Mark your calendar for an event you don't want to miss!

The 30th Annual Options Industry Conference
The Roosevelt, New Orleans

Click here to receive information, email updates and the latest news about the 2012 Conference.


Clearing News & Resources

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

In the latest edition of Options Central, OIC Instructor Steve Meizinger of the International Securities Exchange writes on the topic of "Further Insight into Options Pricing: The Rationale for Multiple Implied Volatilities - Options Skew." To read the article in its entirety, click here.


OCC News Archive

Click here for prior issues.

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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.