September 2012 Newsletter

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In This Issue

OCC Designated Systemically Important Financial Market Utility

On July 18, OCC was designated as a systemically important financial market utility by the Financial Stability Oversight Council (FSOC) as part of the Dodd-Frank financial overhaul law. This designation requires compliance with prescribed risk management standards and heightened oversight by U.S. financial regulators, the details of which remain in progress. The Dodd-Frank Act and related FSOC provisions are designed to promote robust risk management and safety and soundness, reduce systemic risk and support the stability of the broader financial system. OCC expected this designation, which reflects its critical role within the U.S. financial markets infrastructure.

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Joseph Corcoran Shares His Washington Agenda

Joseph Corcoran, OCC's First Vice President and Head of Government Relations, discusses a few of his current priorities in Washington, D.C. He reveals OCC's expectations for recently being named a systemically important financial market utility, touches on the company's stance on options trading tax issues and more.

What are some of the implications of the systemically important financial market utility designation for OCC?

As you may be aware, the legislation in the Dodd-Frank Act that provided for the designation of OCC as a systemically important financial market utility (FMU) also has modified the regulatory regime for OCC. The Securities and Exchange Commission (SEC) will continue to be our primary regulator, referred to as our "Supervisory Agency" under that Dodd-Frank Act legislation, but the Fed also will have oversight authority over FMUs. One of our focuses in Washington has been trying to understand what this modified regulatory regime will look like. For instance, we have been engaging in dialogue with Fed staff about regulatory best practices and expectations for FMUs like OCC.

Can you provide an update of the options trading tax issues and the efforts OCC is undertaking on the industry's behalf?

On behalf of the options exchanges (i.e., the U.S. Securities Market Coalition), OCC and the tax counsel at Covington & Burling have been working with CBOE and NYSE Amex to advocate the Coalition's positions on proposed IRS regulations that would seek to impose U.S. withholding tax on certain options transactions entered into by non-U.S. persons, such as off-shore hedge funds. In April of this year, the Coalition submitted a comment letter on the proposed regulations that generally argued that the regulations in their current form are too broad when applied to the listed options markets and could be very disruptive to those markets. Since submitting that comment letter, we have met with the IRS, Treasury and Senate staff to advocate our positions. In August, the IRS announced a delay in the effective date of the proposed regulations from January 2013 to January 2014. We view this extension of time as a positive development.

Are you focused on any other legislative or regulatory priorities?

Two of the areas that we are focused on are preservation of 60/40 tax treatment for options market makers and potential amendments to the Dodd-Frank Act. While we believe that nothing is imminent on the 60/40 front in the near term, we are keeping an eye on the issue and meeting with Congressional staff to advocate our position on it. It probably comes as no surprise given the size of the federal deficit, but we believe that significant tax reform is a possibility next year and that 60/40 tax treatment may be affected by this reform, so we are trying to stay ahead of the issue. Similarly, while we believe that no Dodd-Frank Act amendments are imminent, we are keeping close tabs on them. In this regard, the Commodity Futures Trading Commission (CFTC) is up for reauthorization next year (it is up for reauthorization every five years), and legislation governing that reauthorization could provide a real vehicle for members who would like to amend the Dodd-Frank Act.

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Industry-Wide Business Continuity Test Scheduled for October

The Securities Industry and Financial Markets Association and the Futures Industry Association, in coordination with the Financial Information Forum, are leading an industry-wide business continuity test on October 27, 2012.

The test will include options, futures, equities, fixed income, market data, settlement and payment system components. The test will require firms, exchanges and service bureaus to connect simultaneously using backup data centers and alternate operations sites to receive and transmit simulated executions and settlement interactions. The options portion of the test will include the transmission of data between OCC's backup facility and clearing members' alternate sites. This will require firms to receive and send (if applicable) test data using each firms' communication protocol (NDM, FTP+, SFTP and MQ).

Member firms participating in the test must complete basic connectivity testing with OCC prior to the October 27 test. October 13 has been set aside for pre-testing. Please contact a Member Services Representative or email occDRtest@theocc.com if you are interested in testing.

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From the Hill

With the nation's collective attention focused on the upcoming football season, sports are at the forefront of daily life, both in Washington and throughout the country. And one thing that Americans enjoy as much as watching sports is talking about sports.

To that end, a fitting analogy would be to compare Congress to soccer, which involves little scoring and is painful for many Americans to watch. In the Congressional version of "the beautiful game," as soccer is known throughout the world, the Republican team would advance the legislative ball out of the House, only to watch the Democratic team swat the ball away in the Senate with a superior defense known as the "filibuster." After two years, the score would still be tied, 0-0.

The few laws that have been enacted notwithstanding, the Republican and Democratic teams in Congress spend most of their time on defense, attacking each other with bills passed out of their respective chambers that are struck down by the other side. Two examples in July were the Senate's passage, with majority Democratic approval, of a one-year extension of the Bush-era tax cuts that would have only applied to individuals earning under $250,000 per year and the House's quick passage, with majority Republican approval, of a bill that would have provided $383 million in drought aid to livestock and other agricultural producers. The Republican-led House team wanted the Bush-era tax cut extension to apply to all taxpayers regardless of income and the Democratic-led Senate team wanted to pass a full, multi-year Farm Bill instead of a partial, temporary fix. Neither bill was passed and Congress, along with the American public, ended up scoreless going into the August recess.

The one legislative topic that both teams have actually agreed on is to fund the government for another six months so as to avoid a government shutdown on September 30. But that agreement, which still has not been approved, just keeps government funding at current levels and does not address any of the many outstanding policy disputes that both teams have so eagerly blamed each other for not fixing. Call it a draw.

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Advantages of Clearing Member Representative Program

Customer service is a primary focus at OCC. One method whereby OCC provides personal support to its clearing members is through the Clearing Member Representative Program. The program pairs each clearing member with an OCC representative who develops a relationship with the operations manager and operations staff at the firm. This enables the representative to get a full understanding of the firm's business and use of OCC services. The representative is responsible for providing personalized service, communicating important business information such as notification of new systems and services, product and systems training and processing of required documents.

Other functions of representatives are to conduct operations orientations for business expansions, perform member visits on a yearly basis, work with new applicants with the start of the application through the activation of the firm and coordinate technical connectivity between OCC and the firm. For more information, contact memberservices@theocc.com.

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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.