September 2018

OCC Clears the Path to Greater Capital Efficiencies for Clearing Firms

OCC has begun implementing Phase One of its new Financial Safeguards Framework and clearing fund methodology.

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OCC Clears the Path to Greater Capital Efficiencies for Clearing Firms in U. S. Exchange-Listed Options Markets

OCC is constantly searching for ways to promote stability and market integrity through effective and efficient clearance, settlement and risk management services while providing thought leadership and education to market participants and the public about the prudent use of the products we clear.

Enhancing our resiliency as a Systemically Important Financial Market Utility (SIFMU) is critical to our ability to reduce systemic risk, increase market transparency, and provide capital and collateral efficiencies for the users of the U.S. exchange-listed options markets.

One step in this strategic process is our Financial Safeguards Framework (FSF), which determines how OCC sizes its clearing fund and allocates contributions to the clearing fund from OCC's clearing members. With the approval of the FSF by the U.S. Securities and Exchange Commission on July 27, OCC began implementing the FSF on September 4.

Our current clearing fund methodology, which has been in place since 2012, needed significant modifications in order to meet new and evolving regulatory requirements and industry best-practices. Our new FSF will provide a significantly improved methodology and enhanced resources to our clearing firms and liquidity providers.

Dale Michaels, OCC Executive Vice President, Financial Risk Management, explains the key benefits for market participants from OCC's new clearing fund methodology:

OCC is committed to providing market participants with high quality and efficient clearing, settlement and risk management services, with a particular focus on elevating our risk management capabilities.

An Update from John Davidson

As we move to the midway point of the second half of 2018, I want to provide an update on what we are doing to provide you the world-class clearing, settlement and risk management services with operational excellence that you expect from OCC.

Based on what our clearing firms told us in our 2017 satisfaction survey, they are satisfied with our ability to meet their needs, most notably customer service, communication, responsiveness, reliability, and staff experience and knowledge. We also are working to enhance our capabilities as per their suggestions:

• Improve/expand ENCORE functionality
• Improve our reporting capability
• Provide greater transparency on our clearing fund and margin requirements

As President and Chief Operating Officer, let me provide an update on what we are doing in Financial Risk Management, Information Technology, and Operations in furthering our capabilities to better serve our stakeholders.

Financial Risk Management:

• We received regulatory approval of our proposed Financial Safeguards Framework that aligns to a Cover 2 standard and corrects inconsistencies in the Clearing Fund allocations. Implementation began on September 4.
• We also received regulatory approval of our proposed recovery tools and proposed recovery and wind-down (RWD) plan, providing critical tools designed to enable OCC to successfully manage extreme market disruptions in future financial crises.
• We are making enhancements to the STANS margin model calculations that will include daily, rather than monthly, updates on volatilities of all securities. This is scheduled to be implemented on October 1, pending regulatory approval.
• We also are making enhancements to the STANS margin model calculations that will address pro-cyclicality of margin changes by smoothing some of the implied volatility components that are reactive to large jumps, such as what occurred on February 5. We anticipate implementation of these changes in the fourth quarter of 2018.

Information Technology:

• We have launched a five-year Encore sustainability plan to address software component issues.
• We have vastly improved the diagnostic capabilities in Encore which are reducing support response times.
• We have improved our trade validation performance, which is leading to reduced latency during peak periods.
• We recently expanded our Encore data structures to better support clearance and settlement of bitcoin futures and NFX freight products.


• We will be filing a rule change with the SEC to require an actionable identifier on all customer and firm trades. This change will facilitate more timely and accurate processing of CMTA trades.
• We have done some fine tuning of our trade processing, which has resulted in continued improvements in processing performance and timeliness.
• As Tom Pappageorge discusses elsewhere in this issue, we are utilizing SWIFT messaging for daily cash settlement with six of our eight settlement banks, and the remaining banks will be converted soon. This action is resulting in faster payment processing and the elimination of payment errors among other benefits and efficiencies.

I believe OCC is well prepared for transformational change. We remain committed to providing our participating exchanges, clearing firms, and market participants with high quality and efficient clearing, settlement and risk management services. With plans for a new technology platform being developed, we will continue to meet the regulatory requirements expected of us as a Systemically Important Financial Market Utility, while also weighing new business opportunities to better serve the users of our markets and fortify OCC’s position as the foundation for secure markets.

Our goal is to meet or exceed the standards we set last year for our clearing firms and exchanges. By delivering operational excellence, we can clear the path to even better service for market participants and the greater public interest.

OCC Recovery Tools, Recovery and Orderly Wind-Down Plan Approved by SEC

The U.S. Securities and Exchange Commission approved OCC's proposed recovery tools and proposed recovery and orderly wind-down plan, providing critical tools designed to enable OCC to successfully manage extreme market disruptions in future financial crises.

OCC is the first Systemically Important Financial Market Utility (SIFMU) whose primary supervisory agency is the SEC to have its recovery tools and RWD plan approved by the SEC.

"Today's approvals are significant accomplishments that allow OCC to further align its recovery and wind-down planning with its peer clearing organizations and conform to accepted international standards in the Principles for Financial Market Infrastructures," said Craig Donohue, OCC Executive Chairman and Chief Executive Officer. "They also enhance OCC's ability to successfully manage extreme market disruptions that may occur in future financial crises, which is critical to our mission of promoting stability and market integrity."

More details on the plan’s enhancements to OCC's resiliency can be found in the press release.

OCC Applauds Passage of Options Markets Stability Act by U.S. House of Representatives

H.R. 5749, the Options Markets Stability Act, was passed by the U.S. House of Representatives on July 10.

This legislation requires the appropriate U.S. federal banking agencies to increase the risk-sensitivity of the capital treatment of centrally-cleared options. In July, the House Financial Services Committee passed the bill by a unanimous vote of 54-0.

"OCC and the U.S. Securities Markets Coalition applaud passage of H.R. 5749, the Options Markets Stability Act. Passage of this legislation, sponsored by Representatives Randy Hultgren (R-IL) and Bill Foster (D-IL), is an important step forward in helping ensure that market makers can provide vital liquidity for investors who use the U.S. equity options markets to help manage their financial risk," said Craig Donohue, OCC Executive Chairman and CEO. "OCC appreciates the leadership of Representatives Hultgren, Foster, House Financial Services Committee Chairman Jeb Hensarling (R-TX), Ranking Member Maxine Waters (D-CA) and the other members of the Committee for securing passage of H.R. 5749."

A companion bill was introduced in the Senate on July 26, as reported below in the Update from Capitol Hill section.

OCC Launches New Brand Identity

OCC is an important market utility intently focused on sound risk management, increased policy advocacy, and compelling educational content. The new OCC brand identity, launched on June 21, reflects these important characteristics of the organization.

The new OCC logo represents the stable foundation the company provides to financial markets. The square shape is a building block and the basis of a pattern found throughout the company's visual identity. The evolution of color from green to navy and gray evokes durability and security, and provides a powerful statement when combined.

"This new brand identity is an exciting change for OCC. It represents our evolution from being not only an important market utility, but also becoming an acknowledged industry influencer and thought leader," said Craig Donohue, OCC Executive Chairman and CEO. "Over the past 45 years our talented team of colleagues has built a solid foundation with a strong reputation for delivering sound risk management and capital efficiencies to the markets we serve. This new branding will support our tireless work to clear the path and enable a stable tomorrow for market participants in our role as the foundation for secure markets."

The OCC brand is as much about reputation and risk management as it is about identity. The new brand identity sets expectations for what people should see, hear, and expect from OCC. It also provides OCC with a way to "live the brand" by translating its values into tangible action. The new visual identity, guiding actions and rally cry, in conjunction with the company's mission, purpose and values, emphasizes OCC's brand promise to enable a stable tomorrow.

Q & A with Tom Pappageorge, OCC's Vice President of Collateral Services

Tom Pappageorge discusses OCC’s expansion of SWIFT messaging to facilitate daily cash settlement.

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") is a globally recognized leading provider of secure messaging services. Thousands of financial institutions rely on the SWIFT global network on a daily basis to communicate instructions for payment, securities, and other business purposes via standardized instruction messages.

What is the latest news about OCC and SWIFT?

OCC undertook a large scale effort to incorporate SWIFT messaging in our daily USD cash settlement processes. Although we have been using SWIFT services in other areas over the years, this latest initiative takes us to a whole new level as OCC issues hundreds of payment instructions daily.

What do these payment instructions represent?

OCC initiates payment instructions for various purposes including but not limited to the settlement of trade premiums, stock loan and futures mark-to-market, exercise/assignment of options, margin deficits, and withdrawal requests submitted by our clearing members.

What are some of the benefits of SWIFT?

First, let me describe our settlement process without automated messaging. Primarily, banks are required to login to OCC’s proprietary web-based Online Cash Settlement ("OCS") system to retrieve/view batched settlement instructions and to then provide acceptance or rejection of those instructions. However, our system is not integrated with any of the banks’ payment systems. As a result, banks are performing manual account reviews and, in many cases, relying upon key entry to process the instructions internally. This process is time-consuming, prone to input error, and delays could impact OCC's strict settlement deadlines.

With all of our settlement banks being SWIFT capable, this was clearly the way to go. Since we have implemented SWIFT, the entire end-to end settlement process from distribution to acceptance is much more efficient. First off, banks no longer need to login to OCS to perform any actions. We are receiving payment confirmations on individual instructions, which means we are achieving settlement finality much sooner than under the previous method, and to the satisfaction of our settlement banks, manual steps have been eliminated. These are tremendous benefits in terms of operational efficiency.

Why is OCC making the transition now?

Quite frankly, this was long overdue. Over the years, we had been routinely asked the question "When is OCC moving to SWIFT?" by our banking partners and we really didn’t have a good answer. The former process, given the manual nature, had been a significant pain point for our banks.

Why are we doing it now? I think over the last few years, as OCC underwent a very positive culture transformation, it was increasingly important for us to listen to our external partners and work hard towards strengthening those relationships. Additionally, this not only aligns OCC with widely used and accepted communication protocols for payment processing, but also brings tremendous efficiencies to the process. It is risk reducing and a true win for OCC, our settlement banks and our clearing members. It is extremely exciting and rewarding to be part of this effort.

When did the process of transitioning to SWIFT start?

The process actually started in 2016 and the first bank was on-boarded in December 2017. This was quite an undertaking as it not only required all the internal and external testing and system changes necessary to support OCC’s usage of SWIFT, but also involved an extensive legal effort as we took this opportunity to re-paper the applicable banking agreements governing cash settlement.

Is OCC now using SWIFT with all eight settlement banks?

We are nearly there and expect to achieve this much anticipated milestone any day now.

OIC Sponsors Two Studies on Exchange-Listed Equity Options

The Options Industry Council, an educational resource managed by OCC, is tasked with increasing the awareness, knowledge and responsible use of exchange-listed equity options among a global audience. This past quarter, the OIC announced the results of two commissioned studies on investor behavior.

In May, Greenwich Associates released an OIC-sponsored study, How Institutional Investors Use and Think About Exchange-Listed Options. The study found that more than 80 percent of institutional investors surveyed who currently use exchange-listed options are satisfied with the performance against major market benchmarks.

"The valuable insights gained from this study will support our continued efforts to provide the most relevant educational thought leadership to asset managers, pension funds, and endowments. We want to lead deeper discussions with the institutional investor community on the strategic benefits of exchange-listed options and how exchange-listed options strategies potentially improve risk-adjusted returns and address the pension elephant in the room, which is underfundedness," said Joseph Cusick, OIC Director of Institutional Investor Education.

In June, Burton-Taylor International Consulting released an OIC-commissioned study, European Demand for U.S. Exchange-Listed Equity Options 2018. European investors account for approximately nine percent of total U.S. exchange-listed equity option order flow. The magnitude of their U.S. equity holdings has increased 52 percent since 2013 to a total of $461 billion in 2017, continuing to drive the demand for risk management strategies for portfolio protection, according to the study.

"European investors are clearly focused on U.S. exchange-listed equity options, as these markets provide investors with the deep liquidity and product diversity to support their U.S. focused strategies," said Andy Nybo, Director at Burton-Taylor International Consulting. "The range of available products provides considerable flexibility for a broad variety of income and risk management strategies, with rising demand from institutional and retail investors supporting future growth."

"The Burton-Taylor study builds upon previous studies done in 2014 and 2011 and provides OIC with invaluable insights as we look to develop and grow our international educational initiatives," said Gary Delany, Director of European Education for OIC.

Update from Capitol Hill


Bi-Partisan Options Markets Legislation Adds Additional Senate Support

On August 23, Senator Richard Durbin (D-IL) announced he would co-sponsor S. 3283, the Options Markets Stability Act, a bi-partisan Senate companion bill to H.R. 5749, which originally passed the House of Representatives by a unanimous vote of 385 – 0 on July 10. S. 3283 directs the federal banking regulators to propose and promulgate a rule to increase the risk-sensitivity of capital treatment for centrally cleared options. Senator Durbin joins Senators Mike Rounds (R-SD) and Tammy Duckworth (D-IL) in supporting S. 3283. Senator Durbin’s backing of S.3283 also provides additional bi-partisan support for including the House-passed Options Markets Stability Act language in a larger legislative package that may be considered by the Senate and House in the coming weeks.

Senate Votes to Confirm Nominees to SEC, CFTC and Federal Reserve Board

On August 28, the U.S. Senate confirmed the nominations of Dawn Stump and Dan Berkovitz to be members of the Commodities Futures Trading Commission (CFTC). Ms. Stump, the Republican nominee, served as executive director of the Americas Advisory Board for the Futures Industry Association and as vice president at NYSE Euronext. She also served on the staff of both the House and Senate Agriculture Committees, focusing on derivatives policy issues. The Democratic nominee, Mr. Berkovitz, is a partner at the law firm of WilmerHale, and served as former CFTC general counsel during the Obama administration. With the confirmations of both Ms. Stump and Mr. Berkovitz, the CFTC has a full complement of five commissioners for the first time since 2014.

In addition to approving the CFTC members, the Senate also voted to confirm the nomination of Richard Clarida to be Vice Chairman of the Board of Governors of the Federal Reserve System, for a four-year term. Mr. Clarida replaces former Vice Chairman Stanley Fischer, who resigned in 2017. Mr. Clarida’s nomination was approved by the Senate Banking Committee on June 12, following a hearing by the Senate Banking Committee on his qualifications. Mr. Clarida was previously an economics professor at Columbia University and has been a managing director at PIMCO since 2006. Mr. Clarida also served under the George W. Bush Administration as an assistant secretary in the U.S. Department of the Treasury. He received his Bachelor of Science degree from the University of Illinois and his Masters and Doctorate in Macroeconomics at Harvard University.

Finally, on September 5, the U.S. Senate voted to confirm the nomination of Mr. Elad L. Roisman to be a member of the Securities and Exchange Commission (SEC). Mr. Roisman’s nomination to the SEC had bi-partisan support in the Senate Banking Committee, which advanced his nomination in August. Mr. Roisman, nominated by President Trump to fill the seat previously held by Commissioner Michael Piwowar, previously worked at the SEC as counsel to former Commissioner Daniel Gallagher. He also worked as an attorney at NYSE Euronext Inc. and as an associate at Milbank, Tweed, Hadley & McCloy LLP. He most recently served as Chief Counsel to Senator Mike Crapo (R-ID), Chairman of the Senate Banking Committee.

House Committee Examines Upcoming CFTC Agenda

On July 25, the House Agriculture Committee held a hearing entitled, “Examining the Upcoming Agenda for the Commodity Futures Trading Commission” (CFTC). The Committee examined the regulation of derivative clearinghouses and how the current Brexit negotiations with the European Union (EU) are impacting the 2016 CFTC-EU Equivalency Agreement between the U.S. and the EU on central counterparty clearinghouses. The purpose of this hearing was to give the members of the Agriculture Committee, which has oversight over CFTC, the opportunity to hear from CFTC Chairman J. Christopher Giancarlo on his agenda to improve the operation of the agency and its regulated entities.

At the hearing, Chair Giancarlo stated that the equivalency issue is bipartisan and the Federal Reserve, the President, the Treasury Department and all other relevant agencies within the federal government are unified on this issue. He added that the CCP issue is part of a broader concern related to the failure of both sides of the Brexit debate to reach a measured and mutually satisfactory resolution.

Spotlight on OCC 2018 Employee-Designated Charities

Every year, OCC employees select two company-sponsored charities, one for the Chicago office and one for the Dallas office. Each charity must align with the OCC charitable mission by focusing on assisting people and communities at risk. As part of the program, OCC will match, dollar-for-dollar, up to $50,000, employee contributions to the selected charities.

This year, the Chicago office has selected i.c.stars, a workforce development non-profit that identifies, trains and jump-starts careers for low-income young adults who demonstrate extraordinary potential for success in the business world, and who have the opportunity to positively impact their communities.

The Dallas office renewed its commitment to Metrocrest Services, a local charity focused on assisting families, individuals and senior adults who are coping with crisis situations, and who need help stabilizing their lives, or who require support to live independently. Metrocrest's assistance includes rent and utility bill aid, financial and budgeting assistance, and food donations.

Markets Media Names OCC Best Clearing House

On April 24, OCC was named Best Clearing House by Markets Media as part of the publication's 6th Annual Markets Choice Awards in New York.

The Markets Choice Awards (MCA) span the most important sectors of institutional trading and investing — buy-side investors, traders and trading desks, sell-side execution desks, exchanges and platforms, traditional technology providers and emerging fintech firms.

Winners are determined based on feedback from readers of Markets Media and Traders Magazine, as well as editorial interviews with leaders in financial markets and the MCA Advisory Board.

Editorial Team

  • David Prosperi
  • Editor
    Senior Vice President,
    Corporate Communications and OIC
  • (312) 322-4484
  • Angela Kotso
  • Senior PR Specialist
  • (312) 322-6267
  • Alex Starace
  • PR Specialist
  • (312) 322-4529
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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.