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OTC Options

Introduction

OCC has collaborated with dealers, buy-side participants and the ISDA Committee to formulate a clearing solution for OTC equity derivatives. The program will mitigate inter-dealer counterparty and systemic risk through an OCC guarantee backed by the same margin and clearing fund regimes that have served the listed options markets for 38 years. The initial product available for clearing will be cash settled options with notional value and tenor parameters. OCC anticipates a 3rd quarter 2012 launch date for dealer-to-dealer trades, followed by dealer-to-client trades shortly after. Eligible products will be expanded in Phase II.

Program Description

The OTC options will be entered into bilaterally and entered into MarkitSERV. Affirmations and confirmations will be handled in MarkitSERV and then the matched trade will be submitted to OCC for clearance. OCC will perform validation checks and send accept/reject trade messages back to MarkitSERV, MarkitSERV will notify participants of the trade status.

As the central counterparty, OCC will create positions, price new and open contracts, generate margin requirements and settle all valid contracts. OCC will provide an end of day report for trade and position activity. At expiration, OCC will automatically exercise any in-the-money option positions and settle cash movements the following business day. Trades submitted to OCC for clearing by 4 pm CT on the current business day will be processed for the current business day while trades submitted after 4 pm CT will be processed for the following business day. All OTC options will be settled in cash in U.S. Dollars.

Positions in OTC options will be commingled with listed positions within OCC's existing clearing member account structure to provide portfolio margining benefits and account for margin offsets. OTC positions will be fungible with other OTC positions with identical terms, but not fungible with listed positions. OCC expects to clear the OTC options subject to the same basic rules and procedures that are used for the clearance of listed index options. In addition, no separate clearing fund for OTC options is currently contemplated. Standard OCC risk management policies and procedures will be applied.