Bringing Innovative Ideas to the Market

July 11, 2016

With our continued focus on innovation, OCC is always asking the question of how we can bring the right ideas, products and services to the market.

One such answer was our creation last year of an innovative, pre-funded, committed repurchase facility with CalPERS, the largest U.S. pension fund. This facility increases OCC's overall liquidity resources from $2 to $3 billion, while diversifying its committed lenders to include pension funds in addition to its existing participant base of banks and broker-dealers.

For 2016, we renewed the committed credit facility with CalPERS. Some of the concerns with the original agreement were that the maturity of our lines, both bank-based and pension-based, occurred during the fourth quarter. Therefore, we took steps to address some of these concerns by laddering the maturity schedule of the CalPERS line; staging the maturity for $500 million of the resources with a renewal in June and the remaining $500 million maturing in January of 2017. Moving forward, we plan to consider additional diversification of the maturities of these lines which would lend to the increased overall resiliency of OCC.

Having access to committed liquidity is critical to central counterparties like OCC to ensure that we meet our payment obligations at all times and in a timely manner in our role as a foundation for secure markets. These resources safeguard OCC's guarantee to satisfy all obligations, even if its largest clearing member fails, which promotes the uninterrupted flow of settlements within our markets. Given the dynamic nature of the listed options industry, we continuously monitor our liquidity demands. Based on certain historical observations and forecasted derivatives volume, we determined it was prudent to raise our committed resources by $1 billion to ensure that OCC has sufficient liquidity.

That being said, we also are highly sensitive to both the demand and supply side of liquidity. We must have access to a sufficient supply of committed liquidity long-term to support the anticipated growth in derivatives. Given the changes impacting the way banks account for committed liquidity on their balance sheet, which would effectively reduce the supply of liquidity available to central counterparties like OCC. So we felt it was important to explore viable alternatives to securing access to liquidity in ways that enhance our diversification of counterparties where we already have exposure.

To do this, we felt we had to take an innovative approach, given our objective of identifying alternate liquidity lenders that present right-way risk and can provide timely funding. We explored the concept of accessing pension funds. Working with qualified pension funds such as CalPERS fulfills our goal of securing liquidity in a way that is not pro-cyclical, preserving the liquidity of our 115 clearing members during a time of market crisis.

I am proud to say OCC was the first major U.S. derivatives clearing house to diversify its credit facilities through a non-bank facility. In doing so, we enhanced our ability to meet settlement obligations in times of stress, thereby reducing systemic risk and promoting safety and soundness in the financial markets. Implementing this solution expanded the range of qualified lenders that we can rely on.

For OCC, this was the initial step in diversifying our liquidity sources while promoting an alternative we hope will be viable long-term. As we continue to validate the model and as more lenders enter the marketplace, we anticipate that pension funds will become an increasingly attractive liquidity source to reduce concentration risk and overall pro-cyclicality, thus improving the resiliency of our markets. Depending on our needs we plan to maintain a level of diversification in our committed liquidity through a mix of traditional and pension-based funding.

John Fennell is Executive Vice President, Financial Risk Management, for OCC, the world's largest equity derivatives clearing house and the foundation for secure markets.

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