John Fennell Discusses Establishment of Innovative Committed Repurchase Facility with Pension Fund

March 20, 2015
OCC News -

John Fennell

OCC recently announced the establishment of an innovative pre-funded, committed repurchase facility with a leading pension fund. The new facility increases OCC's overall liquidity resources from $2 to $3 billion, while diversifying its committed lenders to include qualified pension funds in addition to its existing participant base of banks and broker-dealers. Executive Vice President of Financial Risk Management, John Fennell shares insight on the company's decision to expand its liquidity resources.

What prompted OCC to expand its liquidity resources?

Having access to committed liquidity is critical to central counterparties like OCC to ensure that we are able to meet our payment obligations at all times and in a timely manner. 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 and growth of this 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 we have sufficient liquidity.

That being said, we are also 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, it is important that OCC explore viable alternatives to securing access to liquidity in ways that enhance our diversification of counterparties where we already have exposure (i.e., banks, broker-dealers and FCMs).

How is this agreement an innovative move for the U.S. options industry?

Given our objective of identifying alternate liquidity lenders that present right-way risk and can provide timely funding, OCC explored the concept of accessing pension funds. Working with qualified pension funds fulfills our goal of securing liquidity in a way that is not pro-cyclical, preserving the liquidity of our clearing members during a time of crisis.

OCC is the first major U.S. derivatives clearinghouse to diversify its credit facilities through a nonbank facility. In doing so, we have 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 expands the range of qualified lenders that we rely on. It's the first of its kind, and because of this it required SEC approval, which we received in January.

Is OCC pursuing this type of agreement with other pension funds?

This was the initial step in diversifying our liquidity sources while promoting an alternative we hope will be viable long term. As we 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.

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