OCC announced
today its Board of Directors approved a newly formed capital plan designed to
comply with proposed new standards for covered clearing agencies. Under the
plan, OCC's existing stockholders, Chicago Board Options Exchange,
Incorporated, International Securities Exchange, LLC, NASDAQ OMX PHLX LLC,
NYSE MKT LLC, and NYSE Arca, Inc. will contribute $150 million in equity
capital, increasing OCC shareholders' equity to approximately $247 million by
Q1 2015.[1] The existing stockholders will also commit to provide specified
replenishment capital if needed. The plan, which is subject to regulatory
approval, and approval by the exchange stockholders' boards of directors, will
enable OCC to be compliant with the proposed new standards by February 2015,
well in advance of the expected implementation date.
Implementation of OCC's capital plan would increase OCC's shareholders' equity
to $247 million, which consists of $117 million of baseline capital (equal to
6 months of forward-looking expenses) and a $130 million risk buffer (covering
OCC's operational and business risks). The $247 million of shareholders'
equity would be further backed by a replenishment capital facility that would
give OCC the ability to access additional committed equity capital from the
owner exchanges in an amount up to the baseline capital (currently $117
million) in the event of unexpected losses. In total, the plan would provide
OCC with ready access to approximately $364 million in equity capital
resources.
Under the proposed plan, after retaining equity capital sufficient to ensure
that OCC remains above its target capital requirement, OCC will pay a refund
equal to 50% of distributable earnings before tax. The exchange stockholders
will then receive dividends equal to the after-tax income in excess of the
amount required to maintain OCC's target capital requirement.
The proposed plan also provides that OCC will target a 25% buffer margin on
revenue, a reduction of 6% from its 31% average over the last 10 years. The
reduction in target buffer margin reflects OCC's commitment to operating as an
industry utility and ensuring that market participants benefit as much as
possible from OCC's operational efficiencies in the future. This reduction
will also enable OCC to charge lower fees to market participants rather than
maximizing refund and dividend distributions to clearing members and exchange
stockholders.
Additionally, upon receiving the requisite regulatory and exchange stockholder
approvals, OCC's new capital plan will enable OCC to declare a refund of
approximately $40 million[2] from 2014 fees to its clearing members and to
return to a lower effective fee schedule during the second quarter of 2015.
"OCC's new capital plan puts us in a strong position to comply with proposed
new regulatory capital requirements while minimizing negative impacts on
market participants," said Craig Donohue, OCC Executive Chairman. "It creates
an even stronger partnership and alignment between our exchange stockholders
and our clearing members and accelerates our compliance with the proposed new
capital standards. Most importantly, this plan eliminates the need for OCC to
raise fees and burden the industry for a prolonged period, enabling us to
return quickly to the efficient, low cost operating model that has served our
markets well."
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