Market Overview

OCC Financial Safeguards Framework Approved by SEC


OCC, the
world's largest equity derivatives clearing organization
, today
announced that the U.S. Securities and Exchange Commission approved the
company's proposed Financial Safeguards Framework, which impacts how OCC
sizes its Clearing Fund and allocates contributions to the Clearing Fund
from OCC's clearing members. OCC plans to implement the FSF starting 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 Financial
Safeguards Framework will provide a significantly improved methodology
and enhanced resources to our clearing firms and liquidity providers,"
said Craig
, OCC Executive Chairman and Chief Executive Officer.
"Enhancing our resiliency as a 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 and futures markets."

Market participants will see several key benefits from OCC's new
clearing fund methodology:

Improved Methodology: The size of OCC's
clearing fund will now be based on stress testing results that include
historical and other "extreme but plausible scenarios" rather than
trebling margin variances.

  • The new FSF will reduce pro-cyclicality by decoupling the simultaneous
    increase in margin and clearing fund contributions that can place
    undue liquidity demands on OCC's clearing members.
  • The new FSF will also make the manner in which OCC handles stress
    shocks on index options products and single-name equity options
  • The new FSF will eliminate the $1.8 billion "prudential margin of
    safety" given the improved methodology enhancements.

Enhanced Resources: OCC's new clearing fund
will now be sized to cover the simultaneous default of its two largest
clearing members ("Cover Two") versus a default by its single largest
clearing member ("Cover One").

  • While the new Cover Two approach exceeds U.S. regulatory requirements,
    this higher standard better aligns OCC with other systemically
    important derivative clearing houses, including CME and ICE.
  • Moving to Cover Two also allows OCC to meet international standards,
    which will be important for OCC in ultimately achieving recognition as
    a "Qualified Central Counterparty" in Europe.
  • Meeting Cover Two requirements will also better enable OCC to maintain
    its exceptional AA+/Stable credit rating by Standard & Poor's. Of the
    9,328 global entities and sovereigns rated by S&P, only one percent
    have a AA+/Stable rating like OCC, reflecting our efforts to
    strengthen our FSF and promote stability and market integrity through
    effective and efficient clearance, settlement and risk management

Risk-Based Allocation: The new FSF more
appropriately risk-weights OCC's allocation of clearing fund
contribution requirements to each of its clearing members. OCC's
clearing fund now will be allocated to clearing members based on 70
percent margin risk, 15 percent open interest, and 15 percent cleared
volume, rather than 35 percent margin risk, 50 percent open interest,
and 15 percent cleared volume under the current methodology. Margin risk
provides a transparent and easily understood metric for clearing firms
and aligns incentives with clearing members by increasing the allocation
to members with more margin risk.

About OCC

OCC is the world's largest equity derivatives clearing organization and
the foundation for secure markets. Founded in 1973, OCC operates under
the jurisdiction of both the U.S. Securities and Exchange Commission
(SEC) as a registered clearing agency and the U.S. Commodity Futures
Trading Commission (CFTC) as a Derivatives Clearing Organization. Named
2018 Best Clearing House by Markets Media, OCC now provides central
counterparty (CCP) clearing and settlement services to 19 exchanges and
trading platforms for options, financial futures, security futures, and
securities lending transactions. More information about OCC is available

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