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OCC Issues Paper on Central Clearinghouse Resiliency and Stability

In the midst of record cleared contract volume, OCC, the world’s largest equity derivatives clearing organization, has released a paper titled, Optimizing Incentives, Resilience and Stability in Central Counterparty Clearing, on central counterparty (CCP) clearing resiliency, recovery and resolution. The paper details OCC’s approach as a market utility, to risk and capital management, ensuring industry feedback is received and considered, enhancing operational resiliency, and providing greater transparency to market participants.

KEY TAKEAWAYS:

  • CCPs like OCC – which stand between buying and selling parties in trades and manage the risk to the market should one side of a transaction default – have worked extremely well over the course of their existence by underpinning stable markets to the benefit of the investing public during times of market stress.
  • With record-setting cleared contract volume so far in 2020, OCC is taking new steps to further enhance its financial and operational resiliency and respond to industry feedback, including previously established skin-in-the-game, and recently announced plans to seek regulatory approval to increase it.
  • CCPs must have an eye toward supporting the entire market ecosystem, balancing, and optimizing incentives toward maximum stability, security and continued functioning in regular times and particularly in times of stress.

“CCPs have served markets and investors with extraordinary consistency since their inception” said Craig Donohue, OCC Executive Chairman. “Policymakers recognized this in the wake of the financial crisis, expanding the use of central clearing and establishing enhancements to the already successful model.”

Last month, OCC announced it would seek regulatory approval from the U.S. Securities and Exchange Commission (SEC) to amend its Capital Management Policy, which the SEC formally approved in January. It was within this Policy that OCC established its initial approach to funding skin-in-the-game. OCC subsequently proposed a floor for its level of persistent skin-in-the-game of $62 million, in line with the European Market Infrastructure Regulation (EMIR) requirement of 25 percent of regulatory capital.

“Over the past decade, CCPs like OCC have committed unprecedented resources to deliver the enhanced financial and operational resilience expected by policymakers, regulators, and market participants,” said John Davidson, OCC Chief Executive Officer. “Market participants can look no further than this year’s unprecedented market activity to conclude that such efforts are serving the markets well. Part of OCC’s commitment to delivering high quality, resilient clearance, settlement, and risk management services entails constantly evolving and improving to meet the expectations of all our stakeholders.”

Continuing OCC’s efforts to provide greater transparency to market participants, the company is also releasing today the OCC Recovery and Orderly Wind-Down Plan Participant Guide to share enhanced details about what is (and is not) contained in the Recovery and Orderly Wind-Down Plan and when and how tools within the Plan would be implemented. The guide also can be found here on the OCC website.

“In addition to clearing record contract volume for our industry, we are delivering operational excellence to our market participants, resulting in lower cost of participation for our clearing member firms,” said Scot Warren, OCC Chief Operating Officer. “We believe the paper and the Participant Guide will provide greater insight into OCC’s operational and financial risk management practices and enhanced certainty relative to plans for recovery and wind-down scenarios.”

According to OCC literature, the company has cleared more than 28 million contracts on average per day so far in 2020, a 60 percent increase over 2019. June, March and August are now the top three months by volume in OCC’s history, respectively, with June cleared volume reaching an industry record of 693 million contracts, up nearly 81 percent over the same month in the previous year.

OCC said it consistently reviews and considers input from market participants, including a paper released last year by a group of institutional investors and investment banks titled, A Path Forward for CCP Resilience, Recovery, and Resolution. This paper was the impetus for OCC to offer its perspective, as a market utility, on the evolution, strength, and resilience of CCPs.

The new paper can be found here on OCC’s website.

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