«© 2016 The Options Clearing Corporation Page 1 of 128 The Options Clearing Corporation Responding Institution: United States Jurisdiction in which ...»
THE OPTIONS CLEARING CORPORATION
DISCLOSURE FRAMEWORK FOR FINANCIAL
© 2016 The Options Clearing Corporation
Page 1 of 128
The Options Clearing Corporation
Jurisdiction in which the FMI Operates:
U.S. Securities and Exchange Commission
Authority regulating, supervising or overseeing the FMI: U.S. Commodity Futures Trading Commission Board of Governors of the Federal Reserve The date of this disclosure January 31, 2016.
This disclosure can also be found at [http://www.theocc.com/pfmiresponse].
For further information, please contact PFMIdisclosures@theocc.com.
© 2016 The Options Clearing Corporation Page 2 of 128 Table of Contents I. EXECUTIVE SUMMARY
II. SUMMARY OF MAJOR CHANGES SINCE LAST UPDATE
III. GENERAL DESCRIPTION OF OCC
History and Organization
The Markets OCC Serves
System Design and Operations
IV. PRINCIPLE-BY-PRINCIPLE NARRATIVE DISCLOSURE
PRINCIPLE 1: LEGAL BASIS
PRINCIPLE 2: GOVERNANCE
PRINCIPLE 3: FRAMEWORK FOR THE COMPREHENSIVE MANAGEMENTOF RISK
PRINCIPLE 4: CREDIT RISK
PRINCIPLE 5: COLLATERAL
PRINCIPLE 6: MARGIN
PRINCIPLE 7: LIQUIDITY RISK
PRINCIPLE 8: SETTLEMENT FINALITY
PRINCIPLE 9: MONEY SETTLEMENTS
PRINCIPLE 10: PHYSICAL DELIVERIES
PRINCIPLE 11: CENTRAL SECURITIES DEPOSITORIES
PRINCIPLE 12: EXCHANGE-OF-VALUE SETTLEMENT SYSTEMS................ 84 PRINCIPLE 13: PARTICIPANT-DEFAULT RULES AND PROCEDURES....... 84 PRINCIPLE 14: SEGREGATION AND PORTABILITY
PRINCIPLE 15: GENERAL BUSINESS RISK
PRINCIPLE 16: CUSTODY AND INVESTMENT RISKS
PRINCIPLE 17: OPERATIONAL RISK
PRINCIPLE 18: ACCESS AND PARTICIPATION REQUIREMENTS.............. 110 PRINCIPLE 19: TIERED PARTICIPATION ARRANGEMENTS
PRINCIPLE 20: FMI LINKS
PRINCIPLE 21: EFFICIENCY AND EFFECTIVENESS
PRINCIPLE 22: COMMUNICATION PROCEDURES AND STANDARDS...... 123
PRINCIPLE 23: DISCLOSURE OF RULES, KEY PROCEDURES ANDMARKET DATA
PRINCIPLE 24: DISCLOSURE OF MARKET DATA BY TRADEREPOSITORIES
V. LIST OF PUBLICLY AVAILABLE RESOURCES
VI. GLOSSARY OF KEY TERMS AND ABBREVIATIONS
© 2016 The Options Clearing CorporationPage 3 of 128I. EXECUTIVE SUMMARY
The following disclosure constitutes the response of The Options Clearing Corporation, a Delaware corporation, to the Disclosure Framework for Financial Market Infrastructures developed by the Committee on Payment and Settlement Systems (now the Committee on Payments and Market Infrastructures) and the Technical Committee of the International Settlements and the International Organization of Securities Commissions (CPMI-IOSCO). This Disclosure Framework is current as of December 31, 2015, and will be updated following any material changes to OCC’s systems or environment or, at a minimum, every two years. This Disclosure Framework provides relevant information regarding the methods that OCC uses to manage the risks it faces as a central counterparty. In addition, this document facilitates OCC’s compliance with proposed SEC Rule 17Ad-22(e)(23).
II. SUMMARY OF MAJOR CHANGES SINCE LAST UPDATE
The primary changes to this disclosure since the last publication in 2014 are: (i) updates to OCC’s governance structure that reflect changes in executive management and (ii) updates to OCC’s liquid net assets funded by equity level pursuant to its approved Capital Plan. In addition, OCC has adopted a comprehensive Enterprise Risk Management Framework, which is referenced throughout the document.
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III. GENERAL DESCRIPTION OF OCCHistory and Organization OCC, founded in 1973, is the world’s largest equity derivatives clearing organization.
OCC’s mission is to provide market participants with innovative risk management solutions and provide high quality and efficient clearing and settlement services for options, futures and other financial transactions. OCC also values the important role it plays in educating investors and the public about the prudent use of options and futures markets. As a systemically important institution, OCC recognizes its critical role in promoting financial stability and integrity in every market it serves.
OCC operates under the jurisdiction of both the SEC and the CFTC. In July 2012, OCC was designated by FSOC as a SIFMU pursuant to Title VIII of the Dodd-Frank Act, 1 bringing it under the additional oversight of the Board of Governors of the Federal Reserve. 2 OCC issues and clears U.S.-listed options and futures on a number of underlying financial assets including common stocks, currencies and stock indices. OCC’s clearing membership consists of approximately 115 of the largest U.S. broker-dealers, U.S.
FCMs, and Canadian securities firms representing both professional traders and public customers.
OCC performs a guarantee function, which ensures the financial integrity of the markets in which it clears contracts. In its role as guarantor and central counterparty, OCC ensures that the obligations of the contracts it clears are fulfilled. Through a novation process, OCC becomes the buyer for every seller and the seller for every buyer, thus protecting clearing members from counterparty risk and allowing the settlement of trades in the event a clearing member fails to meet its obligations. OCC does not assume any guarantor role unless it has a precisely equal and offsetting claim against a clearing member. OCC’s obligations under the guarantee arise in the event a clearing member is unable to meet its obligations to OCC. Margin deposits and clearing fund deposits are required to collateralize clearing members’ obligations and thus support OCC’s guarantee.
OCC is the sole clearing organization for all securities options exchanges in the United States. Additionally, OCC clears transactions in commodity futures products and security futures traded on several additional markets and acts as a central counterparty for stock loan transactions.
1 Pub. L. No. 111-203, 124 Stat. 1376 (2010).
2 OCC is not currently designated as systemically important in any non-U.S. jurisdictions.
© 2016 The Options Clearing Corporation Page 5 of 128 OCC is owned equally by five of the options exchanges for which it provides clearing services. The stockholder exchanges share equal ownership of OCC. This ownership, along with a diverse clearing member, participant exchange, public director, and management presence on OCC’s Board, ensures a continuing commitment to servicing the needs of OCC’s participant exchanges, clearing members, and their customers.
OCC’s Board sets clearing fees and determines the amounts of refunds, and dividends, if any, based upon the current funding needs of OCC and in compliance with policies adopted under OCC’s Capital Plan (as discussed below).
OCC’s Rules set forth its governance structure. The oversight of OCC’s business and affairs is vested in its Board. The Board’s composition is intended to provide accountability to all relevant stakeholders. The Board maintains five Committees – the Audit Committee, the Compensation and Performance Committee, the Governance and Nominating Committee, the Risk Committee, and the Technology Committee, each responsible for specific oversight functions. OCC’s management ultimately is responsible to the Board. Underneath the Board, there are two chains of command, bifurcating operational and oversight functions.
The Markets OCC Serves
OCC is the sole clearing organization for all securities options exchanges in the U.S.
OCC also serves other markets, including those trading commodity futures, options on futures and security futures. A list of the exchanges for which OCC provides clearing services is posted on OCC’s website. 3 OCC also provides central counterparty services for two securities lending programs, OCC’s Stock Loan/Hedge Program and the Market Loan Program, through which OCC provides clearing services to one or more marketplace(s) for securities lending and borrowing.
OCC began clearing OTC Index Options in April 2014, beginning with index options on the S&P 500® 4 broad-based securities index. OCC also may clear OTC options on other indices and on individual equity securities in the future.
Regulatory Oversight OCC is registered as a clearing agency under Section 17A of the Securities Exchange Act of 1934, as amended and as a derivatives clearing organization under Section 7a-1 of the Commodity Exchange Act and operates under the jurisdiction of both the Securities and Exchange Commission and the Commodity Futures Trading Commission. OCC has also been designated by the FSOC as a “systemically 3http://www.optionsclearing.com/about/corporate-information/what-is-occ.jsp.
4S&P 500 is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”). OCC uses the S&P 500 trademark pursuant to a license agreement with S&P.
© 2016 The Options Clearing Corporation Page 6 of 128 important” financial market utility under Title VIII of the Dodd-Frank Act. 5 For purposes of Title VIII, the SEC is OCC’s supervisory agency.
The regulatory jurisdiction for the different options and futures contracts are shown below.
5 Pub. L. No. 111-203, 124 Stat. 1376 (2010).
© 2016 The Options Clearing Corporation Page 7 of 128 Key Metrics OCC’s cleared contract volume reached over 4.2 billion contracts in 2015, out of which 89% of the contracts were equity options. Index and commodity futures contracts comprised 82% of the 66.9 million futures contracts cleared by OCC in 2015. The breakdown of volume for options and futures contracts as of December 31, 2015, is shown below.
System Design and Operations OCC supports near real-time trade, post-trade validation and position processing through its clearing system, ENCORE. Each exchange for which OCC clears transactions submits confirmed options and/or futures trades that have been effected on or through the facilities of the exchange to OCC. Upon OCC’s acceptance of such a submitted trade, OCC is substituted through novation as the buyer to the seller and the seller to the buyer. Accepted trades and post-trade transactions (e.g., trade allocations, position adjustments, transfers, etc. submitted by clearing members) update clearing member positions on a near real-time basis within the ENCORE system.
Trades are sent to OCC throughout the trading day on a near real-time basis, and each exchange reports to OCC information with respect to each confirmed trade at the end of the day. Based on this information, OCC delivers a Daily Position Report each morning to each clearing member with respect to each clearing member account, listing all of the clearing member’s confirmed trades that are settling on that day and any net daily premiums or futures variation margin due to or from OCC as a result of these trades.
OCC employs the proprietary STANS margin methodology to calculate margin requirements based on the position portfolio within ENCORE for each clearing member account. Each morning, OCC makes available to each clearing member a Daily Margin © 2016 The Options Clearing Corporation Page 8 of 128 Report for each account, showing the amount of initial margin required by OCC on the clearing member’s marginable positions in each account.
Each clearing member is obligated to pay to OCC an amount equal to any reported deficit by the established cut-off time. Additionally, at or before the “settlement time” as indicated in OCC’s Rules, the clearing member will be obligated to pay to OCC the amount of any net daily premium and variation payment due to OCC. OCC is authorized to withdraw funds from the clearing member’s applicable bank account with respect to any amounts due. OCC may also require the deposit of additional “intra-day” margin by any clearing member in any account at any time during any business day.
IV. GLOSSARY OF KEY TERMS AND ABBREVIATIONS
Note: All times referenced in this Disclosure Framework are Central Time.
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V. PRINCIPLE-BY-PRINCIPLE NARRATIVE DISCLOSUREA narrative response to each Principle and the corresponding Key Considerations, as well as the associated SEC Proposed Rule, is provided below.
PRINCIPLE 1: LEGAL BASIS; SEC Rule 17Ad-22(e)(1) An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
Proposed SEC Rule 17Ad-22(e)(1) would require OCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.
Key Consideration 1: The legal basis should provide a high degree of certainty for each material aspect of an FMI’s activities in all relevant jurisdictions.
The key aspects of OCC clearing activities that require a high degree of certainty include membership, clearing member obligations, specific transaction/trade terms, posting of clearing fund and margin, establishment of accounts, suspension/liquidation of clearing members, and close-out netting on OCC insolvency. Each key aspect is addressed in OCC’s Rules, and thus there is a high degree of certainty for each aspect.
Further, OCC operates within a sound and certain legal framework, as set forth in its Legal Risk Policy and as described below.