OCC at risk of losing AA+ S&P rating
20 April 2016 Chicago
Image: Shutterstock
Options Clearing Corporation (OCC) has staunchly defended its financial safeguards following Standard & Poor’s (S&P) decision to put the central counterparty’s credit rating on CreditWatch with a negative designation.
The ongoing review of OCC’s financial safeguards and means that its AA+ credit rating is at risk of being downgraded.
In response, OCC argued that its safeguards are actually superior to those of its global peers, stating that they include the use of a two-day margin period of risk.
They also include a $1.8 billion prudential margin of safety in the clearing fund above the cover one level, the ability to call for additional individual intra-day clearing fund contributions of up to $1 billion, and the ability to re-size the clearing fund intra-month if required by changing market conditions.
OCC went on to add that “like other systemically important central counterparties, OCC is actively working with US and international regulators to implement enhancements to further strengthen its loss absorption capacity and liquidity resources based on conservative stress testing methodologies”.
The central counterparty also pointed out that the Securities and Exchange Commission (SEC), its primary regulator, has not yet adopted enhanced capital, loss absorption and liquidity requirements in line with international standards.
“[OCC] has been proactive in strengthening its capital and clearinghouse financial safeguards in advance of such requirements, as well as European requirements that would potentially apply to OCC pursuant to an equivalency decision between the SEC and the European Commission.”
The questions regarding OCC’s financial safeguards come only two months after the SEC overruled industry opposition and approved its capital plan that saw its capital increase by almost 900 percent.
OCC’s capitalisation grew from $25 million at the beginning of 2014 to $247 million in 2016.
S&P also shone the spotlight on the Depository Trust & Clearing Corporation (DTCC), which faces the possibility of having two of its credit ratings downgraded due to concerns over DTCC subsidiary the Fixed Income Clearing Corporation’s (FICC) liquidity tools.
FICC’s current credit rating is AA+, while DTCC’s stands at AA. Both are at risk of a downgrade.
In response to the review, a DTCC spokesperson said: “DTCC plans to continue working with S&P in the coming months to ensure a complete understanding of all liquidity tools available to Fixed Income Clearing Corporation, including access to the clearing fund.”
“We will also continue to engage with our regulators and clients to accelerate the implementation of a committed backstop liquidity facility for FICC.”
The ongoing review of OCC’s financial safeguards and means that its AA+ credit rating is at risk of being downgraded.
In response, OCC argued that its safeguards are actually superior to those of its global peers, stating that they include the use of a two-day margin period of risk.
They also include a $1.8 billion prudential margin of safety in the clearing fund above the cover one level, the ability to call for additional individual intra-day clearing fund contributions of up to $1 billion, and the ability to re-size the clearing fund intra-month if required by changing market conditions.
OCC went on to add that “like other systemically important central counterparties, OCC is actively working with US and international regulators to implement enhancements to further strengthen its loss absorption capacity and liquidity resources based on conservative stress testing methodologies”.
The central counterparty also pointed out that the Securities and Exchange Commission (SEC), its primary regulator, has not yet adopted enhanced capital, loss absorption and liquidity requirements in line with international standards.
“[OCC] has been proactive in strengthening its capital and clearinghouse financial safeguards in advance of such requirements, as well as European requirements that would potentially apply to OCC pursuant to an equivalency decision between the SEC and the European Commission.”
The questions regarding OCC’s financial safeguards come only two months after the SEC overruled industry opposition and approved its capital plan that saw its capital increase by almost 900 percent.
OCC’s capitalisation grew from $25 million at the beginning of 2014 to $247 million in 2016.
S&P also shone the spotlight on the Depository Trust & Clearing Corporation (DTCC), which faces the possibility of having two of its credit ratings downgraded due to concerns over DTCC subsidiary the Fixed Income Clearing Corporation’s (FICC) liquidity tools.
FICC’s current credit rating is AA+, while DTCC’s stands at AA. Both are at risk of a downgrade.
In response to the review, a DTCC spokesperson said: “DTCC plans to continue working with S&P in the coming months to ensure a complete understanding of all liquidity tools available to Fixed Income Clearing Corporation, including access to the clearing fund.”
“We will also continue to engage with our regulators and clients to accelerate the implementation of a committed backstop liquidity facility for FICC.”
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