OCC financial safeguards framework approved by SEC
30 July 2018 Chicago
Image: Shutterstock
The US Securities and Exchange Commission (SEC) has approved the OCC’s proposed Financial Safeguards Framework (FSF).
The framework, which effects how the OCC sizes its clearing fund and allocates contributions to the clearing fund from the OCC’s clearing members, is expected to be implemented on 4 September.
The framework means the size of the 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.
It will also make the manner in which the OCC handles stress shocks on index options products and single-name equity options consistent.
The framework will eliminate the $1.8 billion “prudential margin of safety” given the improved methodology enhancements.
The OCC’s new clearing fund will also 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 US regulatory requirements, this higher standard better aligns OCC with other systemically important derivative clearing houses, according to the OCC.
The OCC’s clearing fund will now 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.
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.
Craig Donohue, executive chairman and CEO of the OCC, said: “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.”
He added: “Enhancing our resiliency as a systemically important financial market utility is critical to our ability to reduce systemic risk, increase market transparency, and provide capital and collateral efficiencies for the users of the US exchange-listed options and futures markets.”
The framework, which effects how the OCC sizes its clearing fund and allocates contributions to the clearing fund from the OCC’s clearing members, is expected to be implemented on 4 September.
The framework means the size of the 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.
It will also make the manner in which the OCC handles stress shocks on index options products and single-name equity options consistent.
The framework will eliminate the $1.8 billion “prudential margin of safety” given the improved methodology enhancements.
The OCC’s new clearing fund will also 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 US regulatory requirements, this higher standard better aligns OCC with other systemically important derivative clearing houses, according to the OCC.
The OCC’s clearing fund will now 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.
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.
Craig Donohue, executive chairman and CEO of the OCC, said: “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.”
He added: “Enhancing our resiliency as a systemically important financial market utility is critical to our ability to reduce systemic risk, increase market transparency, and provide capital and collateral efficiencies for the users of the US exchange-listed options and futures markets.”
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