TABB Group considers implications if OCC capital plan is not re-approved
01 October 2018 New York
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TABB Research Group has published a note considering the implications for the exchange-listed options market should the US Securities & Exchange Commission (SEC) not re-approve the OCC’s capital plan for the fourth time.
The note, OCC’s Capital Plan: The Value of a Bird in the Hand, reviews the history and structure of the plan to date in some detail. It broadly approves the success of the plan in enabling OCC to build up a capital buffer from a level that was previously ‘woefully deficient’.
The most recent payout under the plan was a refund of $78.7 million to clearing members, paid on 14 September.
There are multiple immediate negative consequences if the plan is rescinded by the SEC, TABB commented. Firstly, the stockholder exchanges (Intercontinental Exchange, Nasdaq and CboE Global Markets) would need to be repaid their respective contributions to the plan.
Secondly, OCC would lose its right to stockholder exchange replenishment funds of up to $200 million. As a result, OCC would not have the needed liquid net assets funded by equity to cover the mandated six months of operating expenses.
Thirdly, there would be no plan in place to replace the lost capital and, most important, OCC would not have the necessary capital to weather any unforeseen operational, business, or pension risks.
If the SEC rescinds the plan, OCC will need to look for alternative sources of funding to achieve the level of operating capital mandated by regulators. The only apparent scenario would involve OCC charging higher fees, said TABB.
This was the alternative presented to the OCC Board of Directors when the capital plan was approved initially. The plan resulted in market participants not being subjected to punitive capital charges, noted TABB.
OCC implemented the plan in response to regulatory changes that recognised the clearinghouse as a systemically important entity within the US financial system. Its benefits have proven to be valuable to exchanges, clearing firms and all market participants.
The plan strengthens OCC’s capital base from a business perspective and enables OCC to meet the heightened capital requirements that are critical to entities designed as Systemically Important Financial Market Utilities (SIFMUs), and better positions it to meet international requirements.
“The initial objections to the capital plan have been shown to be unfounded, as the industry continues to thrive,” wrote TABB. The whole listed option space has benefitted, as OCC is now able to withstand any unforeseen shocks to the financial system, it stated.
If the plan is rescinded, the raising of fees to replace the capital and the shareholder replenishment commitment could have a detrimental impact upon all market participants, TABB concluded.
We asked the SEC to comment upon the timing of its next review and its likely outcome but they officially declined the invitation.
The note, OCC’s Capital Plan: The Value of a Bird in the Hand, reviews the history and structure of the plan to date in some detail. It broadly approves the success of the plan in enabling OCC to build up a capital buffer from a level that was previously ‘woefully deficient’.
The most recent payout under the plan was a refund of $78.7 million to clearing members, paid on 14 September.
There are multiple immediate negative consequences if the plan is rescinded by the SEC, TABB commented. Firstly, the stockholder exchanges (Intercontinental Exchange, Nasdaq and CboE Global Markets) would need to be repaid their respective contributions to the plan.
Secondly, OCC would lose its right to stockholder exchange replenishment funds of up to $200 million. As a result, OCC would not have the needed liquid net assets funded by equity to cover the mandated six months of operating expenses.
Thirdly, there would be no plan in place to replace the lost capital and, most important, OCC would not have the necessary capital to weather any unforeseen operational, business, or pension risks.
If the SEC rescinds the plan, OCC will need to look for alternative sources of funding to achieve the level of operating capital mandated by regulators. The only apparent scenario would involve OCC charging higher fees, said TABB.
This was the alternative presented to the OCC Board of Directors when the capital plan was approved initially. The plan resulted in market participants not being subjected to punitive capital charges, noted TABB.
OCC implemented the plan in response to regulatory changes that recognised the clearinghouse as a systemically important entity within the US financial system. Its benefits have proven to be valuable to exchanges, clearing firms and all market participants.
The plan strengthens OCC’s capital base from a business perspective and enables OCC to meet the heightened capital requirements that are critical to entities designed as Systemically Important Financial Market Utilities (SIFMUs), and better positions it to meet international requirements.
“The initial objections to the capital plan have been shown to be unfounded, as the industry continues to thrive,” wrote TABB. The whole listed option space has benefitted, as OCC is now able to withstand any unforeseen shocks to the financial system, it stated.
If the plan is rescinded, the raising of fees to replace the capital and the shareholder replenishment commitment could have a detrimental impact upon all market participants, TABB concluded.
We asked the SEC to comment upon the timing of its next review and its likely outcome but they officially declined the invitation.
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