Bats and co take capital plan objection to court
22 February 2016 Washington DC
Image: Shutterstock
Opponents of Options Clearing Corporation’s (OCC) recently approved capital plan have taken their case to court in a bid to have the Securities and Exchange Commission’s (SEC) decision overturned.
Exchange operator Bats Global Markets, along with trading firms Susquehanna International Group LLP and KCG Holdings, filed a motion to block the SEC’s approval of OCC’s capital plan on 12 February at the US Court of Appeals for the District of Columbia Circuit.
OCC is poised to issue a $39 million refund to clearing members and distribute $17 million in dividends to stockholder exchanges, including Nasdaq OMX Group and Chicago Board Options Exchange, in exchange for capital, which will increase their equity from $25 million to $247 million. They will also have to replenish the OCC’s reserves in the future.
Bats, Susquehanna and KCG disagree with the SEC’s decision to approve the capital plan because it is “irrational” to swap OCC’s own funds for “exorbitantly priced capital” from the exchange’s owners, according to court documents.
The capital plan will create an unfair advantage for a systemically important financial market utility such as OCC, according to the complainants, as it will also be able to implement a new fee schedule that will mark a 19 percent drop in cost.
OCC is the sole clearinghouse for exchange-listed options in the US and the capital plan, in essence, effectively allows its shareholder exchanges to monetise the OCC's monopoly over options clearing for their benefit, according to the complainants.
Under the approved capital plan, OCC will pay dividends at a level some 16 to 20 percent higher than current market rates, they argued.
At the heart of the group’s argument to have the approval overturned is the SEC’s consultation process, which saw the US securities markets regulator receive a string of comments in opposition, all of which were largely ignored, according to Bats and its co-complainants.
The SEC’s approval “contains factual errors, ignores relevant data, fails to engage in necessary economic analysis and does not consider reasonable alternatives”, they argued.
Bats, Susquehanna, KCG and others contested the capital plan last year, citing policy and competition concerns. They managed to convince the SEC to implement a temporary stay while the plan was reviewed, but that was eventually lifted and the plan later approved.
Dismissing their petitions on 11 February, the SEC said “given OCC’s critical clearing functions and its systemic importance, the commission agrees that having OCC increase its capitalisation is appropriate and in the public interest”.
“The capital plan does not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the [Exchange] Act.”
Speaking on 11 February, Craig Donohue, executive chairman of OCC, commented: “We are pleased that the SEC has granted final approval of OCC’s capital plan.”
“Through this action, the SEC has confirmed that strengthening OCC’s capitalisation is a compelling public interest and has acknowledged OCC’s importance to the US financial markets as a systemically important financial market utility.”
OCC has reportedly requested to be a party to the case. The SEC hasn’t responded publicly to the case, while OCC doesn’t comment on pending litigation.
Exchange operator Bats Global Markets, along with trading firms Susquehanna International Group LLP and KCG Holdings, filed a motion to block the SEC’s approval of OCC’s capital plan on 12 February at the US Court of Appeals for the District of Columbia Circuit.
OCC is poised to issue a $39 million refund to clearing members and distribute $17 million in dividends to stockholder exchanges, including Nasdaq OMX Group and Chicago Board Options Exchange, in exchange for capital, which will increase their equity from $25 million to $247 million. They will also have to replenish the OCC’s reserves in the future.
Bats, Susquehanna and KCG disagree with the SEC’s decision to approve the capital plan because it is “irrational” to swap OCC’s own funds for “exorbitantly priced capital” from the exchange’s owners, according to court documents.
The capital plan will create an unfair advantage for a systemically important financial market utility such as OCC, according to the complainants, as it will also be able to implement a new fee schedule that will mark a 19 percent drop in cost.
OCC is the sole clearinghouse for exchange-listed options in the US and the capital plan, in essence, effectively allows its shareholder exchanges to monetise the OCC's monopoly over options clearing for their benefit, according to the complainants.
Under the approved capital plan, OCC will pay dividends at a level some 16 to 20 percent higher than current market rates, they argued.
At the heart of the group’s argument to have the approval overturned is the SEC’s consultation process, which saw the US securities markets regulator receive a string of comments in opposition, all of which were largely ignored, according to Bats and its co-complainants.
The SEC’s approval “contains factual errors, ignores relevant data, fails to engage in necessary economic analysis and does not consider reasonable alternatives”, they argued.
Bats, Susquehanna, KCG and others contested the capital plan last year, citing policy and competition concerns. They managed to convince the SEC to implement a temporary stay while the plan was reviewed, but that was eventually lifted and the plan later approved.
Dismissing their petitions on 11 February, the SEC said “given OCC’s critical clearing functions and its systemic importance, the commission agrees that having OCC increase its capitalisation is appropriate and in the public interest”.
“The capital plan does not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the [Exchange] Act.”
Speaking on 11 February, Craig Donohue, executive chairman of OCC, commented: “We are pleased that the SEC has granted final approval of OCC’s capital plan.”
“Through this action, the SEC has confirmed that strengthening OCC’s capitalisation is a compelling public interest and has acknowledged OCC’s importance to the US financial markets as a systemically important financial market utility.”
OCC has reportedly requested to be a party to the case. The SEC hasn’t responded publicly to the case, while OCC doesn’t comment on pending litigation.
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