Time for change
03 May 2018
With financial technology being an important part of innovation, John Davidson, president and chief operating officer of OCC, discusses the firm’s technology upgrade
Image: Shutterstock
Financial technology is an important part of innovation, growth and efficiency for the US exchange-listed equity options industry. If OCC, the world’s largest equity derivatives clearing organisation, is to become the ‘gold standard’ for central counterparty (CCP) clearing services, we must continue to adapt to meet the ever-changing needs of our exchanges, clearing firms, and market participants.
Technology is enabling us to accomplish our strategic goals and initiatives more efficiently and less expensively, with a higher degree of security than we have had in the past. This is critical to our mission if we are to reduce systemic risks, increase transparency, and provide capital and collateral efficiencies to the users of our markets. This includes a much stronger focus on enhancing our cyber resiliency and cyber security.
While cybersecurity has always been a vital part of OCC’s technology roadmap, today’s global cyber ecosystem dictates that we increase our endeavors to safeguard the integrity of cleared markets. To address this extremely complex objective, in 2017, we created a new position dedicated to delivering an ambitious and long-term cyber security vision for OCC. We named Mark Morrison, formerly with State Street Corporation and several US government defense and security agencies, as chief security officer. Morrison’s 35 years of experience and leadership has helped our organisation integrate information security best practices into our service offerings while lowering systemic risks. Thanks to the dedicated focus of Morrison and his team, OCC has made significant strides in our cyber security environment on an accelerated pace and we will to continue to invest in this area in 2018.
We are also investing in a significant effort to build or buy the next generation of clearing technology at OCC, and this is our biggest strategic priority. Around 25 years ago, most CCP clearing organisations like OCC were building their own proprietary technology. Today, with such technology becoming more widely available than ever before, there are a variety of different providers of that technology where a lot of that functionality has become more commoditised.
Presently, we use a proprietarily developed platform called Encore, which after 20 years is reaching the end of its useful life. The system has performed admirably over the last two decades as it has scaled up to handle increases in options volume and new products. It is incredibly stable and still manages our processes on a daily basis and well within the service level agreements we have set with our clearing firms. However, it became a more complex and expensive system to operate.
While there have been many upgrades to Encore, it is time to build a new platform. We have initiated the process to evaluate options for replacing Encore and the related infrastructure with a modularised system that will use an OCC-specific data model and warehouse.
While we are in the early stages, we are contemplating greater use of cloud technologies as they will offer us more efficiency, lower cost, and enhanced security. We expect that when this project is completed, the new system will be cloud-based and far more modular so it can work with our system for theoretical analysis, and numerical simulations margining system and the 36 components within it. It will deliver a more nimble and self-controlled system that will provide our exchanges and clearing firms with additional capabilities.
Aside from operational efficiency, another objective of our technology upgrade is to free up our development time so that we are in a better position to bring to market the new products we are being asked for by our exchanges, clearing firms and market participants. Having a strong technology platform allows OCC to support the strategic plans of our exchanges by providing high-quality clearing and risk management services.
A good case in point is our stock loan business, which grew 22 percent last year and is up 34 percent through February. As the only US CCP for securities lending transactions where return of stock or cash to bilateral and exchange-traded securities lending participants is guaranteed, OCC already has a foothold in the securities lending market with nearly $88 billion in loans being cleared, which includes a nearly seven percent increase in February. This year marks 25 years after the launch of our clearing programme, but access has been limited. Currently, we are working on expanding our model to better accommodate the buy-side through various enhancements, and we are very much looking forward to expanding our footprint and service to the securities lending market.
All of our work on enhancing our technology will help OCC as we address a number of regulatory challenges in our role as a systemically important financial market utility. I am confident that we will be able to successfully move OCC into the next generation of clearing technology so that we will be well positioned as a CCP, and deliver on our promise to be the ‘gold standard’ for CCP clearing services everywhere in the world.
Technology is enabling us to accomplish our strategic goals and initiatives more efficiently and less expensively, with a higher degree of security than we have had in the past. This is critical to our mission if we are to reduce systemic risks, increase transparency, and provide capital and collateral efficiencies to the users of our markets. This includes a much stronger focus on enhancing our cyber resiliency and cyber security.
While cybersecurity has always been a vital part of OCC’s technology roadmap, today’s global cyber ecosystem dictates that we increase our endeavors to safeguard the integrity of cleared markets. To address this extremely complex objective, in 2017, we created a new position dedicated to delivering an ambitious and long-term cyber security vision for OCC. We named Mark Morrison, formerly with State Street Corporation and several US government defense and security agencies, as chief security officer. Morrison’s 35 years of experience and leadership has helped our organisation integrate information security best practices into our service offerings while lowering systemic risks. Thanks to the dedicated focus of Morrison and his team, OCC has made significant strides in our cyber security environment on an accelerated pace and we will to continue to invest in this area in 2018.
We are also investing in a significant effort to build or buy the next generation of clearing technology at OCC, and this is our biggest strategic priority. Around 25 years ago, most CCP clearing organisations like OCC were building their own proprietary technology. Today, with such technology becoming more widely available than ever before, there are a variety of different providers of that technology where a lot of that functionality has become more commoditised.
Presently, we use a proprietarily developed platform called Encore, which after 20 years is reaching the end of its useful life. The system has performed admirably over the last two decades as it has scaled up to handle increases in options volume and new products. It is incredibly stable and still manages our processes on a daily basis and well within the service level agreements we have set with our clearing firms. However, it became a more complex and expensive system to operate.
While there have been many upgrades to Encore, it is time to build a new platform. We have initiated the process to evaluate options for replacing Encore and the related infrastructure with a modularised system that will use an OCC-specific data model and warehouse.
While we are in the early stages, we are contemplating greater use of cloud technologies as they will offer us more efficiency, lower cost, and enhanced security. We expect that when this project is completed, the new system will be cloud-based and far more modular so it can work with our system for theoretical analysis, and numerical simulations margining system and the 36 components within it. It will deliver a more nimble and self-controlled system that will provide our exchanges and clearing firms with additional capabilities.
Aside from operational efficiency, another objective of our technology upgrade is to free up our development time so that we are in a better position to bring to market the new products we are being asked for by our exchanges, clearing firms and market participants. Having a strong technology platform allows OCC to support the strategic plans of our exchanges by providing high-quality clearing and risk management services.
A good case in point is our stock loan business, which grew 22 percent last year and is up 34 percent through February. As the only US CCP for securities lending transactions where return of stock or cash to bilateral and exchange-traded securities lending participants is guaranteed, OCC already has a foothold in the securities lending market with nearly $88 billion in loans being cleared, which includes a nearly seven percent increase in February. This year marks 25 years after the launch of our clearing programme, but access has been limited. Currently, we are working on expanding our model to better accommodate the buy-side through various enhancements, and we are very much looking forward to expanding our footprint and service to the securities lending market.
All of our work on enhancing our technology will help OCC as we address a number of regulatory challenges in our role as a systemically important financial market utility. I am confident that we will be able to successfully move OCC into the next generation of clearing technology so that we will be well positioned as a CCP, and deliver on our promise to be the ‘gold standard’ for CCP clearing services everywhere in the world.
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