2019 Annual Report

Another strong year of world-class service.

MESSAGE FROM THE CHIEF FINANCIAL OFFICER

In 2019, OCC experienced another strong year of providing world-class clearance, settlement, and risk management services for the U.S. equity options, futures, and securities lending markets. OCC’s total cleared contract volume for the year was 4.98 billion contracts, with average daily volume exceeding 19.7 million contracts. This was the second highest annual volume in our history, and it underscores OCC’s importance as the foundation for secure markets.

Our colleagues continue to have a relentless focus on delivering operational excellence to our exchanges, clearing member firms, and market participants. We remain dedicated to managing costs in a fiscally responsible manner in order to better serve the users of our markets.

OCC’s total cleared contract volume for the year was 4.98 billion contracts, with average daily volume exceeding 19.7 million contracts.

During the last few years, we have taken steps to significantly strengthen OCC’s financial resiliency. In 2014, OCC had only $25 million of capital on the balance sheet. Today, we maintain equity capital, separate from our clearing fund capital, above our target level of $247 million. We worked with our clearing member firms, market participants, and regulators to finalize our plans to manage OCC’s capital, including a replenishment plan, in the unlikely event that capital falls below that level due to an operational loss of the company. At the end of 2019, we held nearly $118 billion in margin on behalf of our customers, and over $11 billion in our clearing fund.

We fortified our financial posture by successfully renewing our syndicated bank credit facility. We added one new bank and retained all 18 facility participants for a total of 19 banks in the facility. We also maintained pre-funded financial resources available to OCC by requiring a minimum of $3 billion in cash in the clearing fund, which is held at the Federal Reserve Bank of Chicago.

At the end of 2019, we held nearly $118 billion in margin on behalf of our customers, and over $11 billion in our clearing fund.

On January 24, 2020, the Securities and Exchange Commission (SEC) approved, pursuant to authority delegated to the Division of Trading and Markets, our new Capital Management Policy, which is designed to reduce systemic risk, increase market transparency, and provide capital and operational efficiencies to the users of our markets.

The policy addresses these core elements:

— Provides OCC’s approach to determining clearing fees inclusive of an operating margin based on the variance in daily volume;

— Identifies the considerations made in determining OCC’s level of target capital on an annual basis;

— Describes how OCC will monitor its capital levels to identify whether OCC’s capital has fallen or is in danger of falling below defined thresholds triggering further action; and

— Establishes a replenishment plan for accessing additional capital should OCC’s equity capital fall below those defined thresholds.

Under the policy, if OCC’s capital is above 110 percent of its target plus approved capital for infrastructure needs, tools would be used to lower or waive clearing fees to return to the 110 percent level plus approved capital needs. In the event of a clearing member default, the amount of equity capital above 110 percent of the target capital requirement will be available to offset the loss after utilizing the margin and clearing fund contributions of the default clearing member. We worked with our clearing members, market participants, and regulators on finalizing our replenishment plan in the unlikely event that we fall below that level due to uninsurable business or operating losses.

We are pleased to be the first SEC-registered clearing agency to offer an innovative approach to ‘skin-in-the-game’ by including a deferred compensation component. In approving our Capital Management Policy, the SEC said, “OCC also proposes to charge losses remaining after the application of OCC’s excess capital to OCC senior management’s deferred compensation as well as non-defaulting clearing members. The Commission understands these aspects of the proposal to constitute the first instance where a covered clearing agency is seeking Commission consideration of a ‘skin-in-the-game’ component to financial risk management for central clearing.”

We are pleased to be the first SEC-registered clearing agency to offer an innovative approach to ‘skin-in-the-game’ by including a deferred compensation component.

In another example of our increased financial resiliency, Phase II of OCC’s Financial Safeguards Framework was approved by the SEC in December 2019, making changes to OCC’s rules, clearing fund, and stress testing and margin methodologies to supplement and enhance the 2018 implementation of Phase I of our Financial Safeguards Framework.

Lastly, OCC has an “AA” credit rating with S&P Global (S&P), which places us in the top four percent of all global companies and sovereigns rated by S&P and compares favorably to other global central counterparties.

Whether financial markets are calm or volatile, OCC must deliver seamless clearance, settlement, and risk management services to market participants without exception. In 2019, as in years past, we fulfilled the fiduciary responsibility that our exchanges, clearing member firms, and investors expect from OCC.

We intend to continue that course in 2020 and beyond.

Amy C. Shelly
Chief Financial Officer

OCC has an “AA” credit rating with S&P Global (S&P), which places us in the top four percent of all global companies and sovereigns rated by S&P and compares favorably to other global central counterparties.
TheOCC.com