2019 Annual Report

Even with the progress we’ve achieved, we continue to look ahead.

MESSAGE FROM THE EXECUTIVE CHAIRMAN

On behalf of the Board of Directors and my OCC colleagues, I am pleased to share with you our 2019 annual report.

For the past five years, OCC has been engaged in a comprehensive transformation effort to strengthen our financial resiliency, our people, our compliance processes, and our technology to meet heightened regulatory obligations and to better serve market participants and the investing public.

These enhancements are taking place during a period of historic market growth. OCC’s total cleared contract volume reached 4.98 billion contracts in 2019—the second highest in the history of the U.S. equity derivatives markets and only down 5.1 percent compared to 2018’s record-breaking pace.

This illustrates how OCC continues to deliver on its key services for our participant exchanges, clearing member firms, and market participants, and underscores our critical role as the foundation for secure markets.

Our report also includes commentary from two market participants with interesting perspectives on how OCC has adapted and grown as an organization: Dale Petroskey, President and CEO of the Dallas Regional Chamber, and Jim Toes, President and CEO of the Security Traders Association.

OCC has accomplished a great deal during the last several years: embracing what needed to be done, and acting on what still needs to be done.

ENHANCING OUR RESILIENCY

At OCC, we take seriously our designation as a Systemically Important Financial Market Utility (SIFMU). We are committed to operating as a covered clearing agency and maintaining the highest standards of regulatory compliance throughout our organization.

As part of our ongoing transformation, on September 4, 2019, we announced that we reached a settlement agreement with the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), regarding allegations that OCC failed to comply with certain SEC and CFTC regulations.

In reaching their settlement with OCC, both agencies considered our cooperation and remediation efforts. The SEC noted that OCC developed and provided remediation plans to the Commission staff and had already obtained SEC approval to enhance the company’s margin policy and incorporate stress testing and liquidation costs into its clearing fund and margin methodologies, respectively, among other approvals. The CFTC specifically noted that “OCC developed remediation plans to bring OCC into compliance with [clearing agency] Core Principles and Regulations.”

The settlement agreement contains additional undertakings that OCC is addressing, which we believe will strengthen OCC. Our Board of Directors, management, and our entire team in Chicago, Dallas, and Washington, D.C. will work tirelessly to continue to earn the trust and confidence of our clearing member firms, participant exchanges, business partners, and regulators.

To achieve operational excellence, OCC has made significant progress in strengthening its financial resiliency. In January 2020, the SEC approved our new Capital Management Policy, which ensures that OCC maintains appropriate financial resources to continue providing critical services to our exchanges, our clearing member firms, and their customers in the unlikely event of a material operational loss.

Capitalization sufficient to withstand such a loss is a critical component of OCC’s role as a SIFMU to reduce systemic risk, increase market transparency, and provide capital and operational efficiencies for market participants. We appreciate the work done by the SEC to approve this new policy, and we have benefitted from the feedback we received from our clearing member firms and other market participants.

In addition to regulatory matters, OCC’s Renaissance Initiative is laying the groundwork for far-reaching organizational transformation. It represents our evolution to a completely new technology architecture, which will power a new operating model, automated workflows, and increased collaboration. The Renaissance Initiative will make our company more agile, enhance our resiliency, and further strengthen our compliance posture. It also will help our colleagues deliver more efficient and effective services to the users of our markets.

When the Renaissance Initiative is completed, OCC’s systems will have a modular architecture that includes independent and integrated Clearing, Risk, and Data platforms. This will clear the path for automated tools, allowing OCC colleagues to rely on data and analytics to run the business more efficiently.

The Renaissance Initiative will make our company more agile, enhance our resiliency, and further strengthen our compliance posture.

STRENGTHENING OUR GOVERNANCE AND MANAGEMENT STRUCTURE

Our Board of Directors has deep expertise in risk management, technology, operations, compliance, regulatory policy, and audit. In 2019, our Board was strengthened with the addition of Stuart M. Bourne from Bank of America Merrill Lynch; Maria Chiodi from Credit Suisse Securities (USA), LLC; Christopher A. Isaacson from Cboe Global Markets, Inc.; Kevin J. Kennedy from Nasdaq, Inc. and Susan G. O’Flynn from Morgan Stanley. In addition, the following directors were re-elected to the OCC Board of Directors in April 2019: Kurt M. Eckert, Wolverine Trading; Susan E. Lester, financial executive; Robert R. Litterman, Kepos Capital, LP; Jonathan B. Werts, Bank of America Merrill Lynch; and William T. Yates, TD Ameritrade.

On behalf of our Board, I want to thank Jonathan B. Werts, Edward T. Tilly from Cboe, Christine L. Show from SG Americas Securities, Thomas A. Wittman from Nasdaq, Inc. and Mark F. Dehnert from Goldman Sachs, for their years of service as members of our Board of Directors. Their industry experience and insights were instrumental in setting OCC’s course as an important market utility and industry advocate as well as helping drive our progress with the Renaissance Initiative. Their work and that of their Board colleagues supports OCC’s continued efforts to bring resiliency, innovation, and growth to our company and to the U.S. equity derivatives markets.

Our management structure continued to evolve in 2019 with several key leadership hires and promotions, including: Janet Angstadt, who oversees the strategic direction of OCC’s legal programs with a focus on compliance and regulatory requirements; Saqib Jamshed, who is responsible for enhancing OCC’s model risk management program; Pat Hickey, who manages OCC’s product and business ecosystems; and Sandeep Maira, who is responsible for aligning our evolving technology solutions with our business objectives. I also want to acknowledge and congratulate Carla Dawson on her promotion to Senior Vice President and Chief Human Resources Officer.

Our Board of Directors has deep expertise in risk management, technology, operations, compliance, regulatory policy, and audit.

ADVOCATING FOR OUR INDUSTRY

For several years, OCC has led the efforts of the U.S. Securities Markets Coalition, which engages in regular educational outreach to policy makers in Washington, D.C. to discuss the potential impacts of various regulatory and tax proposals on investors who use the markets we clear.

We commend the actions of the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency for finalizing a rule in 2019 to update how certain bank-affiliated clearing member firms measure counterparty credit risk posed by derivative contracts under the agencies’ regulatory capital rules. The new methodology, called the Standardized Approach for Counterparty Credit Risk (SA-CCR), replaces the current exposure methodology (CEM) for calculating exposures to derivatives contracts such as listed options under the capital rules, and in the words of Federal Reserve Chairman Jerome Powell, “would appropriately recognize the counterparty risks on derivatives, including the lower risks on most centrally cleared derivatives.”

This action addresses some of the issues OCC and the U.S. listed options industry have highlighted with policymakers for several years. We appreciate the agencies’ work to finalize this important measure, which provides rational capital efficiencies for clearing firms and facilitates the provision of vital clearance and settlement services in our industry.

Our advocacy is complemented by our educational work through The Options Industry Council (OIC), whose development of unbiased content since 1992 has made a significant contribution to the continued education of the users of the U.S. exchange-listed options markets. In 2019, OIC’s robust digital programming attracted over 100,000 participants. We also collaborated on educational initiatives with several of our clearing member firms and participant exchanges.

For several years, OCC has led the efforts of the U.S. Securities Markets Coalition.

IN CLOSING

My OCC colleagues have accomplished a great deal during the last several years as we continue to transform our company. We embraced what was needed to be done, and we are acting on what still needs to be done.

As a SIFMU, OCC is more committed than ever to our mission to serve as the foundation for secure markets. We will continue to work tirelessly as a team to earn the trust and confidence of our clearing members and participant exchanges, our business partners, and our regulators in order to help grow the U.S. equity derivatives industry.

Craig S. Donohue
Executive Chairman

 

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