2019 Annual Report

We pursue excellence today to ensure stability tomorrow.

MESSAGE FROM THE CHIEF EXECUTIVE OFFICER & THE CHIEF OPERATING OFFICER

On behalf of our colleagues, we are pleased to report that in 2019, OCC continued to provide world-class risk management, clearance, and settlement services to the users of the U.S. equity derivatives and securities lending markets. This was done by delivering operational excellence while transforming our processes and technology to better serve stakeholders and market participants.

OCC successfully cleared and settled 4.98 billion contracts in 2019—the second-highest volume in the history of our industry.

2019 HIGHLIGHTS

As a Systemically Important Financial Market Utility (SIFMU), we focus on flawless execution and the delivery of operational and capital efficiencies to the users of our markets. OCC cleared and settled 4.98 billion contracts in 2019—the second-highest volume in the history of our industry. This reflects the stability and integrity we provide the users of our markets as the foundation for secure markets.

We began our multi-year effort to modernize our technology infrastructure with the launch of the Renaissance Initiative. We continued to maintain robust daily operations while transforming our risk culture and reducing the backlog of regulatory findings.

As a Systemically Important Financial Market Utility (SIFMU), we focus on flawless execution and the delivery of operational and capital efficiencies to the users of our markets.

CAPITAL MANAGEMENT POLICY

After the disapproval of our capital plan by the SEC, OCC undertook decisive action to ensure that it had sufficient capital to remain operationally resilient while allowing for the return of $150 million of capital previously invested by OCC’s stockholders.

In January 2020, the SEC approved our new Capital Management Policy, which addresses these core elements:

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

— It 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,

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

To align the interests and incentives of OCC management with its clearing member firms, OCC also will contribute the funds held under its Executive Deferred Compensation Plan (EDCP), to the extent such funds are deposited on or after January 1, 2020, on a pro-rata basis with clearing member clearing fund draws. We believe the inclusion of the EDCP funds is appropriate to strengthen the alignment of interests between OCC’s management and our clearing member firms to maintain the necessary level of pre-funded financial resources.

In January 2020, the SEC approved our new Capital Management Policy.

TRANSFORMATION

2019 was a year of progress for OCC’s Renaissance Initiative: our multi-year technology modernization project designed to enhance our resiliency. We selected Cinnober as the developer of our new Clearing platform and began our work to build the new Clearing platform. When completed, Renaissance will deliver increased business agility, more efficient and effective operations, and improved technology resiliency. All of this will help us better serve the users of our markets.

There also will be multiple benefits for market users: intuitive clearing member interfaces, self-service reporting, strengthened analytics with enhanced access to data, customized solutions, an ongoing commitment to data and cybersecurity protection, and increased confidence in OCC’s ability to deliver in times of market stress.

Our colleagues will benefit from the opportunity for enhanced performance via simpler processes and more intuitive tools to do their jobs. An increased focus on business process reengineering will allow them to engage in even more challenging work that will shape our industry. It also will allow them to have defined roles and competencies that will align the interests of OCC with available skills and opportunities.

By the end of 2019, we completed eight Clearing and Transaction Solutions sprints, launched our Data platform along with the loading of historical, market, and operational data, determined the future state and integrated architecture for the Risk and all other platforms, and developed an infrastructure to support cloud hosting, subject to regulatory review.

Cloud solutions, if approved, will enhance our resiliency in several ways, including improved redundancy via multiple data centers operating across diverse U.S. geographic regions and the ability to quickly model and create or decommission development and test environments for back-testing, stress-testing, and general software development needs.

To continue to support this transformation, OCC has already hired or internally onboarded over 100 experts specializing in high-performance Cloud computing, quant model integration, risk analytics, and next-generation risk technology.

The Renaissance Initiative also gives us the opportunity to think about how we operate. Our Business Process Reengineering team is identifying ways to redesign existing processes and provide input to system requirements. As OCC has traditionally focused on documenting and incrementally improving existing processes, this team is helping us determine the best ways possible to maximize our efficiency and effectiveness to better serve our customers.

In 2019, we formalized four business outcomes from OCC’s Renaissance-led transformation:

Sustaining our legal framework. Integral to being a SIFMU is safeguarding the integrity of cleared markets through expected safe and sound practices.

Reducing cost to run and maintain. Lowering the overall cost of clearance and settlement will be delivered through economies of skill and scale.

Producing capital efficiency. Flexibility, agility, and transformational business capabilities are three key attributes that will enable us to grow and support our customers; providing an environment where authorized business users can explore and analyze data with minimal information technology support.

Bringing new products to market quickly. Market users demand a sustainable product development process that expedites OCC’s ability to help drive industry innovation.

Throughout the financial sector and at OCC, information and cybersecurity remains a significant concern given the increasing sophistication and determination of cyber adversaries. OCC has strengthened its information security controls to identify, protect, and respond to asymmetric cyberattacks. As we transform our information technology operating environment through Renaissance, we are designing and implementing cybersecurity capabilities and processes to support the confidentiality, integrity, and availability of critical OCC business processes and information.

OCC also supports the needs of industry renewal and expansion. In 2019, we supported the launch of 57 new products to help grow the equity derivatives and securities lending markets, and prepared for the launch of clearing services for a new futures market, the Small Exchange.

2019 was a year of progress for OCC’s Renaissance Initiative: our multi-year technology modernization project designed to enhance our resiliency.

OUR PEOPLE

Our greatest asset is our people. OCC cannot deliver on its mission if we do not perform our functions every day as a SIFMU. Our transformation will move forward only through the effort, dedication, and wisdom of our people. Maintaining a high-performance culture and providing our colleagues in Chicago, Dallas, and Washington, D.C. with a collaborative work environment are critically important if we are to deliver on our purpose to ensure confidence in the financial markets and the broader economy.

That is why we are pleased to report that in 2019, OCC’s overall performance was very well received by market participants: 100 percent of the exchanges and 93 percent of the clearing member firms who responded to our survey said they were satisfied or very satisfied with the level of service they received from OCC last year. They are encouraged by the opportunity presented with the Renaissance Initiative. Well over 90 percent of our exchanges and clearing member firms said they were satisfied or very satisfied with key interactions with various OCC departments. These high satisfaction levels reflect why OCC was named Best Clearing House by Markets Media in 2019.

While we are pleased with these results, we understand there are still opportunities for OCC to improve on its service levels, and we are committed to increasing these satisfaction levels in 2020.

Our greatest asset is our people. OCC cannot deliver on its mission if we do not perform our functions every day as a SIFMU.

IN CLOSING

We are grateful for the continued confidence placed in OCC by our participating exchanges, clearing member firms, and market participants. We do not take that confidence for granted, and we know we must deliver operational excellence every day to the users of our markets so we can clear the path for continued growth for the equity derivatives and securities lending markets. Through the Renaissance Initiative and the continued dedication of our entire team, we are working to make OCC a more effective and agile business that can help drive growth in options, futures, and stock lending in 2020 and beyond.

John P. Davidson
Chief Executive Officer

Scot E. Warren
Chief Operating Officer

We are grateful for the continued confidence placed in OCC by our participating exchanges, clearing member firms, and market participants.
TheOCC.com