2020 Annual Report

Message from the Chief Financial Officer

OCC today is in a stronger financial position than ever before, having significantly increased our liquidity resources by diversifying our committed credit facilities with both banks and non-bank providers to $3 billion while also ensuring a minimum of $3.5 billion of cash in the clearing fund. Last year, the SEC approved OCC’s Capital Management Policy, which sets forth our approach to managing capital to ensure that we have the financial resilience to meet the needs of market participants and fulfill our role as a systemically important financial market utility (SIFMU). That policy also established the framework for OCC’s “skin-in-the-game” (SITG), strengthening the alignment between OCC's management and our clearing member firms to maintain the necessary level of pre-funded financial resources in the event of a clearing member default.

For many reasons, 2020 was an extraordinary year in terms of transaction and contract volume, with record highs in both trades and contracts. In late 2019, we projected that 19 million contracts would be the average amount cleared per day, however, the actual average daily volume in 2020 soon reached 28 million contracts. With the volume and a strong focus on expense discipline, we have achieved significant operating leverage. Because of that leverage, and consistent with the Capital Management Policy, we announced in July our plans to lower clearing costs for market participants, including a reduction of clearing fees and a planned refund to clearing member firms.

OCC today is in a stronger financial position than ever before, having significantly increased our liquidity resources by diversifying our committed credit facilities with both banks and non-bank providers to $3 billion while also ensuring a minimum of $3.5 billion of cash in the clearing fund.

CAPITAL MANAGEMENT POLICY

In 2020, the SEC granted final approval of OCC's Capital Management Policy. Capitalization sufficient to withstand a material operational loss is a critical component of OCC's role as a SIFMU. Robust capitalization serves to reduce systemic risk, increase market transparency, and provide capital and operational efficiencies for market participants. The new Capital Management 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 other approved capital needs, tools such as a fee holiday or clearing fee reduction may be used to lower costs for clearing members.

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 defaulting clearing member, i.e., provide SITG. Additionally, OCC 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 and in excess of amounts necessary to pay for benefits vested under the EDCP at such time, on a pari passu basis with non-defaulting clearing member clearing fund contributions. The inclusion of the EDCP funds further strengthens the alignment between OCC's management and our clearing members to maintain the necessary level of pre-funded financial resources.

Following the approval of the Capital Management Policy, OCC proposed to amend this Policy to provide a minimum level of SITG of $62 million with the goal of increasing alignment with our clearing member firms and market participants, further strengthening our pre-funded financial resources, and aligning more closely with international standards. Increasing the minimum amount of OCC’s SITG will also reduce the likelihood of a direct cost to our clearing members in the unlikely event of a default that results in a clearing fund draw. The amendment to the Policy was approved by the SEC in 2021.

In 2020, the SEC granted final approval of OCC's Capital Management Policy.

ENHANCED LIQUIDITY FACILITIES

As in 2019, we have a $2 billion credit facility in place that has a $1 billion accordion feature. Three banks exited the facility, but we added two, leaving a total of 18 institutions participating in the facility. In addition, we increased the minimum cash in the clearing fund by $500 million.

OCC also diversified our sources of liquidity through our non-bank credit facility program in 2020—specifically, by executing committed repo facilities with two new pension funds. Because the pension funds are not connected to clearing members (versus certain banks which may be connected through holding companies), we can mitigate the potential for duplicative exposure in the event of a member default. OCC pioneered this approach several years ago, and we are pleased to continue to incorporate new pension funds into the program.

As in 2019, we have a $2 billion credit facility in place that has a $1 billion accordion feature.

LOWERING COSTS FOR CLEARING MEMBERS

OCC’s continued focus on expense discipline and operational excellence helped us achieve significant operating leverage. As a result, OCC announced reductions in clearing fees to help limit costs for U.S. equity derivatives market users.

In addition, the record volume we experienced in the past year put us in a position to continue to invest in our infrastructure and other critical initiatives while also allowing us to provide a clearing fee refund. In December 2020, OCC’s Board of Directors approved a refund of $156 million, in keeping with our Capital Management Policy, paid to clearing members on April 19, 2021.

OCC announced reductions in clearing fees to help limit costs for U.S. equity derivatives market users.

CHANGES TO CREDIT RATING

S&P Global (S&P) reaffirmed OCC’s ‘AA’ credit rating in 2020, 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. S&P also upgraded its outlook on OCC from negative to stable. This change in outlook from AA Negative to AA Stable was due in part to the approval of OCC’s Capital Management Policy and the implementation of Phase III of OCC’s Financial Safeguards Framework in June.

S&P Global (S&P) reaffirmed OCC’s ‘AA’ credit rating in 2020.

IN CLOSING

Amid the volatility of 2020, OCC continued to deliver high-quality clearance and settlement services to our market participants. These unprecedented times have provided us with an opportunity to enhance OCC’s financial resilience to the benefit of all stakeholders. Looking ahead, we are well-positioned to continue delivering the high level of risk management and operational service that market participants and investors have come to expect while meeting the regulatory expectations of our role as a SIFMU.

Amy C. Shelly
Chief Financial Officer

TheOCC.com