2021 was a record-breaking year for U.S. equity options market growth, and there has never been another period in which the options markets have witnessed so much activity or been so widely reported on and discussed. Increased engagement by investors and innovations in technology have dramatically changed marketplace dynamics. I’m extraordinarily pleased by OCC’s performance during these unprecedented market conditions, considering that Risk Magazine named OCC its 2022 Clearing House of the Year. It is gratifying to see the results of our committed transformation efforts and investments over the past few years, as our critical risk management, clearing and settlement services have kept pace with the record volumes and continue to serve as a strong foundation for the markets and the investing public.
As we enter 2022, we mark the tenth anniversary of OCC and other central counterparty (CCP) clearinghouses being designated Systemically Important Financial Market Utilities, or SIFMUs. The financial crisis demonstrated that cleared markets worked extremely well under extreme stress, and policymakers the world over started to focus more intently on the services that clearinghouses provide. The resulting policy changes enhanced the focus of financial market regulators on the details of how clearinghouses manage risk and deliver their critical services. These changes demanded more from organizations like ours, and rightly so. For all the debate over “systemically important” designations, clearinghouses have always known and accepted that responsibility as part of our vital role supporting markets and investors.
OCC had a lot of work to do to meet the requirements and expectations of being a SIFMU, enhancing our approaches in almost every facet of our operations. I’m proud to say the OCC of today is more operationally, financially and technologically resilient, and we are continuing our efforts to strengthen our organization.
Over the past several years, we have increased our capital on the balance sheet tenfold. Today, OCC maintains equity capital (separate from our clearing fund capital) above its target level of $250 million. In addition, in 2021 we enhanced our approach to skin-in-the-game (SITG), establishing an initial minimum, persistent level of SITG equal to 25 percent of OCC’s target regulatory capital, which amounted to $62 million. This is in addition to our previous and continuing contribution to SITG from management deferred compensation. Both measures are unique among U.S. CCPs and neither is a regulatory requirement; we chose to undertake them because we felt they were important to our resilience and support of the industry. This is similar to our Financial Safeguards Framework under which we adopted a “Cover Two” approach that allows OCC to cover the concurrent default of its two largest clearing firms. This approach also exceeds U.S. regulatory standards but enhances our financial strength and resiliency.
We continued to work on our Renaissance Initiative, our multi-year effort to comprehensively redevelop and modernize OCC’s risk management, clearing and data systems to better serve market participants. We’ve accomplished much and are looking forward to rolling out specifications and beginning testing on the new system which will, among other things, provide an environment for intra-day risk management; enhance the efficiency and speed of margin, stress-testing and back-testing capabilities; and deliver enhanced functionality, reporting, control and information security mechanisms for external and internal users. Pending regulatory approval, OCC plans to adopt cloud-based services to enhance business agility and operational efficiency as well to monitor and manage risk. Considering those benefits, we’ve made strides towards moving our new clearing platform to the cloud. We believe cloud implementation for clearing will ultimately result in improved resiliency, enhanced security and increased scalability for our applications. More information about these efforts can be found in a letter from our CEO and COO.
Fundamental changes in the options industry, including growth in numbers and types of market participants and new means of accessing markets, have generated significant notice and attention, and have driven discussion of potential policy adjustments that may be warranted by those developments. These shifts highlight the importance of two other industry services that OCC has provided and to which we will redouble our efforts in the coming year. OCC leads the U.S. Securities Markets Coalition in Washington, D.C. which educates and advocates on behalf of the listed options industry. Along with our exchange partners and representatives from all aspects of the industry, we invest significant time and effort in ensuring that officials and staff involved in making public policy decisions impacting options and investors understand the structure, function and operations of our markets.
In addition, OCC has a dedicated staff developing and offering free options investor education and programs through its Options Industry Council. We strongly believe in the criticality of investor education and want all investors to understand the risks and potential benefits of investing in listed options. In 2021, we continued our efforts to modernize and expand our offerings, partner with other providers of investor education and promote awareness of all the free resources we offer to meet the growing demand across the investing public.
The increased interest in options investing over the past two years is, in my view, here to stay. It will continue to be fueled in part by innovative technologies allowing broader access to markets. We are committed to ongoing improvement of our operations, services and offerings to ensure we continue to meet the needs of all market participants. During the nearly five decades of spectacular growth since our founding, including last year’s record cleared volume of 9.93 billion contracts, OCC has demonstrated a consistent ability to deliver on our clearing and settlement obligations each and every day. We will continue to strive for excellence as we fulfill our mission to serve as the foundation for secure markets and work to move the industry forward.
Craig S. Donohue
Executive Chairman
I’m extraordinarily pleased by OCC’s performance during these unprecedented market conditions, considering that Risk Magazine named OCC its 2022 Clearing House of the Year.