OCC Boosts Risk Management

Terry Flanagan

Options Clearing Corp., which clears U.S. listed derivatives, is expanding its liquidity capability in order to backstop its role as a systemically important financial market utility.

In addition to expanding its authority to require liquidity margin calls, it recently expanded its committed credit facilities from $2 to $3 billion. It’s also in the process of diversifying these facilities to include approximately $1 billion in committed funding from non-bank providers, thereby reducing cross-exposure risk and pro-cyclicality during times of stress.

“If I had to rank the risk management issues from the regulators perspective, liquidity is probably number one, and no lower than two or three,” Mike Walinskas, executive vice president and chief risk officer at OCC, at the Sifma Listed Options Symposium. “We increased our liquidity facility from two to three billion dollars, and that’s based on very rigorous analysis in terms of looking at both current liquidity peaks as well as forecasted peaks.”

OCC is undergoing a transformation as regulators and stakeholders seek to bolster the financial infrastructure against the shocks that rattled it in 2008.

“If you would have asked me just a couple years ago who our OCC stakeholders are, it would have been clearing numbers and the exchanges, period,” said Walinskas. “Today, when you ask me that question about stakeholders, I will immediately include, on top of clearing members and exchanges, the regulators and indirect customers of OCC, so that includes institutional customers, market makers that clear through OCC clearing members, retail customers, and taxpayers. And that’s the lens through which the OCC management team and its board view all issues.”

OCC executive chairman Craig Donohue, in a speech, said that “given these differences in the functioning of listed and OTC markets, it is not surprising that the G20 countries and the U.S. Congress determined that clearing houses could reduce systemic risks in OTC derivatives markets.”

The business and risk management model that CCPs had developed was superior to the loosely-knit post-trade practices of large financial institutions in the swaps market, said Donohue. As a result, one of the major policy decisions coming out of the financial crisis was to require that standardized swaps be cleared through central counterparties in order to strengthen market protections for OTC market participants.

Market participants, principally JP Morgan and BlackRock, have called for ensuring that clearing houses have adequate “skin in the game” in terms of the mutualized risk structure and default waterfall, Donohue noted.

“This notion of “skin-in-the-game” is probably well placed in the context of a for-profit, exchange-owned clearing house,” he said. “OCC, however, is fundamentally different. We operate as an industry utility…we believe OCC is uniquely aligned with market participants who themselves place a much higher priority on effective risk management than low fees and annual refunds.”

Featured image via goranga/Dollar Photo Club

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