Options Clearing Corporation Occ

Key takeaways

– The Options Clearing Corporation (OCC) is the central clearinghouse and guarantor for U.S. listed options, many futures and options on futures, and certain securities lending transactions.
– OCC acts as a central counterparty (CCP): it becomes the buyer to every seller and the seller to every buyer, reducing counterparty credit risk and enabling netting, margining and centralized default management.
– The OCC operates under dual oversight by the SEC (for options and securities-related products) and the CFTC (for futures and options on futures).
– The OCC’s core risk protections include margin requirements, a clearing fund contributed by members, daily settlement and netting, and stress testing/default-management procedures.
– The OCC cleared a record 9.93 billion contracts in 2021. (Check OCC and regulator sites for updated volumes and leadership information.)

What is the OCC?

The Options Clearing Corporation (OCC) is the largest equity derivatives clearing organization in the world. Founded in 1973, it provides centralized clearing and settlement services for options and many futures-related products. As a registered clearing organization it (1) novates trades (becomes the buyer to each seller and seller to each buyer), (2) guarantees the contractual obligations of the trades it clears, (3) manages margin and collateral requirements, and (4) runs default-management and risk‑mitigation programs aimed at preserving market stability.

Why a CCP like the OCC matters

– Reduces bilateral counterparty risk by centralizing obligations.
– Enables multilateral netting, which lowers funding and settlement needs.
– Creates uniform margining and standardized default processes, which improve transparency and resilience.
– Supports market liquidity and confidence by providing a backstop if a clearing member fails.

Regulatory oversight

– The SEC supervises OCC for its securities- and options-related clearing activities.
– The CFTC supervises OCC as a registered derivatives clearing organization (DCO) for futures and options on futures.
– The OCC must comply with rulebooks and regulatory standards from both agencies, including capital, governance and risk-management requirements.

Core functions and operations

– Novation and central counterparty role: OCC becomes counterparty to both sides of a cleared transaction.
– Netting and daily settlement: positions and obligations are netted across participants to reduce gross exposure; gains and losses are settled daily.
– Margining: OCC requires initial and variation margin from clearing members to cover potential future and current exposures.
– Clearing fund: a pooled resource funded by members to absorb losses if a member defaults and its margin is insufficient.
– Default management: documented procedures to manage member default(s), including position liquidation, collateral use and allocating losses to the clearing fund as needed.
– Operational clearing services: trade allocation, exercise/assignment processing for options, and settlement.
– Value‑added services: research, technology and support services to member exchanges and clearing members.
– Securities lending clearing: OCC provides central counterparty services for some securities lending transactions.

Participants and membership

– Members: primarily broker-dealers and clearing firms that meet OCC’s capital, operational and compliance standards. Members clear trades on behalf of themselves and their customers.
– Exchanges: OCC serves multiple options exchanges (e.g., CBOE, ISE, Nasdaq options platforms, NYSE options venues).
– Customers: retail and institutional traders are indirect users; they interact with OCC through their brokers/clearing firms.

History, governance and reforms

– Founded in 1973 to standardize and stabilize options clearing.
– After the 2008 financial crisis there was increased regulatory focus on clearinghouses as systemic risk nodes; OCC made changes to strengthen risk management.
– In 2013 the SEC criticized aspects of OCC’s governance and management, leading to reforms and changes in executive leadership and enhancements to compliance and oversight.
– OCC is governed by a board composed of exchange representatives, clearing member representatives and independent directors; it generates revenue primarily through clearing fees.

Limitations of OCC protection (what it does NOT do)

– OCC guarantees the performance of cleared contract obligations, but it does not insure investors against market losses.
– OCC is not a substitute for broker solvency protections — if a broker fails, customer asset protections (e.g., SIPC, applicable custody rules, broker insolvency procedures) are separate matters.
– OCC protections apply only to transactions it clears; products outside the clearinghouse model are not covered.

Practical steps — for prospective clearing members and broker-dealers

1. Review OCC rulebook and membership requirements: obtain and study OCC’s membership standards, financial and operational criteria.
2. Meet financial standards: ensure required capital, liquidity and financial reporting are in place. OCC requires ongoing financial disclosure and tests.
3. Implement operational infrastructure: integrate with OCC’s clearing and connectivity systems, build reporting, margining and settlement processes.
4. Complete onboarding and testing: pass connectivity, functional and stress tests required by OCC and the exchanges you will service.
5. Execute legal and clearing agreements: sign the necessary participation agreements, indemnities and collateral arrangements with OCC and any relevant exchanges.
6. Establish risk-management protocols: set internal limits, margin collection policies and default response plans consistent with OCC rules.
7. Participate in ongoing oversight: contribute to the clearing fund, participate in stress-test exercises and comply with periodic audits and regulatory reporting.

Practical steps — for brokered customers and retail investors

1. Know how your broker clears trades: confirm whether your broker is a direct OCC clearing member or uses a clearing firm. This affects who maintains custody of your positions.
2. Understand protections and limits: OCC guarantees performance of contracts it clears, but does not protect against market losses. For broker failure, know SIPC coverage and your broker’s customer protection procedures.
3. Monitor margin and positions: options and futures can require margin adjustments; understand margin calls and maintenance requirements to avoid forced liquidations.
4. Maintain clear records: retain trade confirmations, statements and communications from your broker in case of dispute or broker insolvency.
5. Ask questions: if you’re unclear how exercise, assignment and settlement work for your options, ask your broker for the firm’s procedures and timelines.
6. Stay informed: check OCC and regulator notices for any market-wide actions affecting options exercise/assignment, settlement delays or rule changes.

Practical steps — for market risk managers and institutional users

1. Calibrate exposures: use OCC margin models and your internal models to estimate potential future exposure under stressed scenarios.
2. Participate in industry stress tests: provide accurate and timely data to the OCC for clearinghouse-wide stress testing.
3. Maintain contingency plans: prepare for participant default scenarios and operational outages (backup connectivity and fallback procedures).
4. Review participation in the clearing fund: understand your firm’s potential contributions and how loss allocation works.
5. Coordinate with regulators and exchanges: for large or complex exposures, maintain open lines of communication regarding planned changes to clearing practices or products.

Governance and leadership (note on currency)

– OCC’s board and executive leadership include representatives from exchanges, clearing members and independent managers. Leadership and board composition change over time; as of October 2022, public listings identified key executives such as Craig S. Donohue, John P. Davidson and Scot E. Warren. Always consult OCC’s official site for the current executive roster and board membership.

Where to find authoritative, up‑to‑date information

– OCC website (rules, circulars, clearing statistics, leadership directory) — check OCC’s official site for current rules, circulars, and leadership updates.
– SEC and CFTC websites — for regulatory filings, rule approvals and oversight communications concerning OCC.
– OCC clearing member documentation and exchange connectivity guides for technical onboarding steps.
– Public commentaries, press releases and periodic OCC reports for volumes and annual statistics.

If you want, I can:

– Summarize the OCC rulebook sections relevant to a prospective clearing member (capital, reporting, default rules) and list where to find each OCC rule.
– Provide a checklist you or your firm can use to prepare for OCC membership onboarding.
– Draft a short, plain-language note you can send to your retail customers explaining what the OCC guarantees and what it doesn’t.