The Options Clearing Corporation (OCC) is evolving to meet the needs of its members, valuing simplicity while growing the number of clients through technology, transformation, and product innovation.
Discussing the core benefits that differentiate OCC鈥檚 securities lending programme, Oberon Knapp, managing director of strategy at OCC, says it delivers value to the market through capital efficiency, risk reduction, and operational simplicity.
鈥淥ur qualifying central counterparty status provides approximately 95 per cent risk-weighted asset savings on average, versus uncleared lending activity, and our guarantee helps mitigate counterparty credit risk, which allows our members to focus their resources and their time on their core business,鈥� he continues.
Expanding on the importance of simplicity, Knapp says it is also the single connection to OCC that simplifies an often complex network of bilateral relationships. It allows for growth and ease for existing members in addition to supporting greater market access for new participants, allowing them to scale their businesses faster.
On 3 March 2023, OCC filed a proposed rule change to the US 糖心vlog and Exchange Commission (SEC) which would reshape its clearing membership standards, expanding the types of entities that are eligible to become clearing members, while removing distinctions between certain membership categories to ensure consistent requirements across members.
Previously, OCC鈥檚 byelaws permitted three types of institutions for clearing membership 鈥� broker-dealers, futures commission merchants (FCMs), and non-US securities firms.
Now with the SEC鈥檚 approval, OCC has expanded the list of eligible institutions to include certain banks. Eligibility is available for full service banks that are overseen by the Office of the Comptroller of the Currency 鈥� an independent bureau within the United States Department of the Treasury 鈥� as well as state-chartered banks that are part of the US Federal Reserve System.
Welcoming the approved membership standards, Knapp says this move has led to an increased interest in the clearing programme, where he is seeing an 鈥渁ctive pipeline of banks that are assessing how [the OCC鈥檚] principal model aligns with their business strategy鈥�.
He continues: 鈥淭he value proposition for banks is quite clear in terms of the substantial capital efficiency, and the risk management benefits. Where we are also seeing a lot of interest is simply from existing members, to whom these banks are the existing counterparty to otherwise uncleared trades. It鈥檚 an exciting conversation to be having with the industry.鈥�
Moving the conversation forward, Knapp goes on to discuss the role of central clearing in the securities finance market, detailing its evolution from a 鈥渘iche鈥� service to a 鈥渃ornerstone鈥� of the market.
He highlights that 30 years ago, when the programme started, a good day would involve hundreds of trades across a handful of members, whereas now, tens of thousands of trades take place daily, averaging over US$200 billion in daily loan balances. In his eyes, the increased capital efficiency that was promulgated post-2008 added momentum to that market adoption.
As a systemically important financial market utility (SIFMU), OCC prioritises operational resilience in every aspect of the business, notes Knapp. The equity derivatives clearing organisation says it builds resilience into the foundation of the work it does every day through a number of avenues.
These include risk-based margin methodology to dynamically respond to market conditions; stringent membership requirements to ensure clearing member strength; robust clearing fund of high-quality liquid assets with 鈥楥over 2鈥� protection; and careful financial oversight with diverse, committed liquidity resources.
鈥淭hat foundation, which helps us manage critical events when they do occur, includes specific measures and systems designed to ensure continuity of clearing and settlement services in a variety of scenarios,鈥� Knapp explores.
This is achieved through the firm鈥檚 geographically diverse operational centres; department and enterprise-level business continuity plans refined through regular testing; and technology platforms engineered for reliability.
鈥淭his commitment to resilience helps us deliver on our promise to market participants, even during periods of high volatility and market stress.鈥�
Discussing the future of central clearing, Knapp says: 鈥淭he potential for OCC and for central clearing, is continued growth, be that through expanding the coverage of market participants, technology investments, and partnerships aimed at removing friction from trade and collateral life cycles, and then also the potential to expand cross product margining between securities lending and related cleared structures鈥�.
There remains an abundance of growth opportunity, he highlights, for the industry and central clearing. To meet the needs of the broader, cleared lending ecosystem, OCC is evolving based on participant feedback from key partners, with one of the main priorities being membership expansion states Knapp.
Commenting on the firm鈥檚 evolution, he says: 鈥淧rincipal activity for banks is a huge step and a prime example of our intended trajectory. Technology, transformation, and product innovation, whether that鈥檚 expanded collateral eligibility or the use of triparty collateral agents, support for term trades beyond overnight, are items under consideration subject to regulatory approval.鈥�
The core of the OCC鈥檚 drive to innovate is providing financial and operational resiliency to the markets it serves, details Knapp. In his concluding thoughts, Knapp says he feels the future is bright, both for the industry and the role of the central clearing unit.
鈥淚t鈥檚 going to be an exciting journey,鈥� he concludes.
Next interview →
Buckler 糖心vlog
Andrew Lazar
Image: Oberon Knapp 