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OCC Lingo: SIFMU Stands For Clearinghouse Changes

The OCC was designated a systemically important financial market utility (SIFMU) in 2012. That has meant some big changes at the organization, along with challenges in risk management and credit and liquidity resources.

John Lothian News spoke with John Fennell, executive vice president, financial risk management at the OCC, formerly the Options Clearing Corporation, about what the organization is doing to insure that it meets these and other regulatory obligations.

“As a SIFMU, we need to make sure we have continuous access to liquidity sufficient to run the business,” he said, “So that even in a failure we can meet the obligations of the defaulting member.”

So OCC has taken the step of partnering with non-traditional clearing members, such as pension funds, that might not have the same liquidity problems as, say, a bank might during a time of crisis.

“What we did is looked outside the box and looked at sources outside the banking industry,” he said. “We looked at pension funds as a new source, an innovative source of liquidity, and worked with CalPERS to implement the first committed repo facility for a clearinghouse, with a pension fund.”

Such moves are being driven in part by the implementation of Basel III, he said, where costs will be going up and supply going down. Pension funds do not have the same kind of run risk that a money market fund or a bank will have during a financial crisis, Fennell said.

Meanwhile, the OCC is also implementing ways to reduce volatility risk, a very important risk factor for an options clearing organization. The OCC is doing this by incorporating implied volatility stresses in their margin model in a way that incentivizes members to manage their implied volatility risk, Fennell said.

Another challenge for OCC comes from the EU’s Basel III capital requirements. While the bulk of OCC’s business is clearing US equity options, Basel III is aimed at OCC members, domestic or foreign. OCC must insure it meets global  standards so that its members receive the proper capital treatment of dealing with a qualified CCP.

How those standards get implemented in different jurisdictions (the EU versus the US) is a complicated issue, he said.

“The OCC is active in several international groups to make sure the perspective and uniqueness of OCC’s markets are contemplated in implementing these policies,” Fennell said.

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