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Clearing Evolution: Michael McClain on the changes at OCC

Industry players are gearing up for this year’s Options Industry Conference. One of the key speakers at the event is Michael McClain, president and COO of The Options Clearing Corporation. We talked with McClain in advance of the conference about the changes at OCC and their effect on its resilience and risk management capability. He also looked at securities lending, options education, and the controversy over OCC’s capital plan.

The company has made a number of management changes since it was designated a Systemically Important Financial Market Utility (SIFMU). The changes include increasing the number of public directors.

The significant amount of experience of its new public directors provides a whole new level of checks and balances, McClain said. OCC’s board and risk committee are looking beyond the margin models and looking at total systemic risk, he added, which will make OCC a much more resilient clearing house.

OCC’s new capital plan was approved by the SEC in March; however, some of the exchanges have filed a petition asking the commission to review it again, which has held up the plan’s implementation. The plan calls for the OCC’s equity owner exchanges – CBOE, ISE, NASDAQ OMX PHLX, NYSE MKT and NYSE Arca – to infuse more capital into the clearinghouse and in return gives them half the company’s profits. The remaining options exchanges – BATS, BOX, and MIAX – would not share in the ownership or receive the dividends.

“We’ve taken capital from $30 million to a number we think is right – around $250 million,” McClain said. “While there’s disagreement on the approach we’ve taken to bring that capital forward, there has been unanimous consent that the OCC needs that amount of capital.”

Because of the OCC’s unique structure and place in the industry, he added, “there’s almost no capital plan we could have brought forward that wouldn’t have had some aggrieved parties.”

The petition has put the OCC in a holding pattern, McClain said, but while in that holding pattern, OCC continues to monitor the situation and understand where fees are so it can bring them down as soon as possible.

Another new development at the OCC is its stock loan clearing initiative, which it began in 1993. It was originally designed for members borrowing stock in order to hedge options positions. It has evolved to include credit enhancement and now is evolving again to provide a vehicle for clients to make more efficient use of their capital, McClain said.

“We are taking that securities lending model and extending it to products that are just like securities lending – repos for example,” he added. “OCC is working with market participants on the best possible design to expand the products in the program and also to expand those who can participate.”

The OCC’s concerns apply to the whole options industry, so we expect these issues to be discussed at greater length at the conference.

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