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Make A Plan: How OCC Is Forging Change In The Options Industry

Craig Donohue joined OCC in 2014 to help address some major issues for the clearing house and to position the organization for the new derivatives clearing landscape. He sat down with John Lothian News to discuss the current state of the options industry, regulation and where the organization is heading next.

One of Donohue’s first issues to address was the OCC’s capital plan to raise the organization’s shareholder equity to $247 million, from $25 million. That plan, which strengthens OCC’s capital base as one of the designated Systemically Important Financial Market Utilities (SIFMUs), puts the clearing house on firmer footing going forward, Donohue said. The SEC approved the capital moves by OCC in March.

“It was a tall order of business when I first got here,” Donohue said. “We were very focused on our capitalization as a company and I’m very proud that we’ve fully implemented our capital plan.”

Donohue said last year was critical for OCC, as it addressed more than 90 percent of the issues which the SEC had identified as potential problem spots for the clearing house.

Now OCC and others in the industry are trying to address some policy and regulatory changes that would make options trading more expensive or even prohibited. The 871(m) tax rule from the US Internal Revenue Service and US Treasury will tax foreign firms on certain US equity options positions with a delta of .70 of higher. This could adversely impact the level of foreign options volumes, which exchanges have worked hard to attract in recent years. OCC is working with firms to simplify the process using end-of-day calculations.

OCC also appears to have helped head off a prohibition on individuals using options in their self-directed retirement accounts. In early April, regulators from the US Department of Labor decided not to enact the rule proposal.  Donohue was pleased to see the ruling.

“To put it in context, on an annualized basis, we have about 85 million contracts executed by customers with options in their individual retirement accounts,” Donohue said.

Going forward, Donohue is still bullish on the options industry. He said he sees derivatives as highly innovative instruments that investors and traders still want. But the industry still faces some major cost headwinds due to capital requirements and rules.

“We are a more mature industry and the principal concern that I have, and people in the industry share, is the increased capital cost associated with conducting business is becoming worrisome,” Donohue said.

Donohue believes OCC will be part of the solution as it looks at ways to reduce costs and improve capital efficiencies. The exchange is looking at new technologies to deploy that will help, including potential game changers such as blockchain.

“With the pressures that we’ve talked about, in terms of the cost of increased regulation and capital requirements and the way it is impacting market participants, it’s forcing us to think about “how do we make adaptations and changes that continue that leadership position into the future?”

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Ashburn is a 20-year veteran derivatives trader who has "reinvented himself"​ as a financial journalist.