As former regulators, we saw firsthand the important role central counterparties (CCPs) play during periods of heightened stress, including bankruptcies and global financial market downturns. U.S. CCPs have performed as intended and without fail since their inception.
Central clearing, once largely invisible to most and thought of as the “back office” to the financial marketplace, is appropriately front and center in the financial regulatory system today. The 2008-09 financial crisis put clearing in the spotlight. When G-20 leaders pledged more clearing in the marketplace generally, regulators imposed more stringent rules and oversight of clearing done by CCPs.
A new white paper by one such CCP, the Options Clearing Corporation, outlines the role of CCPs, examines clearing “resiliency, recovery and resolution” and offers feedback to the ongoing dialogue about CCP regulation and industry resilience.
It is noteworthy that OCC reports it is clearing a record number of daily contracts this year that represent a “60 percent increase over 2019.” Founded in 1973, the OCC is the only CCP for all U.S. exchange traded options. The paper details OCC’s approach to risk and capital management, receiving and considering industry feedback, enhancing operational resiliency, and providing greater transparency to market participants.
In the 10+ years following the 2008 financial crisis, CCPs implemented an unprecedented number of regulatory requirements mandated by the Dodd-Frank Act. Several CCPs were designated “systemically important” and subject to additional regulations, including the OCC in 2012. Many CCPs, like OCC, have gone above and beyond, meeting regulatory requirements by further enhancing their risk-management practices and guidelines.
Financial markets are far from static, and ongoing dialogue about regulatory requirements is healthy for the entire market infrastructure. In its white paper, OCC has offered a constructive and thoughtful response to many of the recommendations offered by clearing members earlier this year in a paper titled, “A Path Forward for CCP Resilience, Recovery, and Resolution.”
In our view, OCC correctly highlights the balance of interests and incentives that are vital to sound risk management practices, while recognizing that financial stability is in everyone’s best interest.