Can you speak about the OCC and what drives the Chicago-based clearing house?
OCC is the world's largest equity derivatives clearing organisation. We are covering listed options, derivatives, and securities lending in the US equity markets. For our members, if you are trading single stock listed options or futures — for example, for derivative products like VIX — or if you are doing securities lending and borrowing in any of the 7500 eligible securities at OCC, all of those transactions can come to us for clearing.
The numbers we have released for May highlight the scale of that. It translates to monthly volumes of 978 million options and futures cleared, almost a billion in volume. And then with our securities lending programme, our average balances in May were roughly US$160 billion. Beyond the numbers, OCC is also a systemically important financial market utility (SIFMU).
While that means a lot of things, one of the key points is that we are dedicated to providing financial and operational resiliency to the marketplace. With the goal of reducing risk and increasing market confidence, regardless of conditions. We are known as the foundation for secure markets — that is a pretty good descriptor of our DNA.
Building on those strong foundations, market infrastructure is key in securities lending. OCC is a CCP and a clearing house, how does this structure operate?
As a clearing house, we think of that more as a funnel. At the top of the funnel, we are a strategic partner to our stakeholders, whether that is our exchanges, clearing members or regulators, as new products and capabilities are being contemplated, we are working with them to the extent that those capabilities translate into action. As those trades then come down the funnel, we are at the bottom to clear, settle and risk manage every single transaction.
While the clearing house is the vertical, we think of the CCP as the horizontal. As a central counterparty spanning across all of the trading activity, as those trades come to us, we become the buyer to every seller, the lender to every borrower, and vice versa — guaranteeing the performance of every trade.
In terms of market structure connectivity, OCC is currently connected to 20 exchanges and securities lending markets. We have over 100 clearing member organisations, and we connect to another 250 non-clearing organisations (NCOs) — which are the entities that provide all of these important services such as pre-trade compliance, post-trade services, and collateral optimisation. That has been one of the most interesting parts of OCC for me, seeing not only the transparency we bring to markets, but the structural interoperability that we also bring to the markets that we serve.
The OCC operates two securities lending programmes. Can you explain how each of them works, how they differ, and who they serve?
We have OCC Hedge and OCC Market Loan. Hedge is the original programme, which was founded over 30 years ago, and remains to be where the vast majority of our activity takes place. In Hedge, the counterparties are fully disclosed and they consummate a trade before clearing.
Market loan is the opposite. Market loan counterparties are transacting with each other anonymously, and that anonymity is protected through the lifecycle. However, we are becoming the central counterparty to that trade and we are guaranteeing the performance of it.
In terms of who our members are, both programmes have broker dealers, futures commission merchants (FCMs), as well as certain non-US securities firms fittingly being in Canada right now. The Canadian firms are a large and growing part of the OCC lending community. In addition, recently we approved banks as members, and there are a few starting on their journey toward membership.
Capital efficiency is a topic we talk about a lot — and that is big. We are a qualified CCP (QCCP), which means two per cent as a risk-weight counterparty for a typical OCC member. That amounts to roughly 95 per cent savings. Not just that, but clearing your securities lending activity means increased distribution and sourcing opportunities, as well as lower risk and interoperability. Firms are appreciative of the OCCs ability to help them mature and scale their programmes, rather than having to build one connection at a time.
OCC has been working on a clearing platform named Ovation, can you reveal more about the project?
Ovation is our next generation platform, it offers near real-time clearing, combined with the resiliency of cloud-based architecture. Day one, the promise of Ovation is shortening the time to market from a technical perspective on new products and capabilities that were requested. It will also power enriched data services to members. Day two, it becomes the foundation to so much more that we can do for people. Beyond talking about it, we are excited to start showing it. That will start with industry testing a little later this year, including for our securities lending ecosystem.
Specific to securities lending users, we have taken a lot of care to limit the impact of this conversion, and we are working very closely with the various post-trade providers to ensure a seamless integration for when we go live.
Of course, we would not be doing this if there was not a value proposition. There are three main benefits that we are focused on right now for our securities lending clearing members. The first is harmonising our workflows to increase our guarantee. We have Hedge and we have Market Loan programmes — those programmes have their own operations and technical flows. This conversion is going to let us bring those together, and when we can bring them together, that means we can expand our guarantee. Our members will have coverage of rebates going forward, once we are able to normalise flows, as well as certain corporate action types that are not covered right now.
Number two is the potential to take a node. The securities lending clearing system is, at its heart, based on distributed ledger technology (DLT). Members will have the opportunity to licence a node if they wish, which will give them real-time insight into all of their clearing activity. The fun part is thinking about the new potential tools, products and solutions that we have not even thought about yet, that this type of timely clean data might power.
Lastly, is the accelerated time to market. Whether that means supporting new loan market applicants, supporting onboarding of new members, or considering things like new member types or product expansions. We are looking forward to having a platform that allows us to serve the markets better.
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