Firewall for Options Market Clears SEC Hurdle for Capital Plan

A plan to bolster the financial strength of the U.S. options market’s backstop that has drawn criticism from some exchanges and traders cleared a regulatory hurdle.

The Securities and Exchange Commission on Thursday lifted a stay on a plan by Options Clearing Corp., which processes and guarantees all trading of stock options on U.S. exchanges, to shore up its capital. Under the proposal, Chicago-based OCC has collected $150 million from the five exchanges that own it.

The organization was deemed a systemically important financial market utility in the aftermath of the 2008 global financial crisis, meaning it needed to prove it could withstand another calamity in markets. OCC is a clearinghouse, meaning it collects money to back every options trade on a U.S. exchange, with the goal of preventing losses at one firm from bringing down its counterparties.

OCC’s owners, in exchange for posting the $150 million of added capital, will receive a stream of dividend checks from the clearinghouse. Three options exchanges -- Bats Global Markets Inc., Miax Options and Box Options -- that aren’t part of OCC’s ownership group said it’s unfair they’re excluded from receiving that benefit. Two trading firms, KCG Holdings Inc. and Susquehanna International Group LLP, also objected to the plan.

The SEC granted a further review of those objections.

“The commission believes, on balance, that strengthening the capitalization of a systemically important clearing agency, such as OCC, is a compelling public interest,” according to the SEC’s order. “The commission also believes that the concerns raised by the petitioners regarding potential monetary and competitive harm do not currently justify maintaining the stay during the pendency of the commission’s review.”

The industry created OCC in the 1970s. It acts as a firewall, paying off a trader’s losses when it cannot to help guarantee other traders aren’t harmed. Five exchanges own it: the Chicago Board Options Exchange, International Securities Exchange, Nasdaq OMX PHLX, NYSE Amex Options and NYSE Arca Options.

“We feel very confident that the commission will ultimately dismiss the petitions and affirm its earlier approval of the capital plan,” Craig Donohue, OCC’s executive chairman, said in a telephone interview. “We view this as extremely positive for OCC.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE