CME Ex-CEO Tackles Options Market Risk in New Clearinghouse Role

Craig Donohue, the new chairman of Options Clearing Corp., says he’s focused on improving the organization’s operations after regulators criticized how it managed risk in the $1.2 trillion U.S. equity options market.

“My focus and part of my role and responsibility is to make sure we have a highly compliant organization,” Donohue, who became OCC’s chairman in January, said during a phone interview yesterday. He previously served as chief executive officer of Chicago-based CME Group Inc., owner of the world’s biggest futures exchange.

The U.S. Securities and Exchange Commission said last year that it had “serious concern” about regulatory compliance and risk management at OCC, which guarantees all trades placed on U.S. options exchange and was deemed a systemically important part of the American financial market infrastructure by the Financial Stability Oversight Council. The SEC listed failings of governance, risk management and financial surveillance in a 22-page letter dated Sept. 18, which Bloomberg News obtained.

Donohue declined to comment specifically on the SEC critique.

“When the board brought me on, they separated the role of CEO and chairman,” said Donohue, 52. “My oversight is focused on the control function. I’m here to ensure we are adhering to the absolute highest risk standards.”

He succeeded Wayne P. Luthringshausen, who retired at the end of 2013. Michael Cahill took over as the CEO of OCC, a job Luthringshausen had held since 1973.

‘Systemically Important’

Clearinghouses such as OCC collect collateral from member trading firms to help ensure that a default by one firm doesn’t damage the entire industry. Last year, the dollar value of options traded amounted to $1.2 trillion, according to OCC. The firm has about 120 clearing members.

Among other criticisms, the SEC said last year that OCC didn’t periodically evaluate whether the assumptions underlying its risk models were still appropriate. “Therefore, it cannot substantiate that these assumptions are justified,” according to the SEC. OCC also lacked a comprehensive document summarizing the key processes and methodologies used to monitor and model risks, and senior management “lacks a fundamental understanding of the compliance department’s role,” the SEC said.

“We’re spending a lot of time with the regulators making sure we are understanding their requirements and will focus on making progress till that’s achieved,” Donohue said during the interview.

‘Huge Focus’

He said he’s also looking to ensure the clearinghouse is properly capitalized and has robust systems. Clearinghouses are examining whether they hold enough capital and are testing different default scenarios as new regulations push more derivatives through them. Regulators including the Bank for International Settlements and the International Organization of Securities Commissions have prescribed standards to ensure the agencies are better placed to withstand shocks.

“It’s a pretty significant undertaking, a huge focus,” he said during yesterday’s interview, referring to preparation for the IOSCO standards. “We are looking at increasing the liquid capital base of the OCC. We are anticipating that these requirements will become effective for us in terms of rulemaking in 2014.” He declined to be more specific on OCC’s proposals or how it may affect members.

Donohue, who spent 23 years at futures exchange owner CME Group, also wants to expand OCC’s business in that area. OCC processes futures trades for markets owned by ELX Futures and Nasdaq OMX Group Inc. that compete with CME Group.

Next Decade

“We always welcome new opportunities,” Donohue said. “We have been providing clearing for the futures market, and that’s been a good success.”

Donohue spent eight years as CEO of CME Group, leaving in 2012. He had an agreement not to compete with CME Group that expired in December, according to a 2012 regulatory filing. Born and raised in the Chicago area and a lawyer by training, Donohue received $6.1 million in compensation from CME Group that year.

“I had retired with the plan of staying retired,” Donohue said. “But I thought this was a very unique opportunity. Clearing is very much a part of my background and experience at CME Group. Central counterparty clearing is the most interesting part of markets for the next decade.”

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