OCC at risk of losing AA+ S&P rating
20 May 2016 Chicago
Image: Shutterstock
The Options Clearing Corporation (OCC) has issued a response to Standard & Poor’s (S&P) putting the central counterparty’s credit rating on CreditWatch with a negative designation.
The decision comes following a review of OCC’s financial safeguards and means that its AA+ credit rating is at risk of being downgraded.
In response, OCC argued that its safeguards are actually superior to those of its global peers, stating that they include the use of a two-day margin period of risk.
They also include a $1.8 billion prudential margin of safety in the clearing fund above the cover one level, the ability to call for additional individual intra-day clearing fund contributions of up to $1 billion, and the ability to re-size the clearing fund intra-month if required by changing market conditions.
OCC went on to add that “like other systemically important central counterparties, OCC is actively working with US and international regulators to implement enhancements to further strengthen its loss absorption capacity and liquidity resources based on conservative stress testing methodologies”.
The central counterparty also pointed out that the Securities and Exchange Commission (SEC), its primary regulator, has not yet adopted enhanced capital, loss absorption and liquidity requirements in line with international standards.
“[OCC] has been proactive in strengthening its capital and clearinghouse financial safeguards in advance of such requirements, as well as European requirements that would potentially apply to OCC pursuant to an equivalency decision between the SEC and the European Commission,” the letter said.
The questions regarding OCC’s financial safeguards come only two months after the SEC overruled industry opposition and approved its capital plan that saw its capital increase by almost 900 percent.
The OCCs capitalisation grew from $25 million at the beginning of 2014 to $247 million in 2016.
The decision comes following a review of OCC’s financial safeguards and means that its AA+ credit rating is at risk of being downgraded.
In response, OCC argued that its safeguards are actually superior to those of its global peers, stating that they include the use of a two-day margin period of risk.
They also include a $1.8 billion prudential margin of safety in the clearing fund above the cover one level, the ability to call for additional individual intra-day clearing fund contributions of up to $1 billion, and the ability to re-size the clearing fund intra-month if required by changing market conditions.
OCC went on to add that “like other systemically important central counterparties, OCC is actively working with US and international regulators to implement enhancements to further strengthen its loss absorption capacity and liquidity resources based on conservative stress testing methodologies”.
The central counterparty also pointed out that the Securities and Exchange Commission (SEC), its primary regulator, has not yet adopted enhanced capital, loss absorption and liquidity requirements in line with international standards.
“[OCC] has been proactive in strengthening its capital and clearinghouse financial safeguards in advance of such requirements, as well as European requirements that would potentially apply to OCC pursuant to an equivalency decision between the SEC and the European Commission,” the letter said.
The questions regarding OCC’s financial safeguards come only two months after the SEC overruled industry opposition and approved its capital plan that saw its capital increase by almost 900 percent.
The OCCs capitalisation grew from $25 million at the beginning of 2014 to $247 million in 2016.
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