Another OTC Marketplace Moves Toward CCP Clearing

Guest Contributer: Jim Binder, Director, Public Relations, The Options Clearing Corporation

In the aftermath of the financial crisis, and through the regulatory reform efforts it led to, central counterparty (CCP) clearing has drawn a lot of attention as a way to help manage risk in the over-the-counter markets. Afterall, listed markets with CCP clearing functioned as designed through the crisis.

Most of this attention has focused on bringing CCP clearing to OTC derivatives markets. However, over the past few years CCP clearing has begun to grow in another OTC market without as much notice as derivatives, the securities lending market. In Europe, Eurex and EuroCCP are among those working with stock loan trading platforms to provide clearing and settlement while in the U.S. the Options Clearing Corporation (OCC) is filling that role.

OCC first became involved in stock loan arena in 1993 when it started its Hedge Program. This program was provided to OCC clearing members, allowing them to use borrowed and loaned securities to reduce their OCC margin requirements by reflecting the real risks of their intermarket hedged positions. At the beginning of 2009, OCC agreed to provide clearing and settlement services to Quadriserv’s AQS securities lending platform, bringing CCP guarantees to loans matched there.

The number of stock loan transactions cleared by OCC last year grew 64 percent (in both its own Hedge Program and the AQS program) over 2009 and had an average daily notional value of about $13 million. Attention to the increasing use of CCP clearing in the securities lending marketplace is building, even if it’s not exactly mainstream yet. Just last week SunGard’s 2011 Securities Lending Market Review highlighted the use of CCPs.

The growing transparency, efficiency and automation of the securities lending market through platforms like Quadriserv’s AQS, and the growing use of CCP clearing, has led OCC to make stock loan a key area of its system enhancements for 2011. Among the updates to the stock loan system, the most important is bringing it into OCC’s ENCORE clearing system. Benefits of this include allowing clearing members to use sub-accounts to separately margin and collateralize their largest clients’ positions. It will also allow for flexible mark-to-market routines and real-time position accounting.

There is still much uncertainty about the ultimate direction and outcome for CCP clearing of OTC derivatives. However, the movement of the securities lending marketplace toward transparent platforms like Quadriserv’s AQS and CCP clearing appears well under way.

In the aftermath of the financial crisis, and through the regulatory reform efforts it led to, central counterparty (CCP) clearing has drawn a lot of attention as a way to help manage risk in the over-the-counter markets. Afterall, listed markets with CCP clearing functioned as designed through the crisis.

Most of this attention has focused on bringing CCP clearing to OTC derivatives markets. However, over the past few years CCP clearing has begun to grow in another OTC market without as much notice as derivatives, the securities lending market. In Europe, Eurex and EuroCCP are among those working with stock loan trading platforms to provide clearing and settlement while in the U.S. the Options Clearing Corporation (OCC) is filling that role.

OCC first became involved in stock loan arena in 1993 when it started its Hedge Program. This program was provided to OCC clearing members, allowing them to use borrowed and loaned securities to reduce their OCC margin requirements by reflecting the real risks of their intermarket hedged positions. At the beginning of 2009, OCC agreed to provide clearing and settlement services to Quadriserv’s AQS securities lending platform, bringing CCP guarantees to loans matched there.

The number of stock loan transactions cleared by OCC last year grew 64 percent (in both its own Hedge Program and the AQS program) over 2009 and had an average daily notional value of about $13 million. Attention to the increasing use of CCP clearing in the securities lending marketplace is building, even if it’s not exactly mainstream yet. Just last week SunGard’s 2011 Securities Lending Market Review highlighted the use of CCPs.

The growing transparency, efficiency and automation of the securities lending market through platforms like Quadriserv’s AQS, and the growing use of CCP clearing, has led OCC to make stock loan a key area of its system enhancements for 2011. Among the updates to the stock loan system, the most important is bringing it into OCC’s ENCORE clearing system. Benefits of this include allowing clearing members to use sub-accounts to separately margin and collateralize their largest clients’ positions. It will also allow for flexible mark-to-market routines and real-time position accounting.

There is still much uncertainty about the ultimate direction and outcome for CCP clearing of OTC derivatives. However, the movement of the securities lending marketplace toward transparent platforms like Quadriserv’s AQS and CCP clearing appears well under way.

About Maureen Lowe

President and Founder of Financial Technologies Forum, LLC. Editor-In-Chief of FTF News. Entrepreneur, Jersey Girl that recently returned to Jersey, Loves to Bake, Married to a Kiwi, First Time Mom
This entry was posted in Clearing and Settlement, Derivatives, Guest Blog, Regulation and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s