OCC - Options Clearing Corporation
OCC - Options Clearing Corporation
Who is the Options Clearing Corporation (OCC)?
The OCC operates under SEC and CFTC jurisdiction and is the world’s largest equity derivatives clearing organization. One of the key roles of the OCC is to act as the guarantor behind the derivative contracts traded by over 120 different broker-dealers and on over 14 different exchanges (NASDAQ, CBOE, ICE, NYSE Arca, etc.).
Prinary Role
The OCC is the world’s largest equity derivatives clearing organization. Its primary responsibility is to act as a central counterparty for all options trades executed on U.S. exchanges. This means that once a trade is executed between a buyer and a seller, the OCC becomes the buyer to every seller and the seller to every buyer. This mechanism ensures that even if one party defaults, the other party is protected against counterparty risk.
Margin and Risk Management
As the main counterparty guarantor, the OCC is deeply involved in developing margining systems and setting margin requirements. The OCC provides broker-dealers with the TIMS (Theoretical Intermarket Margining System) methodology which is used to compute the baseline margin requirements for Portfolio Margin accounts. From the TIMS baseline, individual brokers are allowed to modify the methodology according to their in-house rules.
In the context of option trading, the OCC collects margin from market participants (through their brokers) to guarantee the performance of every option contract. These margin requirements are designed to cover potential losses from market volatility, ensuring that financial risks are contained within acceptable limits. The OCC continuously monitors these requirements and adjusts them according to market conditions.
Customer Connection
While the OCC does not interact directly with retail investors, it supports the entire chain by providing a safety net that brokers and exchanges rely on. This provides customers with confidence that their trades will settle, even if one of the trading parties faces financial distress.