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Strengthening Financial Market Resiliency through Technology

June 21, 2016

Regulated counterparties (CCPs) such as OCC have an excellent track record of performing extremely well during times of market stress. This demonstrated resiliency led global policy makers to mandate that more financial transactions be centrally cleared through CCPs following the 2008 financial crisis.

OCC, and other Systemically Important Financial Market Utilities (SIFMUs), are even stronger today as a result of the improvements that regulators have made to the regulatory framework for CCPs. As an expert in managing the risks of others, we deeply understand the need to appropriately incentive users to help safeguard our markets and contribute to maintaining equilibrium in a mutualized system. Without that balance, we run the risk of becoming less secure or diverting attention away from CCPs – in contravention of the goals established by domestic and international policy makers in dealing with the 2008 financial crisis.

OCC has been very focused on improving our resilience and meeting heightened regulatory standards such as Dodd-Frank. We have engaged in a comprehensive review of every aspect of our business, including technology, operations, risk management and compliance. This ongoing review has prompted us to implement significant enhancements to further strengthen our core processes and achieve an elevated level of resiliency.

We improved the comprehensiveness of our STANS margining system by integrating additional stressed risk factors, most notably implied volatility. This significantly expands on the market risks considered by OCC and mitigated. We expanded our capabilities to proactively identify potential challenges to our financial resources by implementing rigorous new stress testing modules to our risk framework. We increased our ability to promptly respond to exposures by adding the authority to collect additional Clearing Fund contributions intra-month, ensuring that we continuously maintain adequate resources available from our Clearing Fund calibrated to our risk. In 2016, OCC will implement additional enhancements to its Clearing Fund approach, further enhancing the comprehensiveness and resilience of our model. Continuous refinement of our risk management tools is evidence of OCC's commitment to managing risk, especially during extreme market events with the overall objective of reducing systemic risk.

Cyber security and system safeguards continue to be top priorities for the listed options industry and OCC. We have made further investments in cyber preparedness and system resiliency as part of our efforts to implement SEC Regulation SCI. In particular, we completed a concerted effort to perform a survey of our systems, identify which systems are covered by these new regulatory standards, and then further identify critical systems within our infrastructure. Collecting this information allowed us to make further system enhancements, as well as update and align policies and controls to the new regulation. This year, we will continue to make significant investments in system and cyber-related projects that will further improve our alignment with Regulation SCI.

One major aspect of SEC Regulation SCI is industry testing. This includes coordinated testing with designated clearing members to ensure that our business continuity and disaster recovery plans will function as intended during an emergency. The first test will be conducted this year and will continue to evolve and expand in 2017 to include industry-wide testing among other market participants covered by this regulation.

OCC also conducted a thorough evaluation of our technology platforms to assess our ability to support the evolving needs of our clearing members, while also meeting the heightened expectations of global regulators. We used the assessment to develop a comprehensive strategy for rebuilding and modernizing our technology platforms. As a part of this new roadmap, we will refine our risk systems and data analytics, boost our clearing and settlement systems, and upgrade corporate support. This multi-year effort will ensure that OCC has the technology necessary to deliver best-in-class clearing solutions for years to come.