Looking ahead to 2017, what are the key trends you see shaping your business, and the market infrastructure industry more broadly?
As a systemically important Financial Market Utility (SIFMU), OCC will continue to focus on risk management and the delivery of capital and collateral efficiency. To ensure confidence in the financial markets, we must continue to provide our stakeholders with an effective and reliable internal control infrastructure that assures risk management and processing outcomes. So a key trend for OCC in 2017 will be to continue investing in our internal control infrastructure in order to enhance our resiliency and operational effectiveness on behalf of market participants. We must continue to develop risk management tools and processes in order for our member clearing firms to optimise the use of capital and collateral.
We also will continue to serve as an industry advocate, as market participants are facing a changing regulatory and tax landscape that will increase the amount of capital they need to hold and add to their tax burden. Finally, expanding our centrally cleared model for securities lending remains a high priority for us in 2017. We know there is growing demand given that we experienced 37 percent growth in securities lending activity in 2016 with almost two million new loan transactions.
What’s your viewpoint on the 2017 regulatory landscape in your jurisdiction, and indeed more globally?
Following the 2008 financial crisis, global policymakers borrowed several key market principles in mandating regulatory reform of the OTC derivatives markets. Today, though, neither the G20 reforms nor the new capital requirements for important market participants, particularly the Basel III regime that covers banks and their affiliated entities, have been fully implemented.
Yet international policymakers have already started efforts to rewrite the rules that underpin the regulatory framework for CCPs such as OCC in ‘Further Guidance’ issued by IOSCO in the summer of 2016. In other words, while we are just learning to walk under this emerging regulatory regime, we are being asked to run. Instead, we should hit the pause button to allow us to get our proper footing with the current efforts to re-regulate centrally cleared, exchange-traded markets. Then we need to do a holistic assessment with a robust cost/benefit analysis to ensure efforts to prevent the next financial crisis are not actually fueling it.
Let’s take appropriate corrective action to address identified problems. Let’s act incrementally and intelligently, based on how the evolving rules are impacting the markets. Before we have more regulations, let’s have smarter regulations.
Do you think the role of exchanges and CCPs will evolve over the coming years, and if so, why?
The U.S. options market is in flux, with a multiplicity of exchanges competing for business. As with much of the post-crisis financial world, the market is more complex and fragmented. Market participants continue to seek the opportunity to trade with minimal risk backed by reliable liquidity. That places a greater burden on the post-trade world and on CCPs like OCC to promote stability and market integrity through effective and efficient clearance, settlement and risk management services.
Centralised clearing is one part of the post-trade mix, but it is becomingly an increasingly important one, in light of the changing regulatory landscape. That landscape will also drive the need for more unbiased education of investors on the responsible use of listed options, which OCC will continue to provide through The Options Industry Council. Centralised clearing will be increasingly integrated into much of the capital and investment markets going forward, and OCC will be well-positioned to take advantage of that opportunity.
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