OCC member default fund contributions climb 11%

CCP's skin in the game up almost 5%

Members’ contributions to the Options Clearing Corporation’s (OCC) default fund rose 11% in the third quarter of last year to their highest level since Q2 2018.

Total pre-funded required participant payments to the central counterparty (CCP) to handle a member collapse stood at $13.8 billion, with members asked to pour an additional $1.4 billion over the three months to end-September.

 

 

The OCC’s own aggregate pre-funded contributions to its default fund were up almost 5% to $329 million – the highest on record.

Quarter on quarter, the CCP saw the size of its liquidity pool grow by almost 8% to $14.9 billion. Holdings of cash stashed at the Federal Reserve rose 14% to $8.8 billion, while other liquid resources in the form of unsecured cash at commercial banks, secured credit lines and highly marketable collateral remained flat over the period.

The CCP’s skin in the game made up 2.4% of the prefunded total. Its share has grown steadily since it was first disclosed in Q1 2020, when it stood at just 0.46%.

The OCC reported 107 clearing members at the end of Q3, one more than the previous quarter.

What is it?

Central counterparties maintain default funds, often segregated by clearing service, to absorb losses in the event of a clearing member failure. They serve as a second line of defence to a clearing house after the defaulting member’s own initial and variation margin payments. The funds receive contributions from the clearing house and clearing members, and consist of prefunded and committed resources.

Disclosure standards drawn up by the Committee on Payments and Market Infrastructures and International Organization of Securities Commissions oblige CCPs to break out the value of prefunded and committed default resources – excluding initial and retained variation margin – by asset type.

Why it matters

The latest increase in members’ contributions means that on average each member paid in $126 million in the third quarter, up from $114 million the prior quarter.

Simultaneously, the CCP increased its contribution by adding almost three times as much as the average prefunded contribution made by its members.

On top of that, liquid resources are at their highest level since the end of 2017, when the OCC held close to $18 billion in its coffers.

Simply put, the OCC is sitting on a rather comfortable cushion made of cash and other liquid instruments ready to be deployed in case of need.

This is an ideal scenario, since it gives confidence to its members that, should things go south, the CCP would be able to plug the hole. It also bodes well for the overall system, something other CCPs have been struggling to achieve lately.

As we previously reported, there’s no fixed rule on how large a CCP’s own contribution should be relative to its members. What matters in the end is that default funds have enough liquidity to handle a default. In this respect, the OCC’s largest estimated loss in excess of initial margin was revised lower, to $5.99 billion in the third quarter of 2021. This is less than half the amount of prefunded resources within the CCP’s default fund.

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