The Options Clearing Corporation, the Chicago-based clearinghouse, will return $110 million of the $150 million contributed by its shareholder exchanges after its capital plan was rejected by the U.S. Securities and Exchange Commission.
OCC has informed its member firms and shareholder exchanges that it will revise its approach to meeting its target capital level after the SEC released a Feb. 13 order rejecting the capital plan. In addition to returning the capital to its shareholders, the clearinghouse plans to retain the income that otherwise would have been distributed in 2019 as refunds to clearing members and dividends to shareholders. OCC also is seeking SEC approval to raise its clearing fees by 0.5 cents.
OCC's efforts to increase its capital is a key part of an overall drive to meet the post-crisis standards for systemically important clearinghouses. OCC is the world's largest clearinghouse for equity derivatives and has implemented a number of measures to enhance its resiliency, including resizing its default fund to cover the simultaneous default of its two largest clearing members.
The clearinghouse's capital plan was implemented in 2015 and won preliminary approval in 2016. Under that plan, the three exchanges that own the clearinghouse agreed to contribute $150 million in additional capital and committed to replenishing its capital in case of significant operational losses. In return, the three exchanges—the New York Stock Exchange, Cboe Global Markets and Nasdaq—were scheduled to receive an annual dividend based on the clearinghouse's income.
However, a group of options trading firms and exchanges went to court to challenge the approval in 2016. The plaintiffs argued that the plan would give an advantage to the three shareholder exchanges over other exchanges that are not shareholders, such as the Box Options Exchange and Miami International Holdings. The court found that the SEC had not sufficiently reviewed this issue and ordered the SEC to review the plan again.
The SEC's Feb. 13 order noted that the clearinghouse had not met certain procedural requirements. In particular, the SEC said the non-shareholder exchanges were not notified as the plan was being developed, as required by OCC's bylaws. The SEC also said that it did not have sufficient information to determine whether the capital plan imposes a burden on competition.