Study of international clearing and settlement Page: 57
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Study of International
Hearing and Settlement
Thel earing and Settlement Process
In North America
Netting. Margin Requirnents, and Cross-Margining
Payments to and from the OCC and its members are on a net basis. At the end of each trading day,
the OCC has an overnight processing cycle in which it calculates the net amount which each member
either owes or is owed. The net figure reflects: a) the premium obligation due on each new long
position; andb) the margin due for each new short position. The OCC then sends payment instructions
to the settlement bank.
The OCC's netting process is done on a multilateral basis: that is, the status of all of a clearing
member's holdings in the options market is taken into consideration in arriving at the daily net total
which represents the clearing member's daily payment obligation to the OCC.
The OCC has two different methods for calculating margin - one for options on equities and another
for all other types of options (for instance, foreign exchange, government securities, or stock indexes).
In both cases, the margin required from the writer of an option is equal to the current market price
of the option, plus a cushion to cover the risk of a change in the current market price.
In the derivative markets, the OCC was the first to evolve from a fixed or flat rate of margining (per
contract) to highly sophisticated computational methods. For all non-equity options, as well as all
options and futures contracts cleared by the Intermarket Clearing Corporation, the OCC uses the
Theoretical Intermarket Margin System (TIMS). TIMS evaluates each clearing member's overall
risk profile and then sets the total margin owed. OCC plans, in the near future, to expand the use of
TIMS to include setting the margin on equity options.
The CFTC and the SEC have approved applications from the OCC and the Chicago Mercantile
Exchange (CME) to allow the cross-margining of stock index options, futures, and options on futures.
Cross-margining between the CME and OCC started in October, 1989. For more on this, please
refer to the expert paper submitted for this study by John Hiatt and James M. Kustusch, and the
expert paper submitted for this study by John Behof. Also see Section 45 of our study:
"Cross-Margining."
The OCC also offers cross-margining through an agreement with its affiliate, the Intermarket Clearing
Corporation (ICC). The ICC clears trades for the New York Futures Exchange, the Philadelphia
Board of Trade, Amex Commodities Corporation, and the Pacific Futures Exchange; therefore, OCC
members have the capability of using their holdings on those exchanges to offset the status of their
open positions at the OCC.
The extent to which OCC and ICC offer cross-margining is limited. This is because the Commodity
Futures Trading Commission (CFTC) has not approved expansion of cross-margining beyond
proprietary accounts to the accounts of major market makers. Nonetheless, according to the OCC,
reductions in overall margin requirements have been quite significant.
The OCC's Interface with Its Clearing Members
The OCC has approximately 190 clearing members. All of the clearing members are brokerage firms
who are members of one or more of the exchanges that the OCC serves. The brokers, in their
transactions with the OCC, are representing themselves, brokers who are not clearing members, and
customers - both institutional and retail.
The link between OCC and its clearing members is automated, as is noted by John Hiatt and James
M. Kustusch, in their expert paper:Page 57
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United States. Congress. Office of Technology Assessment. Study of international clearing and settlement, report, September 1990; (https://digital.library.unt.edu/ark:/67531/metadc97403/m1/78/: accessed April 25, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.