Wall Street brokers and dealers are pushing back on a new margin rule that the world’s largest derivatives-clearing house has proposed to address the risk from the boom in zero-day options even after some revisions.
Options Clearing Corp. should consider rolling out a new add-on charge — one that’s designed to mitigate spillovers in the event of market turmoil — in phases before sunsetting it within two years, the Securities Industry and Financial Markets Association, or SIFMA, wrote in a letter Thursday.
The clearing house also shied away from addressing other industry concerns, such as whether OCC has plans to establish functionality that would allow member firms to better understand which of their clients are generating the highest intraday risk exposures, according to SIFMA. With OCC scheduled to switch to a new clearing and settlement system later this year, there is also question of whether a more-tailored, risk-sensitive intraday margin approach would be available, the industry group said.
“We continue to remain extremely concerned that OCC will never update or change the Intraday Risk Charge once it has been implemented even when it has the capability to do so, despite the blunt nature of the charge in its current form or its potential impact on the listed options market,” Ellen Green, managing director of equities and options market structure at SIFMA, and Joseph Corcoran, associate general counsel for the group, wrote in the letter.
The comments come weeks after OCC dialed back some harsh elements in a revised proposal on the intraday margin rule and gave member firms more time to adjust to the changes. The clearing house’s initial plan was criticized by firms including Matrix Executions LLC and Optiver, who said the new rules raise unwarranted burdens for the industry and hurt competition.
The back and forth highlights the struggle to reach consensus on securing market stability amid the frenzy for trading option contracts that expire within 24 hours. While derivatives with zero days to expire, known as 0DTE, now make up half of the S&P 500’s total options trading, the risk associated with them has yet to be captured by OCC’s existing model. Currently, the margin calculation is based on positions at the end of the day, when those contracts would have been exercised or expire.
An OCC spokesperson didn’t respond to an email seeking comment about SIFMA’s latest letter.
OCC’s proposal is scheduled for a regulatory review by April. If approved, the new measures will be implemented in September and apply to options of all stripes, forcing broker-dealers to allocate more capital as collateral.
Based on the industry’s activity during the 13 months through September, the add-on charge alone would amount to an increase of $1.1 billion in margin requirements across all its clearing members, OCC estimates show.
Despite opposition, the Chicago-based clearing house is pressing ahead with the plan to apply the add-on charge to all its members. Executing brokers such as Matrix, which carry out trades as an intermediary between clients and their prime brokers, have argued that the blanket approach opens the door for OCC to collect and hold margin on the same position from multiple clearing firms.
Executing Trades
“Our feeling is we should be exempt from this rule because all we are doing is just executing trades and passing them on,” Matrix Chief Operating Officer Allen Greenberg said in an interview.
OCC already walked back its initial, tough measures after industry pushback. Under the latest proposal, member firms that show bigger increases in risk exposures in the prior month will have to contribute more to a pool of collateral money. While the look-back period remains one month — as opposed to two weeks or shorter, as suggested by industry participants — the daily observation window, used to assess such collateral obligations, is shortened dramatically.
Rather than tracking a firm’s risk exposure over a roughly 15-hour stretch to spot a peak reading for each session, the monitoring window was set at 1.5 hours starting at 11 a.m. in Chicago.
As for margin calls, OCC plans to install a single intraday collection time. A request for additional collateral can be issued only when a firm’s risk-monitoring threshold is triggered at or around 12 p.m. Chicago time. Anything outside that timeframe would need escalated approvals from top OCC officers. The initial proposal suggested margin calls could be sent out whenever the trigger flashes.
While the amendments show OCC is willing to collaborate with the industry, the clearing house is being pushed to do more to help member firms monitor intraday risk in a timely and accurate manner.
“Not that the firms themselves don’t have abilities, you just want to make sure that you’re fully aligned and nobody’s surprised,” JJ Kinahan, president of online brokerage Tastytrade Inc., said in an interview. “At the end of the day, everybody wants to make sure that nobody’s taking a larger risk than they’re equipped to.”
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