OCC adds liquidation cost to Margin Model

Published 28 Jun, 2019

The Options Clearing Corporation (OCC) will start collecting additional margin from clearing members to cater for potential losses in closing out a defaulters’ position, and therefore avoid potential knock-on effects.

On Monday, the US Securities and Exchange Commission issued an order approving the OCC’s proposal to identify and manage the potential cost of liquidating a defaulted clearing members’ portfolio.

The Chicago-based clearing house will calculate its potential losses based on historical periods of market stress.

Clearing members will then pay the appropriate level of additional margin to cover the OCC’s cost of closing out a defaulting members’ portfolio.

This reduces the potential that the clearing house itself would incur a loss in the process.

“While unavoidable under certain circumstances, reducing the potentiality of loss mutualisation during periods of market stress could reduce the potential knock-on effects to non-defaulting clearing members, their customers and the broader options market arising out of a clearing member default,” the OCC wrote.

The new calculation model is based on the spread between the bid and the ask prices of financial instruments within the portfolio.

This is different to the current STANS (System for Theoretical Analysis and Numerical Simulations) methodology, which attempts to address potential losses from changes in price over two-days. However it doesn’t account for liquidation costs.

This comes amid several enhancements to the OCC’s margin model.

Last month the largest US options clearing house changed its margin methodology for volatility index futures to better account for the term structure of futures and to avoid sudden margin increases.