Options Clearing Corporation

Options Clearing Corporation (OCC) is a United States clearing organization that provides central counterparty clearing and settlement services for listed options, security futures, and certain securities lending and repurchase transactions. Established in 1973, the OCC acts as the central clearing house for exchange-traded options listed on participating U.S. options exchanges by guaranteeing the performance of contracts between buyers and sellers. It is designated as a systemically important financial market utility (SIFMU) under the Dodd–Frank Wall Street Reform and Consumer Protection Act and is regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

History

The Options Clearing Corporation was established in 1973 following the creation of standardized listed options trading in the United States. It was formed to centralize the clearing and settlement of options contracts and to reduce counterparty risk in the rapidly expanding listed options market.

Initially serving the Chicago Board Options Exchange (CBOE), the OCC later expanded its services to multiple U.S. options exchanges. Over time, it broadened its clearing activities to include security futures, stock loan transactions, and certain repurchase agreements.

In 2012, the OCC was designated a systemically important financial market utility under the Dodd–Frank Act, reflecting its critical role in maintaining the stability of the U.S. financial system.

Objectives

The principal objectives of the Options Clearing Corporation include:

guaranteeing the performance of cleared contracts;
reducing counterparty credit risk;
facilitating the clearing and settlement of listed derivatives;
promoting market integrity;
supporting financial market stability;
providing efficient risk management.

Functions

The OCC performs several essential functions.

These include:

clearing listed options;
clearing security futures;
novating transactions;
guaranteeing contract performance;
collecting and managing margin;
managing default risk;
facilitating settlement;
monitoring clearing member risk.

As the central counterparty, the OCC becomes the buyer to every seller and the seller to every buyer after a trade is executed.

Clearing process

The clearing process generally consists of the following steps:

execution of a trade on a participating exchange;
submission of the transaction to the OCC;
novation of the contract;
calculation of margin requirements;
daily risk monitoring;
settlement upon exercise, assignment, expiration, or closing of the position.

This process reduces counterparty risk and promotes orderly market operations.

Products cleared

The OCC clears a variety of financial products, including:

listed equity options;
index options;
exchange-traded fund (ETF) options;
security futures;
certain stock loan transactions;
securities financing transactions;
repurchase agreements under approved clearing programs.

The range of cleared products has expanded as financial markets have evolved.

Risk management

The OCC employs multiple risk management measures, including:

margin requirements;
stress testing;
collateral management;
default management procedures;
clearing member surveillance;
liquidity risk management;
capital adequacy standards.

These measures are designed to protect the clearing system against member defaults and market disruptions.

Clearing members

Only approved clearing members may clear transactions directly through the OCC.

Clearing members generally include:

broker-dealers;
banks;
futures commission merchants;
financial institutions meeting OCC membership requirements.

Most investors access OCC clearing services indirectly through brokerage firms.

Governance

The Options Clearing Corporation operates as a financial market utility owned by participating exchanges and is governed by a board of directors.

Its activities are subject to oversight by U.S. financial regulators to ensure the safety, efficiency, and resilience of the clearing system.

Regulation

The OCC is regulated primarily by:

the Securities and Exchange Commission (SEC);
the Commodity Futures Trading Commission (CFTC).

As a designated systemically important financial market utility, it is also subject to enhanced supervisory standards intended to promote financial stability.

Relationship with financial markets

Institution	Primary function
Stock exchange	Executes securities and derivatives trading
Options Clearing Corporation	Clears and guarantees listed options and certain derivatives transactions
Central counterparty clearing house	Assumes counterparty risk between trading participants
Broker	Executes customer orders and accesses clearing services

The OCC serves as the central clearing organization for listed options traded on participating U.S. exchanges.

Importance

The Options Clearing Corporation contributes to financial markets by:

reducing counterparty credit risk;
improving market confidence;
supporting standardized derivatives markets;
facilitating efficient settlement;
strengthening financial market infrastructure.

Its clearing services are fundamental to the operation of the U.S. listed options market.

Impact

The Options Clearing Corporation is one of the most important clearing organizations in the United States financial system. By acting as the central counterparty for listed options and other derivative products, it significantly reduces counterparty risk and promotes the stability and integrity of financial markets. Its role in risk management, contract guarantee, and settlement has contributed to the growth and efficiency of the global exchange-traded derivatives market.