OCC’s Capital Plan: The Value of a Bird in the Hand

In response to the financial crisis of 2007 - 2009, the Options Clearing Corporation (OCC) was one of a handful of entities that were declared systemically important financial utility. In response to this designation OCC was required to raise equity capital to ensure smooth operation in the event of a market disruption. In 2015 OCC implemented an innovative solution that raised equity capital from various option exchanges. This plan resulted in a solution to OCC’s capitalization shortfall that did not result in higher trading fees. Due to a court order, the SEC is once again reviewing this plan, despite three prior approvals and the industry operating smoothly under the plan for over three years. If the current capital plan is rescinded, the only alternative to raising capital for OCC would involve higher trading fees. Not only would raising fees be more costly to the industry than the plan that is in place, but the ripple effect could be lower volumes, wider bid/offer spreads, and higher trading costs for traders with retail traders feeling the most impact.