Role of Clearinghouses and the OCC

intermediatePublished: 2026-01-01

Role of Clearinghouses and the OCC

Clearinghouses serve as central counterparties (CCPs) that stand between buyers and sellers, guaranteeing trade performance and reducing counterparty risk. The Options Clearing Corporation (OCC) is the primary clearinghouse for US listed options, ensuring the integrity of the options market through robust risk management and settlement services.

Definition and Key Concepts

Central Counterparty Function

Novation: The process where the CCP becomes the buyer to every seller and seller to every buyer.

Before NovationAfter Novation
A trades with BA trades with CCP
A has credit risk to BA has credit risk to CCP
B has credit risk to ACCP has credit risk to both

Key CCP Services

ServiceDescription
Trade matchingValidates trade details from both parties
NovationAssumes counterparty role
Margin collectionCollects IM and VM from members
Default managementManages member failures
SettlementCoordinates payment and delivery
Position managementTracks all open positions

Major Clearinghouses

ClearinghouseProductsRegion
OCCUS listed optionsUS
CME ClearingFutures, options, swapsUS
ICE ClearFutures, CDSUS/EU
LCHSwaps, reposEU/US
Eurex ClearingFutures, optionsEU
JSCCJGB futures, swapsJapan

How It Works in Practice

OCC Structure

Membership tiers:

TierDescriptionRequirements
Clearing memberClears directly with OCCCapital, operational standards
Correspondent memberClears through clearing memberLess capital required
CustomerAccount at broker-dealerAccount agreement

OCC ownership:

  • Owned by exchanges (CBOE, NYSE, NASDAQ, etc.)
  • Regulated by SEC and CFTC
  • Designated as systemically important

Margin Framework

TIMS (Theoretical Intermarket Margin System): OCC's proprietary risk-based margin methodology.

Components:

ComponentPurpose
Premium marginCovers option value
Spread marginOffsets for hedged positions
Additional marginStress scenarios
Concentration marginLarge positions

Example margin calculation:

PositionPremiumTIMS Add-onTotal
Long 100 SPX calls$500,000$0$500,000
Short 100 SPX puts($300,000)$250,000$250,000
Spread creditN/A($150,000)($150,000)
Total$600,000

Default Waterfall

If a clearing member defaults:

LayerSourceTypical Size
1Defaulter's margin$500M - $2B
2Defaulter's contribution to default fund$200M - $1B
3OCC's own capital (skin in game)$100M
4Non-defaulting members' default fund$5B+
5OCC capital and assessmentsUnlimited

Worked Example

Daily Clearing Cycle

Trade: 1,000 SPX Feb 5000 Calls sold at $50

Day 1 (T): Trade Day

TimeEvent
10:30 AMTrade executed on CBOE
10:31 AMTrade reported to OCC
4:15 PMOCC validates trade
5:00 PMTrade novated to OCC
6:00 PMMargin calculated

Margin requirement:

ComponentAmount
Premium received$5,000,000
Short margin requirement$8,000,000
Net margin due$3,000,000

Day 2 (T+1): Settlement

TimeEvent
9:00 AMMargin call issued
10:00 AMMember posts $3,000,000
2:00 PMPremium settlement: Receive $5,000,000
4:00 PMPositions reconciled

Ongoing: Daily Mark-to-Market

DaySettlement PriceVM Payment
T+2$52Pay $200,000
T+3$48Receive $400,000
T+4$51Pay $300,000

Exercise and Assignment

At expiration (assuming exercise):

StepTimingAction
Exercise noticesExpiration FridayHolders submit to OCC
Random assignmentExpiration Friday PMOCC assigns to short positions
SettlementMondayCash or physical delivery

For cash-settled SPX: Settlement amount = (Settlement price - Strike) × 100 × Contracts

Risks, Limitations, and Tradeoffs

CCP Concentration Risk

RiskDescription
Single point of failureCCP failure affects entire market
InterconnectionCCPs connected through common members
ProcyclicalityMargin increases in stress
Liquidity demandLarge margin calls in crisis

Member Default Risk

RiskControl
Credit exposureDaily margin, default fund
Operational failureBackup procedures
FraudAudits, surveillance
Systemic eventStress testing, recovery plans

Common Pitfalls

PitfallDescriptionPrevention
Margin shortfallInsufficient fundsPre-funding, monitoring
Late deliverySecurities not availablePosition management
Exercise errorsWrong exercise instructionVerification procedures
Reporting failuresIncorrect position reportsReconciliation
Documentation gapsMissing agreementsComplete onboarding

OCC Risk Management

Stress Testing

Scenarios tested:

ScenarioMarket Move
Equity crash-25% to -40%
Vol spike+100% to +200%
Rate shock+300 bps
CombinedMultiple factors

Frequency: Daily for key scenarios, weekly for comprehensive

Default Management

PhaseAction
DetectionMember fails to meet margin
ContainmentSuspend trading, freeze positions
HedgingReduce risk on portfolio
AuctionSell positions to solvent members
Close-outFinal settlement

Reporting Requirements

ReportFrequencyDeadline
Position reportsDailyT+1 6:00 AM
Margin statusDailyT+1 9:00 AM
Regulatory reportingDailyT+1
Exception reportsAs neededImmediate

Checklist and Next Steps

Clearing membership checklist:

  • Meet capital requirements
  • Establish operational infrastructure
  • Complete legal documentation
  • Set up connectivity to OCC
  • Implement margin systems
  • Train operations staff

Daily operations checklist:

  • Submit trades for clearing
  • Monitor margin requirements
  • Fund margin calls by deadline
  • Reconcile positions with OCC
  • Review settlement activity
  • Report any discrepancies

Risk management checklist:

  • Monitor exposure limits
  • Review stress test results
  • Track concentration risk
  • Verify default fund contribution
  • Test disaster recovery
  • Review member credit

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