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 n July 1993, The Options
Clearing Corporation (OCC) introduced the Hedge Program for stock options,
which allowed Clearing Members to use borrowed and loaned securities to
reduce OCC margin requirements by reflecting the real risks of their intermarket
hedged positions. |
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The New Hedge Program
Since the program's creation, OCC has worked with Clearing Members and The
Depository Trust Company (DTC) to expand the program and increase the operational
efficiency of the Hedge System.
More importantly, OCC's 'AAA' credit rating from Standard & Poor's and
its role as Principal Counterparty to each transaction mean OCC is the lender
to the borrower and the borrower to the lender.
The results of these efforts have created an environment, under continuous
OCC financial surveillance, which enables Hedge participants to safely:
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Increase credit limits with existing relationships. |
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Obtain credit approval when establishing
new relationships. |
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Reduce collateral requirements for OCC Margin. |
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Establish multiple Stock Loan relationships
under the Hedge umbrella. |
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| Features |
| OCC's Hedge System allows Members to: |
| Use the current DTC stock delivery process to create Hedge
stock loan/borrow positions. |
| Elect to mark stock loans to the market at 100% or 102% by
counterparty . Mark to market payments are guaranteed by OCC. |
| Instruct OCC to automatically allocate Hedge positions against
either equity or index stock positions for margin offset. |
| Reallocate Hedge positions daily to achieve maximum margin
relief at OCC. |
| Minimize maintenance costs by taking advantage of OCC expertise
through daily Margin Analysis reporting. |
| Maximize cost savings through periodic Margin/Hedge Analysis
executed by OCC's Financial Surveillance Group. |
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| Operations |
| Borrower and lender negotiate stock loan transaction terms
and rebate. |
| Details of loan are sent to DTC using special OCC reason codes.
Cash and securities are transferred through DTC. |
| OCC processes new loan and return loan transactions, updates
clearing Members' stock inventories and automatically allocates
new positions per Clearing Members' standing instructions. |
| OCC processes new loan and return loan transactions, updates
clearing Members' stock inventories and automatically allocates
new positions per Clearing Members' standing instructions. |
| Each business evening, OCC marks to market each outstanding
stock loan/borrow position. Intraday and end of day Hedge activity
reports are distributed via ENCORE's Core Report facility. |
| All output reports are available daily on-line. |
| All Hedge data is available to participants in a machine-readable
fashion via daily transmissions. |
| All Hedge participant activity is monitored continuously by
OCC's Financial Surveillance Group. |
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| Benefits |
| OCC: |
| Reduced market risk |
| Stock Lenders and Borrowers: |
| Reduced margin costs |
| Expanded credit lines |
| 'AAA' rated counterparty |
| Expanded lending opportunities |
| Continuous risk monitoring of all Hedge participants by OCC's
Financial Surveillance Group |
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