S&P: Options Clearing Corp. 'AA+' Rating Affirmed, Removed From CreditWatch; Outlook Stable
OCC's Board of Directors approved a plan in July to recalibrate the size of the clearing fund to absorb the concurrent default of its two largest members (cover 2) in "extreme but plausible" conditions. In practice, the clearinghouse will have enough resources to absorb losses not covered by margins in a stress scenario whereby the two largest clearing members and their affiliates default jointly, under "extreme but plausible" conditions as measured as a 1-in-50 year event. "In our opinion, the new calibration will reduce the procyclical nature of the current framework, generating higher clearing fund contributions from members when volatility is low, and providing a higher level of protection for the clearinghouse when volatility and risks suddenly pick up without warnings (such as in the summer of 2015)," said S&P Global Ratings credit analyst Thierry Grunspan. This will align OCC with its peers in Europe and the U. S., in our view, from a loss-absorbing standpoint.
Under the new plan, OCC will require at least $3 billion of the clearing fund contributions in cash (compared with no minimum in cash under the current framework). It also has liquidity resources in the form of an existing $2 billion committed secured credit facility with a syndicate of international banks and $1 billion from a committed secured liquidity facility with The California Public Employees' Retirement System (CalPERS) that, combined, could monetize up to $3 billion of noncash collateral. Combined, these will provide the clearinghouse with a least $6 billion of cash at any point in time to meet potential liquidity outflows, excluding the cash margins posted by the defaulting clearingmembers. The clearinghouse could be exposed to sizable liquidity outflows if a clearingmember defaults right before the options expiration date (for options that settle in cash, like the SPX contract on the S&P500 index). Contrary to most European and some U. S. peers, we note that OCC does not have the ability, under its rulebook, to use cash margins provided by non-defaulting members.
The outlook is stable as we expect the company to implement the new financial safeguards in 2017, provided it receives regulatory approval.
We could lower the ratings if the OCC plan is scaled back, or if the plan does not receive regulatory approval. We could also lower the ratings if estimated peak liquidity outflows in a stress scenario structurally increase so that the back-testing performance of the proposed liquidity framework weakens.
An upgrade is a remote scenario over the next two years.