Options Clearing Corporation

The **Options Clearing Corporation (OCC)** is a U.S. clearing organization that acts as a central counterparty (CCP) for exchange-listed options and clears other derivatives and securities-lending transactions. By interposing itself between buyers and sellers, it manages counterparty risk and supports the clearing and settlement of trades. Founded in 1973, OCC is designated a systemically important financial market utility and operates under the jurisdiction of several U.S. financial regulators.^[1][2]

History and development

OCC traces its origins to CBOE Clearing Corporation, established in 1973 as a subsidiary of the Chicago Board Options Exchange. In 1975, the U.S. Securities and Exchange Commission (SEC) approved its transformation into The Options Clearing Corporation, an industry clearinghouse for U.S. equity options. OCC began clearing put options in 1977 and index options in 1983, as exchange-listed options markets expanded.^[3]

Over time, OCC’s clearing activity extended beyond standardized equity options. Its services have included options and futures on a range of financial assets, securities-lending transactions, and certain over-the-counter index options. Its exact products, participant markets, and operating arrangements are subject to its rules and regulatory oversight.^[2][4]

Role in the options market

An exchange-listed options trade involves parties with opposing contractual obligations. The buyer acquires rights specified by the contract, while the seller takes on corresponding obligations. OCC processes eligible trades submitted by participating exchanges and clearing members. Through **novation**, it becomes the buyer to each seller and the seller to each buyer, replacing the original trading counterparties in the cleared contractual relationship.^[5]

This arrangement means that a market participant’s cleared position is generally against its clearing member, and the clearing member’s position is against OCC, rather than each trade participant bearing direct exposure to the original counterparty. OCC’s role is therefore different from that of an exchange, which provides a venue or mechanism for trading, and from that of a broker, which handles customer orders and accounts. OCC does not decide which options customers should trade, nor does its clearing function remove the market risks of holding options.^[5]

After clearing, OCC supports the processing of contract obligations according to the contract terms and its rules. For options that are exercised, OCC accepts exercise instructions and allocates assignments to clearing members with short positions in the relevant series; clearing members then apply their procedures to assign those obligations to customer accounts. The option’s exercise and resulting delivery or cash settlement depend on the contract’s specifications.^[6]

Products and services

OCC is best known for clearing U.S.-listed equity and index options. Its broader clearing services also encompass certain futures and options on futures, security futures, securities-lending transactions, and over-the-counter index options, as described in its corporate and regulatory materials.^[2][4] Products differ in their underlying assets, contract terms, settlement methods, and market rules. A cleared contract’s inclusion in OCC’s services does not imply that all products are traded on the same exchange or subject to identical procedures.

OCC also publishes materials about options mechanics and risks through the Options Industry Council, an educational initiative associated with OCC. These resources explain market structures and contract features; they are separate from the clearing function itself.^[1][3]

Clearing members and ownership

Clearing members are firms admitted to clear transactions through OCC under its membership standards and rules. OCC materials describe members as including broker-dealers, futures commission merchants, and non-U.S. securities firms. Clearing members serve as the direct participants in OCC’s clearing system; customers typically access that system through their brokerage or other financial firm rather than becoming OCC members themselves.^[2]

OCC’s stockholder exchanges share ownership of the organization, while its board includes exchange, clearing-member, and public representation, as described in its corporate materials. Its governance structure includes a board and board committees with oversight responsibilities. OCC’s risk framework assigns the board responsibility for overseeing risks arising in or borne by the organization.^[2][7]

Risk management and financial safeguards

Central clearing concentrates important risk-management responsibilities in the CCP. OCC manages its exposure to clearing members using measures that include membership standards, margin requirements, and a clearing fund. Margin is collateral intended to address exposures associated with positions; the clearing fund and other financial resources are intended to help manage losses if a clearing member fails to meet its obligations. These safeguards are designed for risk mitigation, but do not guarantee that losses or disruptions cannot occur.^[8][9]

OCC’s risk framework identifies financial, operational, information-technology and security, legal and regulatory, and general business risks. It describes a governance structure and a three-lines-of-defense model for managing and reporting risk. OCC also maintains recovery and orderly wind-down planning as part of its framework for continuity of core services.^[7]

The SEC’s 2023 enforcement order illustrates the importance of controls over those safeguards. The SEC found that OCC failed to implement and comply with its stress-testing and clearing-fund methodology rule during a period from October 2019 through May 2021. The order stated that the resulting failure left the clearing fund underfunded by nearly $600 million at certain times. This was a finding about a past period and a specific control failure, not a description of OCC’s current financial resources.^[10]

Regulation and systemic importance

OCC is a registered clearing agency subject to SEC oversight and also clears futures products under the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC). OCC identifies the Board of Governors of the Federal Reserve System as another federal authority within its supervisory framework. Its designation as a **systemically important financial market utility (SIFMU)** reflects its role in the financial system and subjects it to additional oversight under U.S. law.^[1][4]

Regulatory oversight covers matters such as OCC’s rules, governance, risk management, financial resources, and operational resilience. Proposed or adopted changes to OCC rules may be filed with regulators and reviewed through applicable processes. For example, SEC filings document changes to OCC governance materials intended to align with CFTC requirements for derivatives clearing organizations.^[4]

Market significance and limitations

By clearing contracts across participating markets, OCC provides a shared post-trade infrastructure for a substantial part of U.S. listed options activity. Its CCP function can reduce direct bilateral counterparty exposure between market participants and support the processing of cleared trades. At the same time, it places significant demands on OCC’s ability to measure exposures, collect adequate resources, operate reliable systems, and manage a member default or operational disruption.^[5][8]

Clearing does not eliminate the financial risks of options. Market prices can move, positions can lose value, and an options holder or writer remains subject to the economics and terms of the contract. OCC’s guarantee operates within its rules and financial safeguards; it should not be understood as protection against investment losses or as a guarantee of a particular market outcome.^[8][9]