Options Clearing Corporation

The Options Clearing Corporation (OCC) is the clearinghouse for all equity option contracts traded on US options exchanges — the CBOE, ISE, NASDAQ OMX PHLX, and others. OCC provides central counterparty clearing and is a utility owned by its member exchanges and brokers, essential to the functioning of the US derivatives market.

Founding and equity options clearing

The Options Clearing Corporation was founded in 1973, the same year as the CBOE, to clear and settle equity option trades. Before OCC, options trading was minimal and risky; OCC’s creation, coinciding with the CBOE’s establishment, created the standardized infrastructure needed for safe, large-scale options trading.

OCC standardized option contracts (specific strikes, expirations, multipliers) and created a central clearing mechanism that eliminated bilateral counterparty risk. This infrastructure made options trading safe and efficient, allowing it to grow into a multi-trillion-dollar market.

Central counterparty clearing

When an option is traded on the CBOE or another exchange, OCC becomes the buyer to every seller and the seller to every buyer. Each participant posts collateral (margin) to OCC, and OCC nets positions to reduce the amount of collateral required.

If an OCC member defaults, OCC uses the member’s collateral to cover losses and is empowered to liquidate the defaulted positions. This mechanism has worked reliably for decades, though it was tested during periods of extreme volatility like the 2008 financial crisis and the March 2020 COVID crash.

Standardization and contract specifications

OCC standardizes option contracts. A standard equity call option represents the right to buy 100 shares (the multiplier) at a specified strike price on or before a specified expiration date. This standardization allows options to trade on screens with perfect fungibility — any buyer can take on any seller’s position.

Without standardization, options would need to be customized and could only be traded over-the-counter with individual counterparties. Standardization is what enables the liquid market that exists on the CBOE and other options exchanges.

Margin and risk management

OCC calculates daily margin requirements for each options position, adjusting as market prices move. The calculation is complex: a call option on Apple might require 10% of the stock’s value as margin if held outright, but if held as a covered call against owned stock, it requires less. OCC’s software calculates these requirements in real-time.

Members must post margin to OCC covering potential losses; if a position moves against a member and the member cannot add margin, OCC liquidates the position.

Exchange participation

OCC’s ownership is held by the exchanges it serves (CBOE, ISE, NASDAQ OMX PHLX, etc.) and by certain broker-dealer members. This mutual ownership structure makes it a utility owned and controlled by its participants. The board is elected by members, though regulatory oversight constrains member control.

Regulatory oversight

OCC is regulated by the SEC and the CFTC. Post-2008 crisis regulatory reforms increased scrutiny of clearing houses’ risk management, capital adequacy, and operational resilience. OCC’s risk management has been strengthened substantially over the past 15 years.

Essential infrastructure

OCC is systemically important to US financial markets. If OCC failed, US equity options trading would cease, causing cascading losses throughout the financial system. For this reason, the Federal Reserve and SEC maintain very close oversight of OCC’s operations.

See also