OTC Products OTC S&P 500 Equity Index® Description: Contracts will contain certain bespoke attributes and are subject to a set of certain parameters. Type: Call or Put Unit of Trade: One contract equals $1.00 (the index multiplier) times the index level Premium Quotations: Stated in points and decimals Exercise Price: Any positive number Exercise Style: American or European Exercise Valuation: Settle On Open (ticker = SET), which is calculated using the opening sales price in the primary market of each component security on the expiration date; or Settle On Close, which is the official closing price of the S&P 500® Index as reported by Standard & Poor's. Premium Payment Date: Any valid business date Expiration Dates: May be any OCC business day, provided that the expiration date is specified to be at least four months, and may not be more than 5 years after the date on which the trade is executed by the initial parties to the trade. Trades are subject to parameters listed below: Have an expiration date greater than four months and not more than 5 years. In some cases closing transactions will be accepted for expiration dates under four months. For initial maturities greater than four months and less than or equal to nine months after the date the trade was executed: a minimum notional value of $500,000 times the value of the S&P 500® Index at the opening of business in New York on the first business day of the calendar year in which the transaction was accepted by OCC is required for the trade to be eligible for clearing. For initial maturities greater than nine months but less than three years after the date the trade was originally executed: minimum notional value of at least $100,000 times the value of the S&P 500® Index at the opening of business in New York on the first business day of the calendar year in which the transaction was accepted by OCC. As indicated, notional value requirements are waived for closing transactions, except for dealer closing transactions that result in a customer open position (then Notional Value Requirements apply). For initial maturities greater than three years, there is no minimum notional value requirement. Settlement Type: Cash (USD)
No ego, not tying to prove anything. I don't think we are gone to get anywhere with this conversation. Your link doesn't address the statement I posted directly from the OCC page, "As mandated by the SEC, standardized U.S. equity options are to be executed solely on exchanges. All equity options in the U.S. are issued and cleared by OCC, and are interchangeable across options exchanges, except in the case of contracts that are licensed exclusively to one exchange" OCC At A Glance (theocc.com) The point being if Deutsche Bank writes 100,000 SPY contracts with Morgan Stanley OTC and DB goes under, the OCC will not step in a guarantee the trade. Those OTC contracts would not fungible and interchangeable. This is my understanding and would have been happy to hear a well documented response proving me wrong. So I guess we will just leave it at that, good night. I will say that I enjoy many of your posts including current events.
If the option trade is not sent to OCC for clearing, who does the enforcement of stuff like RegT and Finra Margin requirements? Do the OTC trades need to still be reported to the SEC? Stepping back, if these big trades are happening off the exchange, and without being reported anywhere, do they really affect the *publicly* listed liquidity? It seems to me that while these big trades do happen, I can't see them affecting (materially) the OI/Volume/Spread/#OfExchanges that are publicly listed. In other words, it doesn't explain the round-numbers effect I asked about. (also thanks for the replies!)
Said I wasn't going to respond, but one more time. Saying I'm wrong with no proof other than a cut and paste that doesn't answer any questions raised and no explanation on your part of any issues or points made is completely worthless. On the SPX issue you may be talking about a SPX Flex trade, not sure as you don't seem to want to discuss anything, respond to any points. Specific questions Do you claim that off exchange trades in equites can be guaranteed by the OCC and are fungible across exchanges, including the likes of SPY which was originally raised the OP? This seems completely opposite of what the OCC posts "As mandated by the SEC, standardized U.S. equity options are to be executed solely on exchanges. All equity options in the U.S. are issued and cleared by OCC, and are interchangeable across options exchanges, except in the case of contracts that are licensed exclusively to one exchange" Do you claim the upstairs, off exchange SPX trades will be guaranteed by the OCC, simply by reporting to them that the trade took place, that there would be no need to cross/execute the trade on the CBOE itself? If so would these trades be fungible to trade with another parties on the exchange. Not including on exchange Flex trades here. If yes to these a explanation would be helpful. How would the OCC handle reporting requirements? It would open them up to potentially trillions in trades that would have to be guaranteed and monitored.
"If the option trade is not sent to OCC for clearing, who does the enforcement of stuff like RegT and Finra Margin requirements? Do the OTC trades need to still be reported to the SEC? Stepping back, if these big trades are happening off the exchange, and without being reported anywhere, do they really affect the *publicly* listed liquidity? It seems to me that while these big trades do happen, I can't see them affecting (materially) the OI/Volume/Spread/#OfExchanges that are publicly listed. In other words, it doesn't explain the round-numbers effect I asked about." So first SPX only and it can/or cannot be submitted to OCC. So it can clear OCC or just be a trade between two contra parties. It is not a flex trade and if I clear it between contra parties - it is seeking some privacy. Very few OTC trades but very large volume. One of the contra parties will still need to do some hedging/layoff and that may be in the listed products and those trades would clearly be transparent. The famous trades here are the Buffet short puts with Goldman as the contra, but if Buffet didn't talk it up -nobody would know and that is why they are done off-exchange. They are done as derivative swaps via the ISDA community. You can visit the ISDA sight for more granular details. Almost every major US derivative desk participates. As to the hedging/round numbers querry - if I trade in the listed market I hedge with whatever paper is cheapest first. That means I may very well have one expiration with numerous others and I frequently rehedge. In all options, I can get hit on a resting order for reasons that can't be explained. Generally you need to look at the "whole" table. A portion of a September position may hedge in another month or a like product. You ever have resting order hit for what appears to be a nonsense reason - look at the whole table.
I just emailed the OCC with this question, "Hi, Hopping you can answer the following question. If an option trade is done upstairs/OTC between two firms, will the OCC guarantee this trade if they report it to the OCC, or will the trade have to actually take place on an exchange for the OCC to guarantee it. Would the same rules apply to an SPX option trade as well? If a trade is done upstairs/OTC is there any reporting requirements to the OCC? Thank you" Their response "Thank you for contacting OCC. In regards to your question, OCC only guarantee's trades enacted on OCC participant exchanges. This applies to SPX trades, as well. If you have any further questions, please let us know."
Clearing OTC Products In 2014, OCC began offering clearing services for OTC products on S&P 500® index options. Transactions are transmitted to OCC via an approved OTC Trade Source and are guaranteed by OCC through a similar novation process as other OCC cleared products. OTC options must be negotiated and matched OTC (not transacted on an exchange or exchange-like market). Clearing member clients must be eligible contract participants. SEC No-Action Following is a "no-action" letter from the SEC to OCC with respect to cleared OTC options and Exchange Act Rules 15c3-1 and 15c3-1(a). OCC received no-action relief from the SEC to permit OTC options to be treated the same as other listed options for purposes of Rule15c3-1, enabling broker dealers to use an approved theoretical options pricing model to calculate capital charges for positions in OTC options and market makers to trade in OTC options without making themselves ineligible for capital treatment. In addition, the minimum capital charge for each OTC option under SEC Rule 15c3-1 will be $0.75, adjusted as appropriate for the size of the OTC option, not to exceed the market value in the case of long contracts in OTC options. Request for No-Action Relief with Respect to Cleared Over-the-Counter Options for Purposes of Rules 15c3-1 and 15c3-1a (PDF) Product Specifications OTC S&P 500 Equity Index® Auction Procedures For auctions that include OTC options products, please refer to the following procedures: Auction Procedures (PDF) https://www.theocc.com/Clearance-and-Settlement/Clearing/OTC-Products
Clearing As the marketplace evolves, so do the clearing capabilities at OCC. Although OCC began as a clearinghouse for listed equity options, it has grown into a globally recognized entity that clears a multitude of diverse and sophisticated products. OCC operates under the jurisdiction of both the SEC and the CFTC. As a registered clearing agency under SEC jurisdiction, OCC clears transactions for exchange-listed options, security futures and OTC options. As a registered derivatives clearing organization under CFTC jurisdiction, OCC offers clearing and settlement services for transactions in futures and options on futures. OCC also provides central counterparty clearing and settlement services for securities lending transactions. In addition, OCC has been designated as a "systemically important" financial market utility under Title VIII of the Dodd-Frank Act. OCC protects the integrity of its financial markets by delivering world-class risk management, clearing and settlement services for options, futures, OTC and securities lending transactions. In its role as guarantor and central counterparty, OCC ensures that the obligations of the contracts it clears are fulfilled. Through a novation process, OCC becomes the buyer for every seller and the seller for every buyer, protecting its members from counterparty risk. OCC is dedicated to promoting stability and financial integrity in the marketplaces it serves by focusing on sound risk management principles, including rigorous initial and ongoing membership standards, prudent margin requirements and a substantial clearing fund. OCC's mission is to provide market participants with innovative risk management solutions. OCC prides itself by offering industry leading efficiencies in the clearing and settlement of financial transactions. Its systems facilitate fulfillment of margin and settlement obligations and improve the effectiveness of back-office operations. By striving to achieve the highest possible standards of service, OCC promotes stability and integrity in every market it serves. OCC clears the following products. Click each product to read its specifications: Equity Options ETF Options FLEX Options Futures Products Index Options Long-Term Equity Anticipation Securities® (LEAPS®) OTC Products Quarterly Options U.S. Dollar Cash-Settled Currency Options Weekly Options Clearance and Settlement Actionable ID Certification Testing Clearing Corporate Action Information Submission Form DDS & Inbound FIXML Reference Overview DDS Reference Expiration Calendar FIXML Schema Definition Changes Inbound FIXML Reference Industry Services Participant Exchanges & Futures Markets Stock Loan Programs Tax Basis Reporting