OCC Upgrades Risk Tools for Fast-Paced Options Trading
Published Date: 1/22/2025
Notice
Summary
The Options Clearing Corporation (OCC) is upgrading its risk-checking tools to better handle the fast-moving world of short-term options. These changes help OCC and its members spot and prepare for risks more accurately, keeping the market safer and smoother. The new system starts soon and won’t cost extra but will make sure everyone’s protected when trading quick-turn options.
Analyzed Economic Effects
3 provisions identified: 2 benefits, 0 costs, 1 mixed.
Aligning Day Counts for Short Options
OCC will align the day-count assumptions used in its models for options with a maturity of one month or less by converting implied volatility data into a trading-day convention for volatility simulation and then converting results back to a calendar-day convention for price smoothing. This change is meant to remove inconsistencies that are especially important for short-dated options (SDOs) and to make margin and stress-test calculations more accurate.
Tailored Volatility Shocks for SDOs
OCC will stop applying the same implied-volatility shock for one-month options to all options with one month or less to expiration. In STANS, OCC will derive shocks for short-dated options using a square-root decay from the 1-month shock; in CST, OCC will set shocks for specific maturities under one month (two weeks, one week) and use linear interpolation down to three days.
Estimated Margin and Clearing Fund Effects
Using data from July 2023 to September 2024, OCC estimated that the proposed changes would have increased average daily margin requirements by 0.58 percent, with daily impacts ranging from a 0.81 percent decrease to a 3.21 percent increase. OCC estimated the total Clearing Fund would have decreased by 0.14 percent.
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