Friday was the last day to file a comment letter to the Securities and Exchange Commission on a capital raising plan, and two of the 12 U.S. options exchanges have voiced an objection.

On January 26, 2015, the SEC published and sent out for comment a proposed rule change at the Options Clearing Corp. that would allow it to raise its target capital reserve from $25 million to $247 million. Under the proposal, the five legacy “equity holder” exchanges – CBOE, ISE, NASDAQ OMX PHLX, and the two NYSE exchanges (NYSE MKT and NYSE Arca) – would augment their capital contributions up to the new buffer, in exchange for a perpetual dividend from the OCC from its clearing fees. The remaining options exchanges – BATS Options, NASDAQ Options, NASDAQ BX, BOX, C2, Gemini, and MIAX, are non-equity holders.

The dual-class system dates back to 2002, when OCC amended its rules to remove the ownership requirement for firms for which it provides clearing services. It should be noted that, of the seven non-equity holders, four of them – C2, NASDAQ Options, NASDAQ BX and Gemini – are all subsidiaries of equity holder exchanges. From a corporate level, that leaves BOX, BATS and MIAX as the possible odd-men out, as non-subsidiaries.

In response to the proposed change, two of the non-equity exchanges – BOX and BATS – filed comment letters claiming the rule would put them at a competitive disadvantage, as clearing fees will be raised across the board, with the five equity-holder exchanges earning an annual dividend that could be used to pay down their respective contributions.  

Read the BOX Letter  =>

Read the BATS Letter  =>

OCC is raising its fees in the wake of a 2013 call-to-action from the SEC to tighten up its risk management practices, as well as its recent designation by the Financial Stability Oversight Council as a systemically important financial market utility.

For more on the OCC’s changes, read The Road Ahead: Donohue Leads OCC in a New and Pricier Era =>

Is the proposed rule, as written, unfair? On the one hand, the legacy exchanges assembled and funded the OCC in 1973, and membership does and should have its privileges. Besides, the equity exchanges are the ones who must put up the additional capital in the short term, and all exchanges, equity and non-equity alike, will share in the benefits of a more financially fit clearing utility.

On the other hand, the SEC has demonstrated time and again that it strives for a level playing field in order to foster competition and innovation in the marketplace. Here lies an opportunity for the regulator to show where the line is to be drawn.


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