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Three Minutes With John Fennell, Chief Risk Officer At OCC

Traders Magazine Online News, December 17, 2018

John D'Antona Jr.

Hehmeyer Trading + Investments sat down with OCC’s John Fennell to talk about how OCC supports market innovations, manages industry risk and addresses advancements in the derivatives space.  OCC shared the blog with Traders Magazine.

"From a Central Counterparty Clearing (CCP) perspective, it is our role to provide stability and certainty behind the trading of a new asset class,” said Options Clearing Corporation (OCC) Chief Risk Officer John Fennell about clearing Cboe’s bitcoin contract.  “It is important for OCC to support new asset classes like crypto and ensure we can provide confidence, both financially and operationally, in a manner comparable to existing products we clear.”

Early Innovations

Fennell started his career at OCC about 25 years ago and has held roles in operations and technology before transitioning into a risk management position.  He has spent the last 15 years looking at how the industry and OCC manages risk.

“I find the derivatives industry very innovative and stimulating,” he said.  “For example, options traders and market participants needing liquidity created box transactions as a substitute for obtaining securing financing.”

In the late 90’s and early 2000’s, traders began taking these risk- neutral positions, effectively buying deep in and out-of-the-money calls and puts that OCC would clear.

“The carry rate incorporated in the option prices would be comparable to financing rates with the options being used to obtain the central counterparty guarantee, making the loan attractive from a credit perspective,” he said about how options traders look at challenges and come up with innovative solutions.  “It’s OCC’s role to support these solutions and manage the risk.”

When it comes to managing risk on cryptocurrencies, Fennell believes that it is important for OCC to look at new asset classes from an operational and financial perspective.

“When we were preparing to clear bitcoin, we looked at price volatility and if our risk models were robust enough to sufficiently predict potential risks,” he said. “We did a lot of back-testing on our margin models to make sure we could manage the price volatility.”

Industry Challenges

Fennell spoke more in depth about his role at OCC.

“My role is to ensure we have a framework that allows OCC to identify, measure, monitor and manage events that could keep the firm from achieving its clearing objectives, whether that be to manage credit, market and liquidity risks or identify areas of operational vulnerability within the firm and as an industry,” he said. 

As Chief Risk Officer (CRO), Fennell oversees various departments at OCC including; Information Security, Enterprise Risk, Model Risk Management, Third Party Risk Management and Business Continuity.

“At the top of the list for all CROs is cyber risk. We are all interconnected as an industry and if a bank or CCP has a weakness in their infrastructure it can impact everything,” he said.  “Industry groups, market participants and the government work together on this subject to combat cyber risk and develop a strong financial eco-system.”

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