GC Friday Interview: OCC's Joe Pelligrini on Expanding the CCP Model to Agent Lenders

At the RMA Conference on Securities Lending in Florida, both borrowers and lenders seemed to embrace central counterparties (CCPs) much more than in the past, and market infrastructures have been working toward meeting this demand. For OCC, in addition to its traditional stock loan program where it acts as a CCP for its broker-dealer clearing members, the organization has also started to explore the possibility of expanding its CCP offering beyond just broker-dealers. OCC Vice President Joe Pellegrini explains how the CCP model is changing, as agent lenders have approached the organization to build a new solution.

GC: What type of activity have you seen in your stock loan program over the last few years?

JP: The growth has been tremendous. The volume right now is about $160-170 billion notional value in the program. Transactions have been trending upwards over the past three or four years. We’ve gone from about $20 billion to, as I said, $160-170 billion in over two years, so it’s been phenomenal growth. We’re bringing on new members each month, and it’s been really good.

GC: At the RMA conference, you noted that you’re looking at introducing a new CCP model for custodians and beneficial owners. How would that model work?

JP: Our current model is geared toward our clearing members, who are key broker-dealers. We know that to continue growth and make it stronger, we need to bring on the agent lenders to provide an important influx of liquidity to the system. So we’re looking at a two-phased approach. The first phase would be bringing them on as true OCC clearing members in which they contribute margin and clearing fund, just like our broker-dealers do today. So there wouldn’t really be any difference in what you see in today’s model. That unfortunately doesn’t solve all the issues that agent lenders will be seeing with regulations that are coming down the pipe. So we’re also looking at an agency lender type of program whereby they continue to be a custodian for the beneficial owner and continue to do their duties that they do today, but do not contribute margin and to the clearing fund of OCC’s program. To achieve that model we need to solve the cash collateral piece of the equation and where it would be maintained. The borrower will remain the same. They’ll put the cash collateral into the system, and we’ll margin them because they get the shares in the transaction.

Again, it needs to be vetted with the industry; we need their feedback and [see] whether or not it works. We think from an accounting regulatory perspective that it keeps the custodial agency lending type of relationship intact for the agent lender.

It gives them the benefits of a CCP as well as the benefits of what they’re doing today.

GC: What stage are you at for developing this model?

JP: For that type of agency lender model, we’re in the first stage—a nascent one where we’re looking at it, vetting it with the industry. We haven’t started a true project at OCC yet, we’re just testing the waters. Phase 1, with banks (lenders) as clearing members, that’s a true project at OCC in the works now, and we hope to bring them onboard in the second or third quarter next year. We don’t see any issues with that project going forward. There are some legal and regulatory hurdles we have to overcome, but otherwise we can pitch it to the industry.

If they become clearing members, they’ll become principal to the trade, so it wouldn’t give them all the benefits that they have as a custodian in today’s world. So it solves a small portion of what they’re looking for, but not the major issues.

GC: Have you heard anything at the conference that will affect what you do going forward?

JP: We’ve been lucky to talk to a lot of agent lenders about this issue before and we’ve heard the same things we hear at this conference. So we’re aware of the issues. That doesn’t mean we’ll be able to solve them all; a lot of them are regulatory hurdles that we’ll need the help of the industry and the SEC (Securities and Exchange Commission) and the Fed to solve. But I haven’t heard anything at the conference that’s been a showstopper.

GC: Do you have any other offerings in the works?

JP: We do have an equity repo product that’s coming out. AQS, our stock loan exchange, has asked us to devise a CCP solution for an equity repo product that they’re bringing to the market sometime next year, so we’ve been helping with that, and we’re very close in finalizing rules for that product. The product is scheduled to be launched in the second quarter of next year, pending regulatory approval.