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Steven Sears takes on an interesting topic in The Striking Price column (subscription required) this week: Should the OCC go public?
At a time when almost everything on Wall Street is valued and traded, Options Clearing Corp. remains an exception. The OCC, which issues and settles all U.S. options contracts, is a true monopoly that remains privately owned. Intercontinental Exchange (ICE), CBOE Holdings (CBOE) Nasdaq OMX Group (NDAQ), and the International Securities Exchange unit of Deutsche Borse (DB1.Germany) are the owners.
In years past, the OCC has been discussed as an initial-public-offering candidate. The OCC says it has no plans for a stock offering, but how to maximize the organization's value is a topic worth revisiting.
My opinion? Noooooooo!
I do agree that it could grow profits by going public, much in the same way all of its owners listed above turned into coin-minting businesses. There are questions about serving the greater good, though, and it's hard to see how turning the OCC into a bottom-line-oriented company serves those needs.
As (the one and only) Steven Sears notes, it's a total monopoly now. For starters, you'd really need to open up the clearing business to competitors. If not, then a public OCC might start charging $50 or $500 to clear some trades. So, let's say we do open up clearing to competitive bids, then what?
Well, the companies will compete on the pricing end, which is great for everyone. But, they'll also have to compete on the servicing end (i.e. -- making good on transactions). Any trade you make now is effectively not with the party on the other side of the transaction. Rather, you're each technically trading with the OCC, which is acting as a guarantor. It's a gigantically important function in that it protects the system from collapsing in case a firm somewhere goes bad and causes a domino effect of defaults.
For this service, they extract a relatively small fee. Think of it as insurance.
To me, having OCC as a quasi-public utility serves this goal way better. Nothing is ever totally guaranteed. If memory serves me correctly, fears about the ultimate solvency of the OCC hit the radar screen in the 2008 meltdown. Then again, fears about every institution cropped up. It just feels like in times of crises, we're better served with an entity like the OCC having ultimate loyalty to the system and not the shareholders.
Now, of course, OCC would need heavy regulation under any structure. Banks have heavy regulation too, which serves as an endless topic for debate. They always want less -- which makes perfect sense given that they're public companies, driving for profits. Which gets back to my whole point that that's not really the battle you want to see a public OCC waging somewhere down the road.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.