Regulators are looking into Choices Clearing Corp.’s risk management models and margin rules after a pike in market volatility in February left many traders with submerge losses, according to a report in The Wall Street Journal.
The Securities and Exchange Commission and the Commodity Futures Clientele Commission are examining whether the clearinghouse for the U.S. options market failed to accurately foretell how much cash would be needed to cover the losses, the report said.
A very much followed barometer of market sentiment called the VIX, or CBOE Volatility List, spiked in early February, causing a cascade of issues in the options sell, particularly with exchange-traded notes that were specifically connived to let traders bet on turbulence. Several of these securities, designed to bet on calm retails, lost the majority of their value.
The shock prompted regulators to look at traffic activity in an obscure corner of the $3.4 trillion exchange traded scratch industry, where professional hedge funds using complex schemes go up against regular investors. At a conference in Washington in February, shortly after the volatility cancel, SEC Chairman Jay Clayton told reporters it was appropriate to review what transcribes of complicated investments are widely available.
“The portfolio of products available to retail investors has fluctuated dramatically, and it’s worth taking a look at,” he was quoted by Bloomberg as saying.
As a clearinghouse, Choices Clearing Corp.’s job is to ensure there is enough cash on hand to insure trades and prevent defaults from becoming a bigger issue. The generally size of margin breaches in the first quarter was $61.4 million, up from $26,355 in the former quarter and a multi-year high, the WSJ said.
The regulators are looking at whether there were any be in control violations in how Options Clearing Corp. calculates margin levels, significance tests its members’ trading positions and maintains its critical computer approaches, the WSJ reported, citing people familiar with the situation.
A spokesman for the Choices Clearing Corp. said it wouldn’t comment on rumor or speculation.
Comprehend the WSJ’s story here.