Regulators examine clearinghouse's risk policies after volatility blowup in February: Report

  • Regulators are looking into Options Clearing Corp.'s risk management models and margin rules after a spike in market volatility in February left many traders with steep losses, the WSJ reports.
  • A widely followed barometer of market sentiment called the VIX, or CBOE Volatility Index, spiked in early February, causing a cascade of issues in the options market.
  • The shock prompted regulators to look at trading activity in an obscure corner of the $3.4 trillion exchange traded fund industry, where professional hedge funds using complex strategies go up against regular investors.
Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC), speaks during an SEC open meeting in Washington, D.C., U.S., on Wednesday, April 18, 2018.
Yuri Gripas | Bloomberg | Getty Images
Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC), speaks during an SEC open meeting in Washington, D.C., U.S., on Wednesday, April 18, 2018.

Regulators are looking into Options Clearing Corp.'s risk management models and margin rules after a spike in market volatility in February left many traders with steep losses, according to a report in The Wall Street Journal.

The Securities and Exchange Commission and the Commodity Futures Trading Commission are examining whether the clearinghouse for the U.S. options market failed to accurately anticipate how much cash would be needed to cover the losses, the report said.

A widely followed barometer of market sentiment called the VIX, or CBOE Volatility Index, spiked in early February, causing a cascade of issues in the options market, particularly with exchange-traded notes that were specifically designed to let traders bet on turbulence. Several of these securities, designed to bet on calm markets, lost the majority of their value.

The shock prompted regulators to look at trading activity in an obscure corner of the $3.4 trillion exchange traded fund industry, where professional hedge funds using complex strategies go up against regular investors. At a conference in Washington in February, shortly after the volatility spike, SEC Chairman Jay Clayton told reporters it was appropriate to review what types of complicated investments are widely available.

"The portfolio of products available to retail investors has changed dramatically, and it's worth taking a look at," he was quoted by Bloomberg as saying.

As a clearinghouse, Options Clearing Corp.'s job is to ensure there is enough cash on hand to cover trades and prevent defaults from becoming a bigger issue. The average size of margin breaches in the first quarter was $61.4 million, up from $26,355 in the prior quarter and a multi-year high, the WSJ said.

The regulators are looking at whether there were any rule violations in how Options Clearing Corp. calculates margin levels, stress tests its members' trading positions and maintains its critical computer systems, the WSJ reported, citing people familiar with the situation.

A spokesman for the Options Clearing Corp. said it wouldn't comment on rumor or speculation.

Read the WSJ's story here.