Awash In Cash

With derivatives contracts soaring due to the pandemic, so did OCC’s cash balance.

Many companies have drawn down on revolving bank credit facilities to get their hands on much-needed cash. But Amy Shelly, CFO of the Chicago-based Options Clearing Corporation (the OCC), the world’s largest equity derivatives clearing organization, faced a different problem during the pandemic: She was sitting on too much cash as a result of an explosion in clearing volumes. “What we saw was record volatility and capital flows, which caused our volumes to skyrocket,” she says. “As volumes increased, open positions and margins increased. Our cash balances went up twentyfold in March, which put strain on our banking partners. My treasurer and I were on the phone with our banks every day trying to understand how much cash they could take.”

Over 95% of the OCC’s revenue is derived from the clearing fee it charges members, and Shelly had budgeted for 19 million contracts to be cleared a day. Then the pandemic struck, and that shot up to an average of 28 million contracts. Shelly couldn’t invest all of the excess cash because her counterparties only had so much capacity. Her only alternative was to park it with her banking partners. “Our settlement banks had potential constraints in terms of how much cash they could hold,” she explains. “But we were able to get many of them to hold a certain value of money during high-volume days.”

As a Systemically Important Financial Market Utility (SIFMU), Shelly has a fully secured credit line available to her, which acts as an insurance policy in the event of a clearing member defaulting. “We’ve put a lot of work into building our bank relationships,” she explains. “But we don’t just look at those relationships through the lens of our bank credit facility. We’re looking for other business as well, and how we can be mutually beneficial to one another.”

Those banking relationships served Shelly well when it came time to renew the OCC’s credit facility this summer. “What we saw with certain industries slowing down during the pandemic was that companies were drawing down on credit facilities, so banks had less capacity,” says Shelly. “We were very engaged with the banks in terms of which banks were able to participate, and which ones weren’t. Luckily, we were able to add two banks and retain one bank that initially indicated they were going to step away.”

As the economic impact of the pandemic continues to play out, Shelly says it is likely to cost more for companies to secure credit lines. “There will be a shift away from unsecured credit, at larger dollar amounts than are done today,” she says. CFOs are also looking to shore up alternative sources of liquidity. “In June, we closed two transactions with pension funds for two secured credit lines,” says Shelly, “and we’re in the process of developing other relationships with pension funds and insurance companies. We’re looking outside of financial services for an alternative. We need to ensure we can still operate and provide resiliency, security and stability to market participants.”

Since becoming CFO four years ago, Shelly has overseen rollout of a new enterprise resource planning system, which has helped the business reduce its month-end financial closing from 15 days to five. “We expanded our use of ACH payments, so we didn’t have to worry about printing checks during the pandemic,” Shelly explains. “A lot of the planning we’d put in place [pre-Covid] has made our lives less complicated.”

The OCC is also implementing a new treasury management system (TMS). “Instead of accessing our banks through their individual web portals, we’ll be able to manage everything in one place through the TMS, cutting down on the amount of work we need to do to connect to our banks.” But she isn’t ready to dispense with spreadsheets altogether. “Spreadsheets aren’t a bad thing,” says Shelly. “We want to automate where it’s smart. We don’t want to unnecessarily increase the complexity of our technology stack.”