SOURCE: The Options Clearing Corporation

November 28, 2006 11:03 ET

The Options Clearing Corporation Launches New Risk Management Methodology

CHICAGO, IL -- (MARKET WIRE) -- November 28, 2006 -- The Options Clearing Corporation (OCC) announced that it has successfully launched its new risk management methodology called STANS, which is used to calculate the margin requirement of its clearing members.

STANS -- an acronym for System for Theoretical Analysis and Numerical Simulations -- uses Monte Carlo-based simulation techniques to generate a set of 10,000 hypothetical market scenarios intended to provide a realistic evaluation of risk at the portfolio level. These simulated scenarios incorporate information extracted from the historical behavior of each individual security as well as its relationship to the behavior of other securities. Scenarios are generated for over 7,000 risk factors, including a broad range of individual equities, exchange traded funds, stock indices, currencies and commodity products.

In addition to the base simulation, STANS generates complementary sets of scenarios intended to measure increased portfolio risk given atypical market conditions. STANS features advanced statistical, mathematical and risk management techniques such as extreme value theory, copula approach, heavy-tailed distributions, dynamic-variance forecasting and expected shortfall estimation.

While the impact of the new system is strongly dependent on the overall market conditions, during the four months of production execution -- along with approximately 1 year of parallel testing -- there was an average decrease of 25% in the risk element of OCC's margin requirements when compared to the requirements estimated within the previous methodology. However, a number of accounts experienced significant increases in their requirements due to the more robust risk measurement of market scenarios.

OCC is the first clearinghouse to implement a Monte Carlo simulation approach to risk estimation. The STANS model provides more precise risk estimations which should improve the financial stability of the derivatives markets, and produce clearing and settlement efficiencies beneficial to investors.

STANS replaced TIMS (Theoretical Intermarket Margin System), which was installed 20 years ago last April and was the first portfolio margin approach used at a clearinghouse.

OCC Background

OCC, founded in 1973, is the world's largest derivatives clearing organization and was the first clearinghouse to receive a 'AAA' credit rating from Standard & Poor's Corporation. Operating under the jurisdiction of the Securities and Exchange Commission and the Commodity Futures Trading Commission, OCC provides clearing and settlement services for the American Stock Exchange, the Boston Options Exchange, Chicago Board Options Exchange, CBOE Futures Exchange, International Securities Exchange, OneChicago, Pacific Exchange, Philadelphia Stock Exchange and Philadelphia Board of Trade. More information about OCC is available through its Web site at

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