Goldman, BOA, Citadel clash with retail brokers over options clearing

[NEW YORK] Bank of America (BOA), Citadel Securities and Goldman Sachs Group have rallied in support of a controversial plan from the world’s largest options clearing house. Retail brokers warn the changes would add hundreds of millions of US dollars in extra costs.

Executives from the three firms backed a proposal from the Options Clearing Corp (OCC), which would change how contributions to a pot of money that pays out in the event a clearing member goes bust are tallied up. They said the plan “reduces the likelihood of abrupt and destabilising clearing fund reallocations during periods of market stress”.

“Clearing members whose activities drive growth in the size of the overall clearing fund today are not responsible for funding that increase,” wrote Stuart Bourne, co-head of global equities and global head of prime financing at BOA Securities; Stephen Berger, global head of government and regulatory policy at Citadel Securities; and Alicia Crighton, global co-head of futures and global head of clearing at Goldman Sachs.

The row is a sign of growing tensions between Wall Street and retail brokers over risk management amid the explosion in retail derivatives trading since the Covid pandemic, with OCC now handling trades worth about US$4 trillion in notional value a day.

The clearinghouse wants risk charges “more fairly” allocated among large banks and retail brokers such as Robinhood Markets and Charles Schwab, which have helped fuel a 130 per cent increase in average daily volume to 69 million trades a day, according to the clearinghouse.

Retail brokers have been fighting against the changes, which Fidelity Investments estimates could lead to a more than 70 per cent increase in its default fund contribution to nearly US$1 billion.

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Fidelity has urged the Securities and Exchange Commission (SEC) to reject the proposal and chief executive officer Abigail Johnson discussed the matter last week with SEC commissioner Hester Peirce, according to an aide to the commissioner.

“The options industry has experienced tremendous change and growth over the past several years, so it is incumbent upon us to assess the fund allocation and effectively manage risk to ensure alignment with the industry and best serve the interest of the investing public,” said Andrej Bolkovic, chief executive officer of OCC, in an emailed statement.

“We value the partnership of our clearing members and appreciate their support of the amendments to OCC’s clearing fund allocation methodology,” he added. BLOOMBERG