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Wall Street Faces Stricter Margin Rules Amid Zero-Day Options Frenzy

Quiver Editor

The world’s largest derivatives-clearing house is seeking to introduce fresh margin requirements on Wall Street firms as the frenzy in zero-day options shows no sign of letting up. The Options Clearing Corp. (OCC) is looking to harden rules on intraday margins at brokers and dealers in the event their risk exposures breach certain thresholds. Additionally, the OCC proposes a monthly add-on to their collateral contributions to ensure the smooth functioning of markets.

This push from industry supervisors aims to secure market discipline amid the trading frenzy in equity contracts that expire within 24 hours, known as 0DTE. These options now make up half of the S&P 500’s (SPY) total options trading. JPMorgan (JPM) strategists have warned that this activity threatens to destabilize the broader equity landscape, a scenario that has received pushback from entities like Cboe Global Markets (CBOE).

Market Overview:
  • OCC proposes stricter intraday margin requirements.
  • New rules target options with zero days to expiration (0DTE).
  • JPMorgan warns of potential market destabilization.
Key Points:
  • OCC's new measures need SEC approval.
  • New margin rules could trigger calls when risk levels spike.
  • Federal Reserve survey highlights varying risk-management practices.
Looking Ahead:
  • OCC’s proposals could face industry feedback before implementation.
  • Stricter rules may impact trading volumes and market activity.
  • Market participants must adapt to changing regulatory landscapes.

The OCC’s proposals, which require approval from the Securities and Exchange Commission, are aimed at mitigating the risks associated with the boom in ultra-short-term options trading. The Chicago-based organization, providing central clearing and settlement services across exchanges, seeks to ensure member firms contribute more to a buffer fund designed to handle market turmoil.

This move has caught the attention of regulators, with the Federal Reserve including special questions about risk-management practices and client activity in a survey last September. Notably, the survey found that two-fifths of dealers don’t require the counterparty to provide collateral for 0DTE trades, while the rest do so only when market volatility is elevated.

Industry reactions are mixed. JJ Kinahan, president of Tastytrade, supports the OCC’s motion but is concerned that overly restrictive measures could stifle trading activity. The potential requirement for firms to put down more capital could disallow certain trades, potentially reducing overall market volume and impacting market liquidity.

About the Author

David Love is an editor at Quiver Quantitative, with a focus on global markets and breaking news. Prior to joining Quiver, David was the CEO of Winter Haven Capital.

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