Modernizing Market Infrastructure: OCC on Reaching a Key Milestone in its Journey to the Cloud
Over the past several years, the move to modernize market infrastructure has accelerated as trading volume and activity surged during the pandemic and has remained at elevated levels, underscoring the need for scalable, resilient and adaptable systems. As such, more central counterparty clearing houses (CCPs) and central securities depositories (CSDs) are turning to the cloud to enhance their infrastructure. In fact, The Options Clearing Corporation (OCC), the world’s largest equity derivatives clearing organization, reached a key milestone in its efforts to migrate its clearing, risk management, and data management systems to the cloud after it received a no-objection notice from the U.S. Securities and Exchange Commission (SEC) in October last year, enabling OCC to move forward with its Renaissance Initiative to redevelop and modernize its technology infrastructure.
EMBARKING ON THE CLOUD JOURNEY
OCC, which provides clearing for options, futures, and securities lending trades for 19 participant exchanges and trading platforms in the U.S., announced its Renaissance Initiative in 2019 with a goal of migrating its underlying platform for OCC’s critical applications, including clearing, risk management, and data management systems, to the cloud.
“We started down this path to replace our core clearing and risk settlement systems with the objective of delivering a resilient and adaptable solution to be able to not only provide our core client services in a reliable way but also add new capabilities quickly and bring things to market with a lot more agility,” said David Hoag, Chief Information Officer of OCC.
The cloud is a central component of OCC’s plan, Hoag stated, noting that OCC cleared more than 10 billion contracts in 2022, setting a new volume record for the third consecutive year. Now that the SEC has issued the no-objection notice, OCC can proceed with its Renaissance Initiative with certainty.
“We have a path forward which the regulators helped us shape that’s going to deliver best-in-class service from a risk management and settlement perspective and for the industry,” Hoag said.
COLLABORATING ON THE CLOUD INFRASTRUCTURE FRAMEWORK
OCC began collaborating with the regulators at an early stage of its move to the cloud, with many discussions about how OCC would maintain responsibility and accountability and what role its cloud provider, Amazon Web Services, would play.
“It really was in partnership with the regulators [that we reached] a solution and an approach that meets our regulatory obligations and enables us to run cloud infrastructure,” Hoag said.
LEVERAGING THE BENEFITS OF THE CLOUD
By modernizing its technology infrastructure with its move to the cloud, OCC will achieve enhanced resiliency and an elevated security profile.
“There are multiple benefits [of moving to the cloud]. The obvious one is really the adaptable capacity,” said Hoag, adding that the cloud will provide the ability to very quickly provision resources and add capacity to meet market demands as compared to traditional infrastructure that often requires a three-month lead time to establish the same capacity capabilities.
“The other important point is when we launch new services that our customers would want, our cloud architecture will allow us to isolate anything we expose to outside parties or APIs or new customer touchpoints from our core claim risk management and settlement systems,” Hoag said.
Hoag acknowledged that building a highly resilient, secure, cloud-enabled platform is hard work, but OCC remains on track to meet key milestones, with plans to begin external testing in 2024 and launch the platform in 2025.
ADOPTING THE CLOUD IS A TREND ACROSS THE CAPITAL MARKETS
OCC will join several global venues that are making the move to the cloud. Nasdaq migrated its first options market to the cloud at the end of last year and is working to move a second options market by the end of this year. Furthermore, Bolsa Electronica de Chile recently announced its commitment to migrating to the cloud in 2024.
According to Magnus Haglind, Senior Vice President and Head of Products for Nasdaq’s Marketplace Technology business, this represents a broader trend for financial market infrastructures (FMIs), and there is a confluence of multiple factors that are driving adoption.
“First, cloud service capabilities, including the advancement of services, resiliency, and performance, have matured massively during the last five years, and companies running mission-critical solutions are nowadays very confident in what the cloud can offer and how to realize the benefits. Secondly, there is a growing acceptance among regulators that the use of IAAS or PAAS provided by a cloud vendor has the necessary characteristics for highly regulated workloads. Thirdly, the use of the cloud and the productivity tools available are defining best practices in modern software engineering, and to provide an efficient way of working and attract talent, the cloud will need to become an integral part of any technology-centric organization,” Haglind said.
With greater adoption of the cloud across FMIs, Haglind noted that it will provide a new infrastructure and service paradigm that has enabled many organizations outside capital markets to transform the way they serve clients, increase agility, and use data and analytics to improve how markets are operated and designed. It will also allow the broader industry to reduce barriers to participating in financial markets, which will improve liquidity and reduce operational risks by replacing static legacy infrastructures with new, more dynamic approaches to interoperability.
Beyond FMIs, cloud adoption is accelerating. According to an October 2022 forecast from Gartner, worldwide end-user spending on public cloud services is forecast to grow 20.7% to a total of $591.8 billion in 2023, up from $490.3 billion in 2022. Notably, infrastructure-as-a-service (IaaS) is expected to experience the highest end-user spending growth in 2023, at 29.8%.
“Cloud computing will continue to be a bastion of safety and innovation, supporting growth during uncertain times due to its agile, elastic and scalable nature,” said Sid Nag, Vice President Analyst at Gartner.
High-velocity clearing, settlement and risk management capabilities for safe, efficient and reliable operations.