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Difficulty: HardDepositories, Clearing Corporations, and Settlement Entities

An investor exercises a standardized equity call option contract through a clearing broker-dealer. Following the assignment of the exercise notice, the delivery of the underlying equity shares and cash settlement must occur. Which of the following statements correctly distinguishes the primary operational roles of the Options Clearing Corporation (OCC) and the Depository Trust Company (DTC) during this transaction?

  1. The OCC acts as the central counterparty guaranteeing performance on the option contract exercise, whereas DTC completes the ultimate book-entry delivery and custody transfer of the underlying shares.Answer
  2. B
    The OCC maintains custody of physical equity share certificates in its depository vaults, whereas DTC acts as the central counterparty netting trade obligations between clearing member firms.
  3. C
    DTC functions as the central counterparty issuing options contracts, whereas the OCC executes retail customer buy and sell orders in the secondary market.
  4. D
    The OCC is a federal government regulatory commission enforcing criminal statutory law, whereas DTC is an SRO responsible for establishing option strike prices.

Answer

The Options Clearing Corporation (OCC) acts as the central counterparty guaranteeing option exercise performance, while the Depository Trust Company (DTC) performs the electronic book-entry transfer of the underlying equity shares.
The correct response accurately reflects the division of responsibilities in post-trade market infrastructure: the OCC acts as the central counterparty guaranteeing performance on options exercises, while DTC handles the book-entry settlement and custody changes for the underlying securities.

Step-by-Step Solution

1
Identify the primary central counterparty for standardized options contracts.
The OCC serves as the issuer, guarantor, and clearing organization for listed options contracts, eliminating counterparty credit risk upon exercise.
Clearance and trade performance guarantee for options fall under the jurisdiction of OCC.
2
Identify the entity responsible for equity share custody and ownership record maintenance upon exercise settlement.
DTC acts as the central depository holding securities in uncertificated/book-entry form and adjusting participant firm positions electronically.
Final settlement of equity securities occurs via book-entry ledger entries at DTC.

Key Concept

Distinction between Options Clearing Corporation (OCC) trade guarantee functions and Depository Trust Company (DTC) depository custody/book-entry functions.
Estimated Time:1m 30s
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Topics

Depositories, Clearing Corporations, and Settlement Entities

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