BOXX etf any thoughts

[engineering]

the OCC Fund has only paid out once and it was only 8mm.

Enron only went bankrupt once.
Whether or not some very specific things have already happened before is not the best way to look at risk.

From what I could find OCC has $232 billion in "margin held" at the end of 2023 and the backstop of a $16.9 billion clearing fund. I could not easily find either a net or a gross exposure. Only a number of contracts which you can't easily put a value to. Without telling us how many chips are out on the casino floor we can't tell if that's a decent amount.

Imagine if Deutsch bank or similar ceased operations tomorrow and all the options contracts they sold had to go on OCCs books.

OCC requires margin deposits, but the vast majority of funds in deposit are securities which can obviously fluctuate in value.
I can imagine a feedback scenario where a drop in stock prices cause a margin call to the member firms. Those firms then have to cut margin lending, this causes margin call to individual customers who sell.

Look at my math. If the tax arb doesn’t compensate you for this risk, then this product isn’t for you.

Agreed. I sometimes enjoy going through the details of "who guarantees x" and "how does y actually clear".

I certainly don't think they're likely to fail, but it is interesting to ask "what would it take?"

 

[newwurldmn]

Enron only went bankrupt once.
Whether or not some very specific things have already happened before is not the best way to look at risk.

From what I could find OCC has $232 billion in "margin held" at the end of 2023 and the backstop of a $16.9 billion clearing fund. I could not easily find either a net or a gross exposure. Only a number of contracts which you can't easily put a value to. Without telling us how many chips are out on the casino floor we can't tell if that's a decent amount.

Imagine if Deutsch bank or similar ceased operations tomorrow and all the options contracts they sold had to go on OCCs books.

OCC requires margin deposits, but the vast majority of funds in deposit are securities which can obviously fluctuate in value.
I can imagine a feedback scenario where a drop in stock prices cause a margin call to the member firms. Those firms then have to cut margin lending, this causes margin call to individual customers who sell.



Agreed. I sometimes enjoy going through the details of "who guarantees x" and "how does y actually clear".

I certainly don't think they're likely to fail, but it is interesting to ask "what would it take?"

Enron is very different than a clearing house that processes more volume than the NYSE.

you may not know this but when congress passed the no shorting rule in 2008, the entire derivatives market collapsed. They quickly changed the rules because shutting down the equity derivatives market would cause trillions of damage to the economy.

 

[maciejz]

- Tax wise if for Non US resident it does not make any diff then is holding BOXX better than holding T bills? If the return is higher with BOXX is it worth the risk that it is a ETF
-OCC going out of business is mentioned.. what are the chances if that happens it will be a much bigger meltdown
- The broker that BOXX uses may go under and would that affect BOXXs ability to continue?

each jurisdiction, country, taxes income and capital gains differently. I live in Canada, and capital gains is treated very differently here — it is taxed at half the rate of regular income such as interest or dividend income. While regular income is taxed at 54%, capital gains are taxed at 27%. So, for someone paying Canadian taxes, BOXX is amazing. It literally saves you 50% on your tax bill on the income you earn on cash (risk free rate).

 

[tradegoodstocks]

Enron only went bankrupt once.
Whether or not some very specific things have already happened before is not the best way to look at risk.

From what I could find OCC has $232 billion in "margin held" at the end of 2023 and the backstop of a $16.9 billion clearing fund. I could not easily find either a net or a gross exposure. Only a number of contracts which you can't easily put a value to. Without telling us how many chips are out on the casino floor we can't tell if that's a decent amount.

Imagine if Deutsch bank or similar ceased operations tomorrow and all the options contracts they sold had to go on OCCs books.

OCC requires margin deposits, but the vast majority of funds in deposit are securities which can obviously fluctuate in value.
I can imagine a feedback scenario where a drop in stock prices cause a margin call to the member firms. Those firms then have to cut margin lending, this causes margin call to individual customers who sell.



Agreed. I sometimes enjoy going through the details of "who guarantees x" and "how does y actually clear".

I certainly don't think they're likely to fail, but it is interesting to ask "what would it take?"

Justy opinion...

I'll argue otherwise on the credit risk. OCC is a private company and apparently there is no insurance.

Some of the articles point to the OCC credit rating being similar to that of the US govt but I consider that a pretty disingenuous argument. These are the same credit agencies that were rating sub prime bonds as AAA remember.

Consider a scenario where 12 banks fail next year as a result of the ongoing CRE debacle and there is a 50% flash crash in the market. Is OCC going to be just as well capitalized and is the market going to blindly trust that is the case? Or is the value of BOX going to flash crash at the same time?

Meanwhile you can pretty much trust that you us treasuries will maintain their value... Which is what you want because you can sell them off to go bargain hunting.

Yes BOX would probably recover, presuming OCC isn't holding any large unhedged bets, but I would expect that by the time it does, the flash crash is over and you bargain hunting opportunity is gone.

as Alan Jacobson has said the OCC Fund has only paid out once and it was only 8mm. So an event that takes down the OCC would be a catastrophic financial event that would take out most of the member firms. (I’m not even sure a nuclear event would do that).

the deleveraging would be massive. All assets would be done, except physical assets like bullets, butter, and jewelry.

My understanding is that the derivatives markets (futures, options) might fail if there is a 1-day flash crash of more than ca. 10%, which is about the margin requirement with respect to equity markets beta exposure. A member firm going under for other reasons wouldn't do much, as their deposited margin would satisfy their obligations at OCC.
I'm not sure if the authorities have a plan for a >10% flash crash, and what that plan would be. A trading halt would not do much, just delay the problem, if the underlying root cause (major war, natural catastrophe...) persists.
It's noteworthy that the 1987 Black Monday crash was 22.6%, and there was not even a major war outbreak or major catastrophe on that day.

 

[ajacobson]

A European box - by design isn't impacted by price change. Doesn't make any difference what price action is.
But a $100 call spread and the mirror $100 put spread. It will trade for the interest rate - price isn't relevant to a European box. They trade in the crown at a quotable rate.

 

[newwurldmn]

My understanding is that the derivatives markets (futures, options) might fail if there is a 1-day flash crash of more than ca. 10%, which is about the margin requirement with respect to equity markets beta exposure. A member firm going under for other reasons wouldn't do much, as their deposited margin would satisfy their obligations at OCC.
I'm not sure if the authorities have a plan for a >10% flash crash, and what that plan would be. A trading halt would not do much, just delay the problem, if the underlying root cause (major war, natural catastrophe...) persists.
It's noteworthy that the 1987 Black Monday crash was 22.6%, and there was not even a major war outbreak or major catastrophe on that day.

derivs markets didn’t crash in 1987. Nor in 2008 when we had many close to 10percent moves nor in march 2020 when we had many 10percent moves or in 2015/2016 when we had some big moves nor in 2010 when we had the flash crash.

 

[traderjo]

I am still trying to understand how BOX spread selling ( not the ETF) can be used
- if it is a cash account
- if it is a margin T account