The Securities and Exchange Commission and the Commodity Futures Trading Commission have announced that the Options Clearing Corporation (OCC) will undertake remedial efforts and pay $20m in penalties to settle charges that it failed to implement policies to manage certain risks as required by U.S. laws and SEC and CFTC rules.
According to the SEC’s and CFTC’s respective orders, Chicago-based OCC failed to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security. The SEC’s order also found that OCC changed policies on core risk management issues without obtaining required SEC approval.
As the US’s sole registered clearing agency for exchange-listed option contracts on equities, OCC was designated in 2012 as a systemically important financial market utility, or SIFMU. That designation makes OCC subject to enhanced regulation and transparency regarding its risk management systems because disruption to OCC’s operations might be costly not only for itself and its members, but other market participants or the broader financial system. This enforcement action is the SEC’s first charging violations of SEC clearing agency standards adopted in 2012 and in 2016, and the CFTC’s first charging violations of Core Principles applicable to Derivatives Clearing Organizations.
“As a clearing agency, OCC performs a range of services that are critical to the effective operation of the securities markets,” said SEC Chairman Jay Clayton. “Today’s resolution is intended to ensure that OCC will have appropriate policies and procedures in place to meet its obligations to our financial system.”
“As this case shows, principles-based regulation does not mean lax oversight,” said CFTC Chairman Heath P. Tarbert. “While clearing agencies have some discretion in crafting their risk management policies and procedures, those policies and procedures must be reasonable and take into consideration relevant risks.”
Without admitting or denying the SEC’s and CFTC’s findings, OCC agreed to pay a combined $20m in penalties ($15m under the SEC’s order and $5m under the CFTC’s order) and hire an independent compliance auditor to assess its remediation of the violations and subsequent compliance efforts.