SEC. CFTC Settle With OCC, Imposing $20 Million in Penalties

The SEC and the CFTC resolved enforcement actions against the Options Clearly Corporation, imposing $20 million in penalties for regulatory failures. This is the first such actions. It serves to highlight the key financial position of the OCC in the U.S. regulatory system. In the Matter of the Options Clearing Corporation, Adm. Proc. File No. 3-19416 (September 4, 2019); In the Matter of The Options Clearing Corporation, CFTC Docket No. 19-19 (September 4, 2019).

The Options Clearing Corporation is the only U.S. clearing agency for exchange-listed option contracts on equities. As such in 2012 the Chicago based organization was designated as a systematically important financial market utility or SIFMU under the Dodd-Frank Act. The designation carries enhanced regulation. Failures by the OCC to properly manage risk might cause harm not just to the organization but also to its members, other markets and the broader U.S. financial system.

The self-regulatory organization is subject to four groups of regulations. The first, enacted under the Exchange Act in 2012, were designed to strengthen the substantive regulation of clearing agencies. See, e.g. Exchange Act Rules 17Ad-22(b) and (d). The second, enacted in late 2014, focused on strengthening of technology infrastructure of the U.S. Securities markets. See, e.g. Reg SCI, under the Exchange Act. About two years later Exchange Act Rule 17Ad-22(e) established enhanced standards for registered agencies that meet the definition of a covered clearing agency – one that essentially imposes higher minimum risk standards. Finally, under Section 19(b) of the Exchange Act, and the related rules, all self-regulatory organizations have the important function of keeping the public and a clearing agency’s members informed and involved with its operations.

Examinations by the SEC established even before the OCC was required to comply with certain of the rules cited above, that its policies and procedures, if not corrected before the required compliance dates, might result in violations of certain rules. Nevertheless, the OCC failed to establish and implement the required polices and procedures. Those relate to the following key points:

Review monthly risk-based margin models: The OCC did not implement, maintain and enforce policies and procedures designed to review risk-based margin models on a monthly basis.

Particular product risks: The OCC did not adopt and implement policies and procedures commensurate with the risks and particular attributes of each relevant product cleared by the regulator.

Credit exposure: The organization did not establish and implement policies and procedures designed to cover its credit exposure. Essentially, the applicable rules require the OCC to have written policies and procedures to maintain “additional financial resources at the minimum to enable it to cover a wide range of foreseeable stress scenarios,” under Exchange Act Rules 1Ad-22(e)(4)(ii).

Sufficient liquid resources: The self- regulatory organization also failed to establish and implement policies and procedures regarding the maintenance of adequate liquid resources.

Comprehensive risk framework: The OCC failed to establish, implement and maintain policies and procedures to maintain a comprehensive risk management framework.

Information systems: The regulator failed to establish, maintain and enforce policies and procedures designed to protect the security of certain OCC information systems.

The SEC’s Order concluded that the OCC violated Exchange Act Section 17(A)(d)(1) and a series of related rules.

In resolving the proceedings, the SEC considered the cooperation and remedial efforts of the OCC. Those included the creation of an Ad Hoc Regulatory Oversight Working Group, the replacement of many senior executives and the development of a remediation plan. The organization also agreed to the implementation of a series of undertakings, including the retention of an independent compliance auditor.

The OCC consented to the entry of a cease and desist order based on the section and rules cited and to a censure. The organization will also pay a penalty of $15 million. The settlement with the CFTC is on similar terms and included a $5 million penalty.

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