The Clearing Corporation will pay $20 million to the US as penalties, following a Securities and Exchange Commission investigation finding the company 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 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 U.S.’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. Today’s 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 $20 million in penalties ($15 million under the SEC’s order and $5 million under the CFTC’s order) and hire an independent compliance auditor to assess its remediation of the violations and subsequent compliance efforts. The respective orders detail the charges and undertakings, as well as cooperation and remedial efforts that the SEC and CFTC considered in accepting OCC’s offer of settlement.
“Here, the SEC sought a resolution that would ensure compliance with the law,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “OCC has begun its remediation efforts and has agreed to undertakings designed to resolve the identified deficiencies and fulfill its regulatory obligations.”
“The CFTC will continue to work closely with our regulatory and enforcement partners to protect the integrity of our markets and to ensure that risks—which can stretch across multiple regulators’ markets—are appropriately addressed,” added James McDonald, Director of the CFTC’s Division of Enforcement. “I want to thank the SEC for their collaboration on this important matter.”
The SEC’s investigation was conducted by Scott B. Tandy, Sarah E. Hancur, and Charles J. Kerstetter of the Chicago Regional Office and supervised by the office’s Regional Director, Joel Levin, and Associate Regional Director, Kathryn A. Pyszka. The Chicago Regional Office, with the assistance of the Office of Clearance and Settlement’s National Examination Program, conducted the examinations that led to the investigation. The examination team included Matthew McGarvey, Allison Fakhoury, Paula Sherman, Anna Mieszaniec, Amy Walstad, Noelito Santos, Jeanine O’Meara, Donald Bernhardt, Karl Nalepa, Angelica Daughaday and Raffaele Maione.
The CFTC’s investigation was conducted by Division of Enforcement staff members Robert Howell, Daniel Burstein, and Scott Williamson of the Chicago Regional Office, with the assistance of the Division of Clearing and Risk.