Tuesday, February 21, 2023

OCC agrees to pay a total of $22 million in SEC, CFTC settlements

By Suzanne Cosgrove

The Options Clearing Corporation (OCC) has agreed to pay $22 million in penalties, $17 million to settle SEC charges that it failed to comply with its SEC-approved Stress Testing and Clearing Fund Methodology rule and another $5 million in a settlement with the CFTC for parallel offenses made between 2019 and 2021 (In the Matter of the Options Clearing Corporation Respondent, Release No. 34-96945, February 16, 2023; In the Matter of: The Options Clearing Corporation, CFTC Docket No. 23-06, February 16, 2023).

Gensler comments. "OCC is the sole registered clearing agency for exchange listed option contracts in the United States," said Chairman Gary Gensler in a statement released Thursday. "Today’s action by the SEC reinforces the importance of OCC’s compliance with risk management policies and procedures designed to meet its obligations to our financial system."

"OCC plays a critical role in our financial markets, and the fact that they violated the very rules designed to ensure the stability and efficiency of those markets is, in a word, troubling," said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

The Chicago-based OCC was designated a systemically important financial market utility in 2012 under the Dodd-Frank Act. In its filing, the SEC noted disruptions in OCC operations, or its failure to manage risk, could result in costs to not only OCC and its members, but also to the broader U.S. financial ecosystem.

CFTC weighs in. In a separate release, CFTC Acting Director of Enforcement Gretchen Lowe said the Commission’s action showed derivatives clearing organizations “must not only establish policies and procedures designed to manage their risks, but also implement, maintain, and enforce those policies and procedures.”

The orders announced Thursday were the second ones for OCC in recent years. Both the SEC and the CFTC initiated actions against the derivatives clearing organization in September 2019 for violations related to risk management procedures. The SEC imposed a $15 million penalty in its settled action that year.

SEC and Reg SCI. In this week’s order, the SEC listed about a half-dozen violations related to the management of operational risk, including failure to enforce written policies and procedures, failure to comply with its margin methodology and policy, failure to modify its Comprehensive Stress Testing System and neglecting to provide timely notification to the SEC of these failures as required by Regulation SCI.

Regulation SCI (Regulation Systems, Compliance and Integrity) requires self-regulatory organizations like registered clearing agencies to take corrective action in the case of systems disruptions, systems compliance issues and systems intrusions--and to notify the Commission if any of those events take place.

OCC’s response. The clearing corporation did not admit or deny the regulators’ findings in its settlements. However, in a statement, OCC indicated it resized its Clearing Fund in 2021 and corrected implementation errors. OCC also agreed to complete additional remedial efforts according to the terms of the SEC and CFTC agreements.

The releases are Nos. 34-96945 (SEC) and 23-06 (CFTC).