Options Clearing Corp. will pay a combined $20 million in penalties to the Securities and Exchange Commission and Commodity Futures Trading Commission to settle charges that it failed to implement policies to manage certain risks as required by U.S. laws and SEC and CFTC rules.
In their orders, the SEC and CFTC say the OCC failed to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security. The SEC also alleged the OCC changed policies on core risk management issues without obtaining required approval.
As part of the settlement, announced Wednesday, the OCC agreed to pay $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 OCC neither admitted nor denied the regulators’ findings.
“We take our responsibility to promote the stability and integrity of markets seriously, and we are committed to operating as a resilient clearinghouse and maintaining the highest standards of regulatory compliance throughout our organization,” said OCC Chief Executive Officer John Davidson in a statement. “Our commitment is reflected in the progress we have made, as most of the compliance remediation is now complete and any remaining actions are on a path to be completed expeditiously. We look forward to continuing to work constructively with our regulators as our transformation continues.”
The enforcement action is the first charging violations brought by the SEC under its clearing agency standards adopted in 2012 and in 2016. It also marks the first charging actions for the CFTC under 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 in a statement. “[This] 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,” stated 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.”
As part of its cooperation with the regulators, the OCC replaced a handful of its senior executives, including the hiring of a new chief executive officer, chief operating officer, head of financial risk management, chief information officer, chief security officer, and heads of control functions. Other remediation efforts include the enhancing of the OCC’s margin policy and incorporation of stress testing and liquidation costs into its clearing fund and margin methodologies.