Options Clearing Corp. (OCC) agreed to pay $22 million as part of settlements with the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) addressing charges the company failed to comply with internal rules to manage risks.
The OCC, the world’s largest equity derivatives clearing corporation, didn’t properly create, implement, and enforce its written policies and procedures related to reducing operational risks, the SEC alleged Thursday. The OCC didn’t comply with its agency-approved stress testing and clearing fund methodology rule between October 2019 and May 2021, per the agency’s order.
When the company didn’t modify its comprehensive stress testing system, as required, it didn’t notify the SEC of this failure, the order stated.
The OCC also didn’t comply with its margin methodology, margin policy, and stress testing and clearing fund methodology related to specific wrong-way risk and holiday margin, the SEC said.
“As a result of deficiencies in certain internal controls, human errors, and oversight failures, OCC’s clearing fund was underfunded by between $200 million to $588 million at various times during October 2019 through May 17, 2021,” the CFTC said in its press release Thursday.
In September 2019, the OCC paid a combined penalty of $20 million to the SEC and CFTC and was ordered to undertake remediations for “failing to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security,” the SEC said.
“The CFTC notes its concern that OCC’s failure to implement certain of its policies and procedures … occurred after the 2019 order,” the agency said.
Without admitting or denying wrongdoing, the OCC agreed to pay $17 million to the SEC and $5 million to the CFTC.
Compliance ramifications: As part of its settlement with the SEC, the OCC agreed to take the following measures:
- Revise its model validation policies and procedures;
- Enhance its approach to risk data governance; and
- Implement changes to aspects of its control environment, including processes, procedures, and controls.
The OCC must also conduct trainings on the updates, the SEC said.
The CFTC required the company complete in one year ongoing reviews of its risk management framework and governance and implement within 18 months the recommendations of an independent compliance auditor received in March 2022.
“[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,” said Gretchen Lowe, the CFTC’s acting director of enforcement, in the agency’s release.
The OCC self-identified and reported the issue to the SEC and CFTC in 2021, the company said in a press release.
“Most of the work to remediate this issue is complete, and any remaining actions are on a path to be completed within the next year,” said OCC Chief Executive John Davidson. “We look forward to continuing to work constructively with our regulators as our transformation continues.”