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SEC and CFTC fine Options Clearing Corp. $22 million for internal rule violations

Options Clearing Corp. (OCC) agreed to pay $22 million as part of settlements with the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) regarding allegations that the company failed to follow internal risk management procedures.

According to the SEC, the OCC, the world's largest stock derivatives clearing business, failed to properly design, execute, and enforce its written policies and procedures for lowering operating risks. According to the agency's ruling, the OCC failed to comply with its agency-approved stress testing and clearing fund methodology regulation between October 2019 and May 2021.

The order noted that because the corporation did not adapt its comprehensive stress testing system as required, it did not notify the SEC of this failure.

The OCC also failed to follow its margin methodology, margin policy, stress testing, and clearing fund methodology for specific wrong-way risk and holiday margin, according to the SEC.

“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.

The OCC paid a combined penalty of $20 million to the SEC and CFTC in September 2019 and was ordered to perform remediation for "failing to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security," according to the SEC.

“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.

The OCC agreed to pay $17 million to the SEC and $5 million to the CFTC without admitting or denying wrongdoing.

Consequences for compliance: As part of its settlement with the SEC, the OCC agreed to implement the following measures:

  • Revision of model validation policies and procedures;

  • Improvement of risk data governance approach;

  • and Implementation of improvements to parts of its control environment, including processes, procedures, and controls.

According to the SEC, the OCC must also provide training on the modifications.

The CFTC requires the corporation to complete continuing reviews of its risk management structure and governance within one year and to execute the recommendations of an independent compliance auditor obtained in March 2022 within 18 months.

“[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.”


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