The Securities and Exchange Commission and the US Commodity Futures Trading Commission have announced that the Options Clearing Corporation (OCC) will undertake remedial efforts and pay $20 million in penalties to settle charges that it failed to implement policies to manage certain risks.

According to the SEC’s and CFTC’s respective 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 US’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. The 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,” says 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.”

CFTC chairman Heath Tarbert, adds, “As this case shows, principles-based regulation does not mean lax oversight. 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.

“Here, the SEC sought a resolution that would ensure compliance with the law,” says 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.”

James McDonald, director of the CFTC’s Division of Enforcement, adds, “The CFTC will continue to work closely with our regulatory and enforcement partners to protect the integrity of our markets

Colin Lambert

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