SEC Charges Options Clearing Corporation with Rule Failures
Posted on 02/19/2023
On February 16, 2023, the U.S. Securities and Exchange Commission (SEC) revealed that the Options Clearing Corporation (OCC) will undertake remedial efforts and pay US$ 17 million in penalties to settle charges that it failed to comply with its SEC-approved Stress Testing and Clearing Fund Methodology rule during certain times between October 2019 and May 2021. The OCC is the sole registered clearing agency for exchange listed option contracts in the United States.
According to the SEC’s order, Chicago-based OCC’s failure to implement and comply with its own rule was the result of its failure to properly establish, implement, and enforce written policies and procedures reasonably designed to manage certain operational risks. The SEC’s order further finds that OCC failed to modify its Comprehensive Stress Testing System and did not provide timely notification to the SEC of this failure as required by Regulation SCI. Regulation SCI requires certain entities to take corrective action with respect to systems disruptions, systems compliance issues, and systems intrusions and to notify the Commission of such events. The SEC’s order also finds that OCC failed to comply with its margin methodology, margin policy, and stress testing and clearing fund methodology relating to specific wrong way risk and holiday margin. As a result of deficiencies in certain internal controls, human errors, and oversight failures, OCC’s Clearing Fund was underfunded by between US$ 200 million to US$ 588 million at various times during October 2019 through May 17, 2021.
In addition to the $17 million penalty, OCC has undertaken several remedial measures, including to revise its model validation policies and procedures; enhance its approach to risk data governance; implement changes to elements of its control environment, including processes, procedures, and controls; and conduct appropriate training on the changes.
This is the SEC’s second enforcement action against OCC. In a September 2019 settled action, the SEC charged OCC with failing to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security, and imposed remedial measures and a US$ 15 million penalty.
CFTC
The Commodity Futures Trading Commission issued an order simultaneously filing and settling charges against the OCC. The order finds the respondent failed to establish, implement, maintain and enforce certain policies and procedures reasonably designed to manage the operational risks related to its automated systems in violation of the Commodity Exchange Act (CEA) and related CFTC regulations. Without admitting or denying the CFTC’s findings, OCC agreed to pay a US$ 5 million penalty for violations of the CEA and CFTC regulations and be subject to undertakings relating to remediation.
