Clearing Agency Sanctioned for Risk Management Failures

The Options Clearing Corporation ("OCC") settled SEC and CFTC charges for failing to fully implement its own rule change relating to the calculation of costs in the event of a need to close out the positions of a defaulting clearing member.

According to the SEC's Order, OCC failed to implement a rule change that added a risk-based liquidation charge to adjust the value of a clearing member's positions. The SEC found that OCC failed to incorporate the rule change into its procedures until several years after the adoption of the rule due to insufficient operational risk management controls. The SEC said the delay in implementation resulted in the underfunding of OCC's Clearing Fund.

The CFTC Order was similar to that of the SEC, stating that the misconduct was in violation of its core principles for the operation of derivatives clearing organizations.

The SEC found that OCC violated SEA Section 17A ("National system for clearance and settlement of securities transactions"), SEA Section 19 ("Registration, responsibilities, and oversight of self-regulatory organizations"), SEA Rule 17Ad-22 ("Standards for clearing agencies") and SEC Regulation SCI Rule 242.1002 ("Obligations related to SCI events"). OCC was also found to have violated CEA Section 5b ("Derivatives clearing organizations"), CFTC Rule 39.17 ("Rule enforcement") and CFTC Rule 39.18 ("System safeguards").

To settle the charges, OCC agreed to (i) accept a censure, (ii) cease and desist, (iii) pay civil monetary penalties totaling $22 million ($17 million will be paid to the SEC and $5 million to the CFTC), and (iv) initiate undertakings to improve its compliance with SEC and CFTC regulations. In determining its penalties, the SEC and CFTC recognized OCC's self-remediation efforts and cooperation throughout the investigation.