The Options Clearing Corporation ("OCC") settled SEC and CFTC charges alleging failures to address risk management related compliance requirements.
According to the SEC, OCC failed to comply with SEA Rule 17Ad-22(b), (d) and (e) ("Standards for Clearing Agencies") and SEA Regulation Systems, Compliance, and Integrity ("Reg. SCI"), despite "advance warnings and ample time to comply." Specifically, the SEC alleged, among other things, that the OCC failed to:
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review its risk-based margin models on a monthly basis;
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match margin levels with the appropriate risks and facets of each relevant product cleared by OCC;
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"measure, monitor and manage its credit exposure and liquidity risk";
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"maintain a comprehensive risk management framework";
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ensure that its information systems were adequately protected; and
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implement a "well-founded, clear, transparent and enforceable legal framework for every aspect of its activities."
According to the CFTC, OCC failed to:
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comply with derivatives clearing organization Core Principles under CEA Section 5b and CFTC Rules Part 39;
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regularly review its risk-based margin models;
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match margin levels with the appropriate risks and facets of each relevant product cleared by OCC;
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fully stress-test its credit exposure on a monthly basis;
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"maintain a comprehensive risk management framework"; and
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ensure that its information systems were adequately protected.
Without admitting to or denying the allegations, OCC agreed to pay $15 million to the SEC and $5 million to the CFTC. Additionally, OCC agreed to hire an independent compliance auditor to review and assess its remedial and subsequent compliance efforts.
Commentary
Nihal Patel
Combined, the two enforcement actions indicate a pattern of risk management deficiencies. In light of the allegations, the sections from the actions on cooperation are notable. The SEC action highlights extensive remedial measures undertaken by the OCC, including the replacement of "many of its senior executives," increased expenditure and headcount for risk management, compliance, legal and IT, and the submission of many significant plans and regulatory filings.
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