The Options Clearing Corporation (OCC) has agreed to take corrective action and pay $17 million in penalties to settle charges brought by the Securities and Exchange Commission that it failed between October 2019 and May 2021 to follow the SEC-approved stress testing and clearing fund methodology rule.
Options Clearing Corporation rule violations
The SEC’s ruling states that the OCC’s failure to adopt, implement, and enforce written policies and procedures reasonably designed to manage certain operational risks led to its inability to execute and comply with its own regulation. OCC did not update its comprehensive stress testing system and did not give the SEC timely notice of this failure, as required by Regulation SCI, according to the SEC’s ruling.
Certain entities are obligated to address system outages, compliance issues, and intrusions and report them to the Commission in accordance with Regulation SCI. According to the SEC’s decision, OCC also violated its margin methodology, margin policy, stress testing, and clearing fund methodology with regard to certain types of holiday risk and holiday margin.
Chairman Gary Gensler stated, “In the United States, the OCC is the only registered clearing agency for exchange-listed options contracts.” Compliance with risk management policies and procedures established by the OCC to meet its responsibilities to our financial system has been highlighted by today’s action by the Securities and Exchange Commission.
The SEC’s Director of Enforcement, Gurbir S. Grewal, stated that “OCC plays a critical role in our financial markets and the fact that they violated the very rules designed to protect investors is deeply troubling.” It ensures the stability and efficiency of those markets are, in a word, troubling.” According to the SEC, “the order includes a substantial penalty and imposes important undertakings while recognizing OCC’s steps to correct the situation and a promise to work toward preventing similar incidents in the future.
OCC has taken several corrective actions in addition to paying the $17 million fine, including updating its model validation policies and procedures, improving its approach to risk data governance, modifying elements of its control environment, including processes, procedures, and controls, and providing adequate training on the new policies and procedures.
The SEC has now taken a second step to enforce the law against OCC. The SEC accused the OCC of not having adequate financial risk management, operational requirements, or information systems security, and in a settled action reached in September 2019, the Securities and Exchange Commission required them to take corrective action and pay a $15 million fine.
Kathryn A. Pyszka and Daniel Gregus oversaw the investigation, which Richard G. Stoltz and Charles J. Kerstetter of the SEC’s Chicago Regional Office carried out. The SEC greatly appreciates the CFTC’s involvement.
