OCC settles with US regulators on risk management failures
05 September 2019 Chicago
Image: Shutterstock
Options Clearing Corporation has agreed to a $20 million fine by US market regulators in relation to failing to manage certain market risks.
The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) has this week found the Chicago-based equity derivatives clearing organisation to have “failed to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security”.
The SEC’s investigation also found that OCC changed policies on core risk management issues without obtaining the required approvals.
As the US’s only registered clearing agency for exchange-listed options contracts on equities, OCC was designated as a systemically important financial market utility (SIFMU) in 2012, thereby making it subject to enhanced regulation and transparency rules related to risk management.
CFTC chairman Heath Tarbert commented: “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 $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.
The SEC confirmed that this week’s enforcement action is the first charging violations of its clearing agency standards adopted in 2012 and in 2016, and the CFTC’s first charging violations of core principles applicable to a derivatives clearing organisation.
In a statement on the settlement, OCC confirmed it has already developed remediation plans to enhance its margin policy, incorporate stress testing and liquidation costs into its clearing fund and margin methodologies, respectively. The plans have been approved by the SEC.
The CFTC noted that the plans will bring OCC into compliance with the core principles and regulations required of clearinghouses.
As part of comprehensive efforts to correct the short-falls, OCC executive chairman Craig Donohue has also reshuffled many of OCC’s senior executives, including handing over the reigns of CEO to John Davidson, while retaining his other role as chair.
Davidson, who joined OCC in 2017 as president and chief operating officer (COO), was approved for the top job by the SEC in February.
Meanwhile, Scot Warren, OCC’s former chief administrative officer, took over as COO in the same month.
The OCC board made further changes to several other senior roles, including head of financial risk management, chief information officer, chief security officer, and heads of control functions.
Moreover, OCC has increased the number of staff responsible for risk management, compliance, legal, and information technology.
Commenting on the settlement, Davidson said: “We take our responsibility to promote the stability and integrity of markets seriously, and we are committed to operating as a resilient clearinghouse and maintaining the highest standards of regulatory compliance throughout our organisation.”
“Our commitment is reflected in the progress we have made as most of the compliance remediation is now complete and any remaining actions are on a path to be completed expeditiously.”
The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) has this week found the Chicago-based equity derivatives clearing organisation to have “failed to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security”.
The SEC’s investigation also found that OCC changed policies on core risk management issues without obtaining the required approvals.
As the US’s only registered clearing agency for exchange-listed options contracts on equities, OCC was designated as a systemically important financial market utility (SIFMU) in 2012, thereby making it subject to enhanced regulation and transparency rules related to risk management.
CFTC chairman Heath Tarbert commented: “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 $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.
The SEC confirmed that this week’s enforcement action is the first charging violations of its clearing agency standards adopted in 2012 and in 2016, and the CFTC’s first charging violations of core principles applicable to a derivatives clearing organisation.
In a statement on the settlement, OCC confirmed it has already developed remediation plans to enhance its margin policy, incorporate stress testing and liquidation costs into its clearing fund and margin methodologies, respectively. The plans have been approved by the SEC.
The CFTC noted that the plans will bring OCC into compliance with the core principles and regulations required of clearinghouses.
As part of comprehensive efforts to correct the short-falls, OCC executive chairman Craig Donohue has also reshuffled many of OCC’s senior executives, including handing over the reigns of CEO to John Davidson, while retaining his other role as chair.
Davidson, who joined OCC in 2017 as president and chief operating officer (COO), was approved for the top job by the SEC in February.
Meanwhile, Scot Warren, OCC’s former chief administrative officer, took over as COO in the same month.
The OCC board made further changes to several other senior roles, including head of financial risk management, chief information officer, chief security officer, and heads of control functions.
Moreover, OCC has increased the number of staff responsible for risk management, compliance, legal, and information technology.
Commenting on the settlement, Davidson said: “We take our responsibility to promote the stability and integrity of markets seriously, and we are committed to operating as a resilient clearinghouse and maintaining the highest standards of regulatory compliance throughout our organisation.”
“Our commitment is reflected in the progress we have made as most of the compliance remediation is now complete and any remaining actions are on a path to be completed expeditiously.”
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