The Options Clearing Corporation (OCC) has settled with both the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) on an error it made implementing a certain rule.
Specifically, the error is concerning the implementation of its rule on Liquidation Cost Model Enhancements and its Liquidation Cost Charge (LC Charge).
The OCC, the world’s largest equity derivatives clearing organization, self-identified and reported the issue to the SEC and CFTC in 2021 and has since undertaken remedial efforts to address the underlying issues.
In addition to the remediation obligations, OCC agreed to pay a $22 million total penalty to the SEC and CFTC – which breaks down to $17 million to the SEC and $5 million to the CFTC.
“We take seriously OCC’s role in providing resiliency, stability, and integrity to financial markets and the broader economy, and we are committed to operating as an industry utility that seeks to be efficient and effective in the delivery of our services. Our commitment is reflected in the tremendous progress we have made over the past several years to enhance our financial, operational, and technological resiliency to fulfill the expectations of market participants and regulators. Most of the work to remediate this issue is complete, and any remaining actions are on a path to be completed within the next year,” OCC CEO John Davidson said.
As a result, the OCC corrected the implementation error and resized its Clearing Fund in 2021. It has also agreed to complete additional remedial efforts pursuant to the terms of the SEC and CFTC settlements.
“OCC is the sole registered clearing agency for exchange-listed option contracts in the United States,” SEC Chair Gary Gensler said. “Today’s action by the SEC reinforces the importance of OCC’s compliance with risk management policies and procedures designed to meet its obligations to our financial system.”
OCC officials said the SEC credited it with self-reporting the implementation error and sharing the results of an independent review of the error with the SEC staff.
“DCOs (derivatives clearing organizations) play a critical role in U.S. futures and options markets, and the CFTC requires full compliance with the DCO Core Principles,” CFTC Acting Director of Enforcement Gretchen Lowe said. “Today’s action shows that to fully comply with the Principles, DCOs must not only establish policies and procedures designed to manage their risks, but also implement, maintain, and enforce those policies and procedures.”