The Fixed Income Clearing Corporation (FICC) has agreed to pay an $8 million penalty to settle charges filed by the Securities and Exchange Commission (SEC) that it failed to have adequate risk management policies within its Government Securities Division.
FICC acts as the sole registered clearing agency for transactions in U.S. government securities. As such, it substitutes itself for both sides of every transaction that it clears, guaranteeing those transactions and making itself the buyer for every seller and the seller for every buyer. Given its role, a failure to manage risk could result in significant costs not only to FICC and its participants but also to other market participants.
The SECʻs investigation found that between April 2017 and November 2018, FICC failed to comply with rules requiring it to have policies and procedures for holding sufficient qualifying liquid resources to meet the financial obligations created by the potential failure of a large participant.
According to the SECʻs order, FICC did not conduct the required analysis of the reliability of its liquidity arrangements, nor did it conduct the necessary due diligence of its liquidity providers. Specifically, FICC failed to correct two erroneous assumptions that inflated its coverage even though both errors had been flagged as deficiencies by the SEC’s Division of Examinations.
“A failure by FICC to have proper risk management policies and procedures in place could adversely impact the broader U.S. financial system,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said. “Today’s order not only ensures that FICC maintains appropriate policies and procedures, but also that it is at all times prepared to fulfill its obligations to the financial markets.”
FICC, a subsidiary of The Depository Trust & Clearing Corporation, violated the Covered Clearing Agency Standards, according to the SEC. Without admitting or denying the SEC’s findings, FICC agreed to a censure and the $8 million penalty. It also agrees to cease and desist from future violations of the charged provisions and retain an independent compliance consultant to assess its compliance efforts.
The investigation was conducted by Eric Kirsch and Wendy Tepperman of the New York Regional Office and was supervised by Sanjay Wadhwa and Richard Best.