Frankly, I'm angry -- angered -- by this SEC Release: SEC Charges Options Clearing Corporation with Rule Failures (SEC Release / February 16, 2023)
To avoid any suggestion that I have misstated or improperly summarized the content of the SEC Release, here it is in full:
FOR IMMEDIATE RELEASE
Washington D.C., Feb. 16, 2023 —
The Securities and Exchange Commission today announced that The Options Clearing Corporation (OCC) will undertake remedial efforts and pay $17 million in penalties to settle charges that it failed to comply with its SEC-approved Stress Testing and Clearing Fund Methodology rule during certain times between October 2019 and May 2021.
According to the SEC’s order, Chicago-based OCC’s failure to implement and comply with its own rule was the result of its failure to properly establish, implement, and enforce written policies and procedures reasonably designed to manage certain operational risks. The SEC’s order further finds that OCC failed to modify its Comprehensive Stress Testing System and did not provide timely notification to the SEC of this failure as required by Regulation SCI. Regulation SCI requires certain entities to take corrective action with respect to systems disruptions, systems compliance issues, and systems intrusions and to notify the Commission of such events. The SEC’s order also finds that OCC failed to comply with its margin methodology, margin policy, and stress testing and clearing fund methodology relating to specific wrong way risk and holiday margin.
"OCC is the sole registered clearing agency for exchange listed option contracts in the United States," said Chair Gary Gensler. "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 plays a critical role in our financial markets, and the fact that they violated the very rules designed to ensure the stability and efficiency of those markets is, in a word, troubling," said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. "The SEC’s order includes a substantial penalty and imposes important undertakings while recognizing the OCC’s remedial efforts and commitment to both redressing these violations and preventing future ones."
In addition to the $17 million penalty, OCC has undertaken several remedial measures, including to revise its model validation policies and procedures; enhance its approach to risk data governance; implement changes to elements of its control environment, including processes, procedures, and controls; and conduct appropriate training on the changes.
This is the SEC’s second enforcement action against OCC. In a September 2019 settled action, the SEC charged OCC with failing to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security, and imposed remedial measures and a $15 million penalty.
The SEC’s investigation was conducted by Richard G. Stoltz and Charles J. Kerstetter of the Chicago Regional Office and supervised by Kathryn A. Pyszka and Daniel Gregus. The SEC appreciates the assistance of the Commodity Futures Trading Commission.
Bill Singer's Comment
As the SEC Release would have you believe, the federal regulator is some tough cop walking a very vigilant Wall Street beat. As the SEC spins it, OCC is going to pay $17 million to settle charges. As SEC Chair Gensler says, the SEC has reinforced the importance of OCC's compliance with risk management. As SEC Enforcement Director Grewal says, OCC's conduct is troubling.
Despite all the tough talk and flashing dollar signs, the SEC Release manages to work in a lot of commentary about OCC's remedial efforts. Remedial efforts? Like what the hell happened with all the remedial efforts in the 2019 SEC settlement with OCC involving similar allegations and a $15 million penalty? Talk about getting two bites at the same regulatory apple. Talk about disparate regulatory treatment: As if a smaller company or a mere associated person would ever get such a second chance!
Consider the title of the 2019 SEC Press Release touting its 2019 action against OCC: "SEC and CFTC Charge Options Clearing Corp. With Failing to Establish and Maintain Adequate Risk Management Policies / OCC to Pay Combined $20 Million Penalty" (SEC Press Release / September 4, 2019) at https://www.sec.gov/news/press-release/2019-171
The 2019 SEC Release mirrors much of the 2023 SEC Release. There is a noteworthy difference between the 2019 and 2023 SEC Releases. In the 2019 SEC Release, the federal regulator discloses this to the public [Ed: highlighting added]:
Without admitting or denying the SEC’s and CFTC’s findings, OCC agreed to pay a combined $20 million in penalties ($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 respective orders detail the charges and undertakings, as well as cooperation and remedial efforts that the SEC and CFTC considered in accepting OCC’s offer of settlement.
No sooner did the SEC slam OCC with a $15 million penalty in September 2019, then the company apparently picked up where it left off with its dubious risk management practices. The misconduct at issue in the 2023 SEC Order took place "during certain times between October 2019 and May 2021." This is now February 2023, as in some 3-plus years since the cited OCC misconduct began. Given that the SEC was on notice of OCC's shortcomings via the 2019 settlement, the federal regulator failed to maintain its oversight of OCC, and all the more so when you reference the findings in the 2023 SEC Order.
Oddly, infuriatingly, the 2023 SEC Release fails to inform the public that OCC entered into the settlement of the SEC's Order "without admitting or denying" the findings. I read and re-read the 2023 SEC Release several times to confirm that omission. I then went to the source 2023 SEC Order at https://www.sec.gov/litigation/admin/2023/34-96945.pdf and noted that this was how that document begins in pertinent part [Ed: highlighting added]:
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 19(h) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against The Options Clearing Corporation (“OCC” or “Respondent”).
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 19(h) and 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below.
at Page 1 of the SEC Order Instituting Administrative and Cease-And-Desist Proceedings / '34 Act Rel. No. 96945 / Admin. Proc. File No, 3-21304 / February 16, 2023.
How absurd and ridiculous! The 2023 SEC Order clearly discloses that OCC refused to admit or deny the federal regulator's findings. All of which makes the 2023 SEC Release's failure to similarly disclose OCC's refusal to admit/deny both laughable and troubling. In contrast to the SEC's inartful and transparent attempt to hide OCC's refusal to admit or deny the findings of fact in the SEC's Order, consider this fully transparent and accurate disclosure in CFTC Orders The Options Clearing Corporation to Pay a $5 Million Penalty for Violations of Core Principles and Regulations Related to Operational Risk Management / Second CFTC Action for Core Principle Violations (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8661-23 [Ed: highlighting added]:
The Commodity Futures Trading Commission today issued an order simultaneously filing and settling charges against The Options Clearing Corporation (OCC), a Chicago-based CFTC-registered derivatives clearing organization (DCO). The order finds the respondent failed to establish, implement, maintain and enforce certain policies and procedures reasonably designed to manage the operational risks related to its automated systems in violation of the Commodity Exchange Act (CEA) and related CFTC regulations.
Without admitting or denying the CFTC’s findings, OCC agreed to pay a $5 million penalty for violations of the CEA and CFTC regulations and be subject to undertakings relating to remediation.. . .
In 2023, OCC settled with both the SEC and CFTC without admitting or denying the findings. That important fact made its way into the CFTC's 2023 Press Release but not the SEC's 2023 Press Release -- and keep in mind that this very disclaimer is tantamount to boiler-plate for virtually all SEC Releases. That very same admonition is in the 2019 SEC Release. Was the SEC's omission inadvertent or part of the federal regulator's marketing effort to give the appearance of regulation when the substance is so lacking? Frankly, it is troubling and warrants an investigation.
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