Chicago-based options clearinghouse hit with $20 million fine

The Options Clearing Corp. is part of the plumbing of the financial markets. While it hasn’t been the source of backups or failures in U.S.-based options trading, its federal regulators have served notice that the plumbing needs repairs.

The Chicago-based OCC has been ordered to pay $20 million to settle charges that it failed to implement policies to limit its financial risks and to ensure reasonable margin requirements from the trading firms that belong to it. The Securities and Exchange Commission and the Commodity Futures Trading Commission published the settlement Wednesday.

It requires the clearinghouse to take specific actions, including hiring an independent auditor within a month. The OCC, which did not admit or deny the allegations, took the unusual step of publicly thanking the regulators, which in turn noted that the clearinghouse has cooperated fully in the probe and changed its senior leadership.

The OCC’s executive chairman, Craig Donohue, thanked the regulators “for their support and cooperation in resolving these matters. For the past five years, OCC has been engaged in a comprehensive transformation effort to strengthen our financial resiliency, our people, our compliance processes, and our technology to meet new and heightened regulatory obligations and to better serve market participants and the investing public.’’

Provided photo

Donohue added, “We also will continue to strive for excellence as we fulfill our mission to serve as the foundation for secure markets.”

The settlement included $15 million to be paid to the SEC, which oversees stock trading, and $5 million to the CFTC, which handles the futures markets. The agencies said failures at the clearinghouse included inadequate security for its information systems and changing certain policies without getting SEC approval.

Under federal law, the OCC is among a handful of “systemically important” parts of the financial markets. Regulators want to ensure it can handle extreme volatility in the markets or the failure of a major trading firm.

SEC Chairman Jay Clayton said the settlement “is intended to ensure that OCC will have appropriate policies and procedures in place to meet its obligations to our financial system.”

At the CFTC, Chairman Heath Tarbert commented in the context of President Donald Trump’s emphasis on reducing regulations. “As this case shows, principles-based regulation does not mean lax oversight,” Tarbert said. “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.”

The OCC has tussled with regulators and even some trading firms over its plans to boost cash reserves. In a statement dated Aug. 20 and posted on the clearinghouse’s website, Donohue and other OCC leaders cited improvements in its financial position, including a $1 billion increase, to $3 billion, in its credit line, and keeping a minimum $3 billion in its clearing fund. Donohue formerly ran the Chicago Mercantile Exchange and became the OCC’s executive chairman in 2014.

“This reduces the risk of a liquidity crisis during periods of extreme market stress and bolsters our resources to meet our daily settlement obligations to our clearing members even in the most challenging market environments,” the statement said.