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Statement: OCC Reaches Settlement with SEC and CFTC Regarding Error in Implementation of Liquidation Cost Model

Error Self-Reported and Corrected by OCC in 2021

February 16, 2023
Chicago -

OCC has reached settlements with the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) regarding OCC’s error concerning the implementation of its rule on Liquidation Cost Model Enhancements and its Liquidation Cost Charge (“LC Charge”). OCC self-identified and reported the issue to the SEC and CFTC in 2021 and has undertaken remedial efforts to address the underlying issues. In conjunction with additional remediation obligations, OCC agreed to pay a $22 million total penalty to the SEC and CFTC, committing to pay $17 million to the SEC and $5 million to the CFTC.

The SEC and CFTC considered OCC's cooperation and remedial efforts in resolving these matters. The SEC specifically credited OCC with self-reporting the implementation error and sharing the results of an independent review of the error with the SEC staff. As previously disclosed, OCC corrected the implementation error and resized its Clearing Fund in 2021 and has agreed to complete additional remedial efforts pursuant to the terms of the SEC and CFTC settlements.

Notwithstanding the error, at all relevant times, OCC’s Clearing Fund exceeded its self-imposed “Cover Two” standard designed to address the possible concurrent default of its two largest clearing firms.

OCC Chief Executive Officer John Davidson said, "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. We look forward to continuing to work constructively with our regulators as our transformation continues."

OCC Executive Chairman Craig Donohue said, "Our Board of Directors and Management Committee appreciate the ongoing engagement with our regulators to resolve this matter. We identified and reported this issue and have created and completed significant portions of the necessary remediation efforts, ensuring systems are in place to swiftly detect similar issues. As always, we are committed to continuously improving as well as building a strong partnership with our regulators for the benefit of all market participants.”

Donohue added, "We commend our OCC colleagues for their diligence in identifying concerns and working to ensure they are adequately addressed. As a team, we will continue to strive for excellence while fulfilling our commitment to delivering efficient and effective clearance, settlement and risk management services to our participant exchanges, clearing member firms and market participants.”

About OCC

The Options Clearing Corporation (OCC) is the world's largest equity derivatives clearing organization. Founded in 1973, OCC is dedicated to promoting stability and market integrity by delivering clearing and settlement services for options, futures and securities lending transactions. As a Systemically Important Financial Market Utility (SIFMU), OCC operates under the jurisdiction of the U.S. Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission (CFTC), and the Board of Governors of the Federal Reserve System. OCC has more than 100 clearing members and provides central counterparty (CCP) clearing and settlement services to 19 exchanges and trading platforms. More information about OCC is available at www.theocc.com.

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