SEC reaches $8 million settlement with clearing agency for alleged securities violations

On October 29, 2021, the Securities and Exchange Commission announced that it reached an $8 million settlement with the Fixed Income Clearing Corporation (FICC), an SEC-registered clearing agency, to resolve charges related to risk management policies within its Government Securities Division. Because the FICC was designated as a systemically important financial market utility (SIFMU) pursuant to Section 804(a) of the Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it is an essential part of the US securities market’s infrastructure serving as the sole central counterparty to process securities trades issued by the federal government.  Because of its SIFMU designation, the SEC is required to examine the FICC annually because a failure or disruption in its processes and procedures could result in significant costs to the FICC, its participants, and the broader US financial system. 

The SEC alleged that between 2017 and 2018 the FICC failed to establish and maintain written policies and procedures designed to monitor the company’s liquidity risks and ensure that the company held sufficient qualifying liquid resources to cover a wide range of foreseeable scenarios, including a large aggregate payment obligation in extreme but plausible market conditions.  During this time frame, the SEC also alleged that the FICC failed to conduct adequate due diligence of its liquidity providers.  In addition, between 2015 and 2016 the SEC claimed the FICC failed to establish and maintain written policies and procedures to review its margin requirements, including risk-based models and parameters used to set margin requirements, to ensure that it had sufficient resources in case of a clearing member default – a review that the FICC should have conducted on at least a monthly basis.  According to the Order, in 2014 the SEC also identified two alleged errors in the FICC’s backtesting methods that overstated its coverage metrics – errors that the FICC allegedly failed to correct until 2017.

According to the order, the FICC was charged with violating the Covered Clearing Agency Standards promulgated by the SEC under the Securities Exchange Act of 1934. The order also provides that, without admitting or deny these findings, the FICC agreed to be censured, pay an $8 million civil money penalty, and cease-and desist from further securities violations. The FICC also agreed to review its policies and procedures and, within a year, inform the SEC of any necessary proposed rule changes it will make in order to comply with the Exchange Act, including the establishment of a Regulatory Committee or revision of its Audit Committee charter in order to monitor its progress.  Within one year, the FICC also agreed to retain an independent compliance consultant that would manage the implementation of any program enhancements and identify additional areas of improvement if necessary.

SEC Press Release | SEC Order

 
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