FICC Settles SEC Charges For Liquidity Policy And Risk Management Failures – Corporate/Commercial Law

United States: FICC settles SEC fees for liquidity policy and risk management failures

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Fixed Income Clearing Corporation installed The SEC charges for (i) having inadequate procedures for determining whether the clearinghouse held “sufficient qualified liquid resources” and (ii) failing to review at least monthly the “models and parameters of margin based on the risk “. The FICC is designated by the Financial Stability Oversight Council as a systemically important financial market utility in accordance with the Section 804 (a) (“Systemically Important Designation”) under Title VIII of Dodd-Frank.

In the Order, the SEC found that the FICC (i) did not have procedures in place reasonably designed to hold sufficient qualifying liquid resources and (ii) did not perform due diligence on the relevant liquidity-providing counterparties. Additionally, the SEC found that the clearinghouse used inaccurate backtests to examine its models and parameters based on margin risk because the backtests overestimated the clearinghouse hedging metrics. Additionally, when the SEC Division of Examinations reported these errors in the backtests, and later when the FICC itself identified the errors, the FICC did not correct its methodology and continued to use the incorrect models.

Following its findings, the SEC determined that the FICC had violated Article 17A (d) (1) (“National Securities Clearing and Settlement System – Activities of Clearing Agencies and Transfer Agents; Enforcement by Appropriate Regulators”) of the Exchange Act and SEA Rules 17Ad-22 (b) (2) and 17Ad-22(e) (7) (ii) and (iv) (“Standards for Clearing Agencies”).

To settle the charges, the FICC agreed to (i) cease and desist from any future violations, (ii) censorship, (iii) a civil fine of $ 8 million and (iv) various pledges, including hiring an independent compliance consultant to test the corrected clearing house policies.

Primary sources

  1. SEC Press Release: SEC Accuses Fixed Income Clearing Corp. have inadequate risk management policies
  2. SEC Order: Fixed Income Clearing Corporation

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