SEC Charges FICC for Inadequate Risk Management10.29.2021
The Securities and Exchange Commission announced that Fixed Income Clearing Corporation (FICC), a clearing agency, has agreed to pay an $8 million penalty to settle SEC charges that it failed to have adequate risk management policies within its Government Securities Division.
— Joe Saluzzi (@JoeSaluzzi) October 29, 2021
According to the SEC’s order, FICC acts as the sole registered clearing agency for transactions in U.S. government securities. FICC substitutes itself for both sides of every transaction that it clears, guaranteeing those transactions and making itself the buyer for every seller and the seller for every buyer. A failure by FICC to manage risk could result in significant costs not only to FICC and its participants, but also to other market participants or the broader U.S. financial system.
The SEC’s order finds that between April 2017 and November 2018, FICC failed to comply with rules requiring it to have reasonably designed policies and procedures for holding sufficient qualifying liquid resources to meet the financial obligations created by the potential failure of a large participant. According to the order, FICC did not conduct required analysis of the reliability of its liquidity arrangements, and it failed to conduct required due diligence of its liquidity providers. The SEC’s order also finds that in 2015 and 2016, FICC failed to adhere to rules requiring it to have reasonably designed policies and procedures for maintaining and periodically reviewing its margin coverage. According to the order, FICC failed to correct two erroneous assumptions that inflated its coverage even though both errors had been flagged as deficiencies by the SEC’s Division of Examinations.
“A failure by FICC to have proper risk management policies and procedures in place could adversely impact the broader U.S. financial system,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Today’s order not only ensures that FICC maintains appropriate policies and procedures, but also that it is at all times prepared to fulfill its obligations to the financial markets.”
The SEC’s order finds that FICC, a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, violated the Covered Clearing Agency Standards promulgated by the SEC under the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, FICC agreed to a censure and the $8 million penalty, as well as to cease and desist from future violations of the charged provisions. FICC also agreed to retain an independent compliance consultant to assess its compliance efforts.
The SEC’s investigation was conducted by Eric C. Kirsch and Wendy B. Tepperman of the New York Regional Office and was supervised by Sanjay Wadhwa and Richard R. Best. The examinations that led to the investigation were conducted by Lourdes Caballes, Anthony Young, Neil Fazel, Anya Veksler, and Ji Li of the New York Regional Office, Paula Sherman of the Washington D.C. headquarters, and Allison Fakhoury, Raffaele Maione, and Karl Nalepa of the Chicago Regional Office. The exams were supervised by Daniel R. Gregus of the Chicago Regional Office.
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