Fixed Income Clearing Corporation settled SEC charges for (i) having inadequate procedures to determine whether the clearing corporation held "sufficient qualifying liquid resources" and (ii) failing to review on at least a monthly basis "risk-based margin models and parameters." FICC is designated by the Financial Stability Oversight Council as a systemically important financial market utility pursuant to Section 804(a) ("Designation of systemic importance") under Title VIII of Dodd-Frank.
In the Order, the SEC found that FICC (i) did not have procedures in place reasonably designed to hold sufficient qualifying liquid resources and (ii) did not conduct due diligence of relevant liquidity provider counterparties. In addition, the SEC found that the clearing agency used inaccurate backtests to review its margin risk-based models and parameters, as the backtests overstated the clearing agency's coverage metrics. Further, when the SEC Division of Examinations flagged these errors in the backtests, and later when FICC itself identified the errors, FICC did not correct its methodology and continued to use the incorrect models.
As a result of its findings, the SEC determined that FICC violated Section 17A(d)(1) ("National system for clearance and settlement of securities transactions - Activities of clearing agencies and transfer agents; enforcement by appropriate regulatory agencies") 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 future violations, (ii) a censure, (iii) an $8 million civil money penalty and (iv) various undertakings, including retaining an independent compliance consultant to test the clearing agency's remediated policies.
Primary Sources
- SEC Press Release: SEC Charges Fixed Income Clearing Corp. With Having Inadequate Risk Management Policies
- SEC Order: Fixed Income Clearing Corporation
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