The SEC today fined Fixed Income Clearing Corporation $8 million for failing to ensure an appropriate level of liquidity to cover payment obligations and for relying on a faulty risk-assessment tool even after learning of its errors, according to a commission filing.

A wholly owned subsidiary of The Depository Trust & Clearing Corporation, FICC is a New York-based registered clearing agency that is the sole central counterparty to process trades in securities issued by the federal government. Because of this, it has been designated as a “systemically important financial market utility” with associated requirements in managing and reducing risk.

FICC agreed to settle the matter without admitting or denial, the filing stated, and as such will review its relationships with liquidity providers, establish a regulatory committee to oversee FICC’s compliance with applicable laws, hire a consultant to test and review FICC’s implementation of its policies around the filing’s charges, follow that consultant’s recommendations, and pay the $8 million fine.

“Disruptions to FICC’s operations, or a failure by FICC to manage risk, could result in significant costs not only to FICC itself and its members, but also to other market participants or the boarder U.S. financial system,” the filing said, adding that the SEC is FICC’s supervisory agency and required to examine FICC at least once annually.

According to the filing, between April 2017 and November 2018, FICC failed to meet liquidity requirements that would ensure intraday and multiday settlement of payment obligations, having sought to cover its requirements through 16 agreements with external parties without confirming that, in the event FICC would need to access that liquidity, those parties would be able to provide it.

“Although FICC conducted analyses of the repurchase market as a whole, none of these analyses concerned the reliability of the ... counterparties to provide liquidity to FICC in the amounts FICC would have required,” the filing stated.

In addition, FICC is tasked with establishing and using margin requirements “to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements,” as well as to review those models and requirements at least monthly, the filing said, adding that common practice is to calculate daily margin requirements using risk-based models that ensure coverage with a 99% confidence rate.

According to the filing, between June 2015 and December 2016, FICC used a back-testing coverage methodology that contained two errors that inflated the results of the back-tests, even after learning of those errors in early 2015. Without those errors, estimated coverage would have fallen below the 99% confidence rate, the filing said.

In a statement regarding the filing, FICC's parent company said it takes its responsibility to protect the soundness of the marketplace very seriously. "FICC has addressed the issues identified in the SEC’s order," the statement said. "We remain committed to delivering these services in accordance with all relevant rules and regulations and to continue interacting cooperatively and transparently with our regulators.”