Aug. 22, 2022
August 22, 2022 Over the years the OCCs Overall Liquidity Plan has been strengthening to avoid an increased fallout from an OCC member not being able to meets its commitments or in the event of a systemic risk. In the last decade both institutional and retail investors have increased their demand for options on equities and Exchange Traded Funds (EFT) so the OCC should increase the funds available through its Overall Liquidity Plan. Under OCC Rule 1002(a) the OCC has the ability to increase the Cash Clearing Fund Requirements of its members to raise additional reserves as part of the Overall Liquidity Plan. The current framework exists to curtail systemic risk to other areas of the financial sector. Raising funds from OCC members in anticipation of volatility may contain the risk of a systemic event without cascading effects of contagion to Non-OCC members. Systemic Risk posed by Master Repurchase Agreements with Non-OCC Members Master Repurchase Agreements with non-OCC members may exacerbate a hypothetical financial crisis from a risk to the OCC and its members, to the balance sheets of the institutional investors who entered into the Master Repurchase Agreements with the OCC. In the event the OCC is allowed to enter new Master Repurchase Agreements in addition to the current agreements it exponentially increases the likelihood that an OCC member may cause systemic risk if it doesnt meet its obligations or may further exacerbate a volatile situation. During systematic risk institutional investors who had entered into Master Repurchase Agreements may need liquidity due to the risk an OCC member has created to the financial system, however the institutional investors will have 60 minutes to meet their obligations to the Master Repurchase Agreement instead of shoring up their own liquidity needs. If the institutional investor is an insurance company, the American public relying on their insurance to pay out their car, business, or home loss in a timely manner will face long wait times for incident payouts as the insurance companys liquidity will be tied up in securities that cannot be sold. Insurance companies need acess to liquid assets at unforeseen intervals to quickly respond to ever increasing natural disasters. If the institutional investor is a pension fund, it will place the retirement funds of Americans of retirement age or near retirement age at risk, as during a crisis the funds liquidity will be lowered dramatically, as will the value of the assets of the pension fund due to the volatility caused by the OCC members risk to the financial system. Baby Boomers are retiring and they may decide to draw funds from their retirement accounts incase of further economic uncertainty. If the institutional investor is a bank, then a Master Repurchase Agreement with the OCC may affect the loan borrowing availability to American businesses and the general public reducing US Gross Domestic Product (GDP) when money isnt easy to borrow. As the US is currently facing the 2022 GDP decline (recession) with high inflation rates, Americans and American businesses are already struggling to borrow from banks due to tightened lending. A wall of separation between financial systems must be kept so as to not further exacerbate the 2022 GDP decline (recession) in the event the OCC recalls collateral per the master Repurchase Agreement. Non-OCC Members Cannot Properly Gage Risk from Current OCC and its Members Publicly Available Disclosures OCC members do not provide public disclosures that would allow institutional investors a clear picture of the overall health of the OCC and its individual members. Institutional investors can make mistakes and not gage proper risks of new investment opportunities. The fact that non-OCC member institutional investors have expressed interest in joining or expanding their participation in the program does not provide proof that the risk of enmeshing the US financial system further is prudent. Conclusion The OCCs lack of foresight to reduce the risk that OCC members may carry in their balance sheets should not be used as an albatross against the American people. Therefore, the OCCs request to modify the Non-Bank Liquidity Facility program to remove the aggregate commitment limit identified in prior advance notices concerning the program to gain greater capacity to source liquidity from external liquidity providers as needed should be denied. The OCC should continue to exercise its authority under OCC Rule 1002(a) to increase the Cash Clearing Fund Requirements of its members instead of undermining the retirement and emergency preparedness of American businesses and the general public.