Feb. 2, 2024
Dear Securities and Exchange Commission, I am reaching out to express my apprehensions regarding the proposed rule change by the Options Clearing Corporation (OCC) related to adjusting parameters for calculating margin requirements during periods of heightened market volatility. As a long-term household investor with a vested interest in the stability and fairness of the financial market, I value the opportunity to share my perspectives on this matter. Upon reviewing the proposed rule change, I have identified potential inconsistencies that merit thorough consideration. The current iteration of the proposed rule seems to unintentionally provide protection to high-risk financial positions by exempting them from the customary risk management mechanism of margin calls during periods of market turbulence. Typically, margin calls act as a safeguard, compelling investors to inject additional funds or securities to cover potential losses when the value of their positions drops below a specified threshold. By limiting or preventing margin calls in volatile market conditions, the proposal may enable investors with imprudent risks to evade necessary adjustments. This absence of an effective risk management mechanism could lead to unbridled growth in risky positions, potentially resulting in more substantial losses and raising concerns about long-term market stability. Therefore, if the proposal's objective is to manage risk, there is a legitimate concern that these protective measures may inadvertently allow imprudent risks to escalate unchecked, posing heightened risks to market stability in the long run. A notable aspect that raises concerns is the role of the Financial Risk Management (FRM) Officer. The proposal assigns significant responsibilities to this individual, whose primary duty is to safeguard OCC's interests. This creates an inherent conflict of interest, as protecting OCC’s interests may not always align with the broader market’s well-being. The proposal acknowledges a scenario where risk factor coverage differs significantly under idiosyncratic control settings compared to regular control settings, underscoring the need for careful scrutiny. Adding to this concern is the lack of transparency in the redacted materials accompanying the proposal. Transparency is vital for fostering trust among investors and the public. The redacted nature of the materials restricts our ability to fully assess the effectiveness of the proposed rule. This lack of transparency not only raises questions about the thoroughness of the evaluation process but also diminishes the opportunity for informed public discourse. While acknowledging OCC's intent to mitigate risks during periods of high volatility, it is crucial to ensure that risk management measures do not inadvertently shield risky positions. Adjusting parameters for calculating margin requirements is essential for market stability, but this adjustment must align with broader market interests. Furthermore, considering the concerns highlighted in the OCC Rule proposal, particularly the unease about increasing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I recommend a reevaluation of the OCC's loss allocation framework. As outlined in the proposal, the current structure places Clearing Fund deposits of non-defaulting firms as the fourth layer of defense in the event of market stress, following the OCC's pre-funded financial resources. This arrangement suggests that the OCC anticipates losses to deplete the first three layers, including its pre-funded resources, before reaching non-defaulting Clearing Members' contributions. To address this potential disparity and promote fairness, I propose prioritizing Clearing Fund deposits of non-defaulting firms over the OCC's pre-funded resources. This adjustment ensures that Clearing Members' contributions play a more immediate and prominent role in covering losses, aligning with principles of equity and transparency in the OCC's risk management structure. Such a modification would offer additional protection to non-defaulting Clearing Members and contribute to a more balanced and resilient financial ecosystem. In light of these concerns, I propose additional safeguards and modifications to the rule. One example is the consideration of an independent review mechanism to assess the impact of control settings on both OCC's interests and the broader market. This measure is essential to reinforce transparency and accountability within the regulatory framework, ensuring an unbiased evaluation of risk management practices. Involving external experts not only mitigates potential conflicts of interest but also fosters public trust and confidence in the regulatory process, aligning with the broader goal of upholding market integrity. Additionally, enhancing transparency by providing non-confidential summaries of redacted materials would enable a more informed public discourse and promote a more inclusive decision-making process. Other recommendations for refining the proposed rule include: Prioritizing enhanced transparency requirements, advocating for increased transparency in reporting and decision-making processes related to risk management measures. Transparent disclosure fosters trust among market participants and allows for a more comprehensive evaluation of margin calculations and adjustments, particularly during volatile periods. Strengthening oversight mechanisms, with a more active role for regulatory bodies, contributes to accountability in risk management practices. The incorporation of public input through consultations and hearings is proposed to foster inclusivity and democratic decision-making in the rulemaking process. Encouraging the establishment of industry-wide standards and best practices in collaboration with stakeholders emphasizes a commitment to market stability. Advocating for public accessibility of stress testing results showcases the effectiveness of risk management measures. Lastly, considering the establishment of an external oversight committee, comprised of industry experts, ensures impartial evaluation and scrutiny of risk management practices. These suggestions collectively aim to fortify oversight, enhance transparency, and uphold accountability, thereby ensuring the integrity and fairness of our financial markets. In conclusion, as an engaged investor, I am dedicated to fostering a financial environment that prioritizes fairness, transparency, and the well-being of all market participants. I trust that the SEC will thoroughly consider these concerns during the rule-making process and work towards a rule that not only addresses risk management but also upholds the broader principles of market integrity. Sincerely, Ravi Patel -- Sincerely, Ravi Patel