Feb. 2, 2024
Dear Securities and Exchange Commission, I am writing to convey my concerns regarding the proposed rule change by the Options Clearing Corporation (OCC) aimed at modifying parameters for calculating margin requirements, particularly during periods of heightened market volatility. As a devoted, long-term household investor deeply invested in the stability and fairness of the financial market, I value the chance to provide my perspective on this issue. After scrutinizing the proposed rule change, I have observed potential inconsistencies that warrant thoughtful examination. The current version of the proposed rule seems to unintentionally provide a protective shield for risky financial positions, hindering the normal risk management mechanism of margin calls during times of heightened market volatility. Typically, margin calls act as a safeguard, requiring investors to inject funds or securities to cover potential losses when their positions' value falls below a specific threshold. By restricting or preventing margin calls in turbulent market conditions, the proposal may enable investors with imprudent risks to evade necessary adjustments. This absence of a robust risk management mechanism could result in unbridled growth in risky positions, potentially leading to more substantial losses and raising concerns about long-term market stability. If the proposal's intention is indeed to manage risk, there is a worry that such protective measures might inadvertently facilitate the unrestrained growth of imprudent risks, posing larger threats to market stability in the long run. A particular area of concern is the role assigned to the Financial Risk Management (FRM) Officer. The proposal places considerable responsibility on 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 significantly differs under idiosyncratic control settings compared to regular control settings, highlighting the need for careful scrutiny. Compounding this concern is the lack of transparency in the redacted materials accompanying the proposal. Transparency is vital for building trust among investors and the public. The redacted nature of the materials limits 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 it must be done in a way that aligns with broader market interests. In light of the concerns raised in the OCC Rule proposal, especially regarding increasing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I propose a reconsideration 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 own pre-funded financial resources. This arrangement suggests that the OCC anticipates losses to exhaust 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 recommend 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 provide additional protection to non-defaulting Clearing Members and contribute to a more balanced and resilient financial ecosystem. To address these concerns, I recommend implementing additional safeguards and adjustments to the rule. One proposed measure involves establishing an independent review mechanism to evaluate the impact of control settings on both the OCC's interests and the broader market. This step is crucial for enhancing transparency and accountability within the regulatory framework, ensuring an impartial assessment of risk management practices. The inclusion of external experts in this evaluation process serves to alleviate potential conflicts of interest and cultivates public trust and confidence in the regulatory proceedings. This approach aligns with the overarching objective of preserving market integrity by providing a robust mechanism for ongoing improvement and adaptability in response to evolving market dynamics. Furthermore, to augment transparency, I suggest the provision of non-confidential summaries for redacted materials. This action would facilitate a more informed public discourse and contribute to 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, composed 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 a dedicated investor actively involved in financial markets, my commitment lies in cultivating an environment that emphasizes fairness, transparency, and the overall well-being of all market participants. I place trust in the Securities and Exchange Commission (SEC) to meticulously weigh these concerns throughout the rulemaking process. I hope the SEC endeavors to craft a rule that not only addresses risk management but also steadfastly upholds the fundamental principles of market integrity. In good faith, Michael Vilay