Feb. 2, 2024
Dear Securities and Exchange Commission, I am reaching out to convey my reservations about the proposed rule change by the Options Clearing Corporation (OCC), which seeks to modify parameters for calculating margin requirements in times of heightened market volatility. As a dedicated long-term investor with a vested interest in the stability and fairness of the financial market, I welcome the opportunity to share my perspective on this matter. Upon reviewing the proposed rule change, I've found certain potential discrepancies that warrant meticulous consideration. The existing draft of the rule seems, inadvertently, to shield high-risk financial positions from the customary risk management mechanism of margin calls during periods of intense market volatility. Margin calls traditionally act as a protective measure, compelling investors to inject 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 tumultuous market conditions, the proposal could enable investors with imprudent risks to evade necessary adjustments. This lack of a robust risk management mechanism might result in unbridled expansion of risky positions, potentially leading to more substantial losses and raising concerns about long-term market stability. If the intention of the proposal is indeed to manage risk, there's a concern that these protective measures might unintentionally foster the growth of imprudent risks, posing larger threats to market stability in the long run. One area of particular concern is the role of the Financial Risk Management (FRM) Officer. The proposal places significant responsibility on this individual, whose primary duty is to safeguard OCC's interests. This introduces 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 scrutiny. This concern is further compounded by the lack of transparency in the redacted materials accompanying the proposal. Transparency is paramount for fostering trust among investors and the public. The redacted nature of the materials restricts our ability to fully assess the efficacy 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 high volatility periods, it is crucial to ensure that risk management measures do not unintentionally shield unsound bets. Adjusting parameters for calculating margin requirements is essential for market stability, but this must align with broader market interests. In light of the highlighted concerns in the OCC Rule proposal, especially apprehensions about increasing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I propose a reevaluation of the OCC's loss allocation framework. 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 implies that the OCC anticipates losses exhausting 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 suggest 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. Given these concerns, I propose additional safeguards and modifications to the rule. One suggestion includes considering 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 mitigates potential conflicts of interest and fosters public trust and confidence in the regulatory process. It aligns with the broader goal of upholding market integrity, providing a robust mechanism for continuous improvement and adaptability in response to evolving market dynamics. 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: 1. 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. 2. Strengthening oversight mechanisms, with a more active role for regulatory bodies, contributes to accountability in risk management practices. 3. The incorporation of public input through consultations and hearings is proposed to foster inclusivity and democratic decision-making in the rulemaking process. 4. Encouraging the establishment of industry-wide standards and best practices in collaboration with stakeholders emphasizes a commitment to market stability. 5. Advocating for public accessibility of stress testing results showcases the effectiveness of risk management measures. 6. 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 summary, as a dedicated long-term investor, my commitment lies in cultivating a financial landscape that emphasizes fairness, transparency, and the welfare of every market participant. I have confidence that the SEC will meticulously contemplate these apprehensions throughout the rule-making journey and strive to formulate regulations that not only tackle risk management but also adhere to the overarching principles of market integrity. Sincerely, Daniel Abad