Feb. 4, 2024
Dear Commissioners, This letter is to express my concerns about the proposed rule change SR-OCC-2024-001 by the Options Clearing Corporation (OCC), as filed with the Securities and Exchange Commission (SEC). The proposal aims to adjust parameters for calculating margin requirements during periods of high market volatility. While the intent to enhance market stability is acknowledged, several aspects of the proposal raise significant apprehensions regarding its potential impact on the financial markets' integrity and stability. Firstly, the redaction of critical details in the proposal materials hinders a comprehensive public review and the ability to provide informed feedback. Transparency is paramount in ensuring that all stakeholders have the opportunity to assess the implications of proposed regulatory changes fully. The lack of detailed information obstructs the community's capacity to evaluate the proposal's effectiveness and potential unintended consequences. Moreover, the proposal seemingly positions certain Clearing Members as "Too Big To Fail," inadvertently suggesting a reliance on regulatory intervention in scenarios that fundamentally stem from the risk management practices of market participants themselves. This perspective not only undermines the role of regulation but also risks amplifying systemic vulnerabilities by potentially encouraging excessive risk-taking behaviors, such as unchecked naked short selling. The concentration of responsibilities on the Financial Risk Management (FRM) Officer, tasked with safeguarding both the OCC's interests and those of at-risk Clearing Members, presents a concerning conflict of interest. The effective management of such conflicting priorities by a single entity is dubious and may compromise the impartiality required for rigorous risk assessment and management practices. Furthermore, the proposal's approach to reduce margin requirements for certain members during volatile periods is counterintuitive. It could exacerbate risk exposure for both the OCC and the broader financial system. This strategy seems misaligned with established risk management frameworks and could lead to an uneven playing field, disadvantaging other market participants. In light of these concerns, I urge the SEC to reconsider the proposed rule change thoroughly. It is crucial to prioritize measures that enhance transparency, reinforce risk mitigation, and ensure the well-being of the broader market ecosystem. To this end, I propose the following recommendations for consideration: 1. Increase and enforce margin requirements to deter excessive risk-taking and safeguard market stability. 2. Modify the Loss Allocation waterfall to emphasize the use of Clearing fund deposits from non-defaulting firms over the OCC's pre-funded financial resources. 3. Introduce external auditing and oversight, coupled with public reporting, to act as a robust check on the OCC's risk management practices. 4. Strengthen regulatory oversight mechanisms, particularly during periods of heightened market volatility, to ensure proactive engagement with evolving market dynamics. 5. Establish clearer guidelines and standards for risk management across the industry, fostering a consistent and transparent approach to handling idiosyncratic controls. I appreciate the SEC's commitment to maintaining a fair, orderly, and efficient market and trust that these concerns and suggestions will be given thorough consideration. Enhanced transparency, diligent oversight, and an inclusive approach to regulatory development are essential to fostering a resilient financial market infrastructure. Thank you for your attention to this matter. Sincerely, Mark Laos