Feb. 4, 2024
Dear Securities and Exchange Commission, I am writing to voice my grave concerns about the proposed rule change by the Options Clearing Corporation (OCC) aimed at adjusting parameters for calculating margin requirements during periods of high market volatility. As a dedicated long-term household investor deeply committed to the stability and fairness of the financial market, I am compelled to provide robust insights on this matter. Upon scrutinizing the proposed rule change, I have identified potential discrepancies that demand meticulous consideration. The current iteration of the proposed rule seemingly unintentionally shields risky financial positions from the essential risk management mechanism of margin calls during heightened market volatility. Margin calls traditionally act as a protective measure, compelling investors to infuse funds or securities to cover potential losses when their positions' value dips below a specified threshold. By limiting or eliminating margin calls in turbulent market conditions, the proposal may allow investors with imprudent risks to sidestep necessary adjustments. This absence of a robust risk management mechanism could lead to unbridled growth in precarious positions, potentially resulting in more substantial losses and raising serious concerns about long-term market stability. If the purported aim of the proposal is to manage risk, there is a valid concern that these protective measures might inadvertently foster the unbridled growth of imprudent risks, posing heightened threats to market stability in the long run. A particular aspect that raises alarm is the pivotal role assigned to the Financial Risk Management (FRM) Officer. The proposal places significant responsibility on this individual, whose primary duty is to safeguard OCC's interests. This sets the stage for an inherent conflict of interest, as safeguarding 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, necessitating meticulous scrutiny. This concern is 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 curtails our ability to fully evaluate 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 periods of high volatility, it is crucial to ensure that risk management measures do not inadvertently shield reckless bets. Adjusting parameters for calculating margin requirements is essential for market stability, but this must be executed in a manner that aligns with broader market interests. In light of the highlighted concerns in the OCC Rule proposal, particularly the apprehension about increasing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I strongly recommend 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 an expectation that losses will 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 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. For instance, considering an independent review mechanism to assess the impact of control settings on both OCC's interests and the broader market is imperative. This measure is essential to reinforce transparency and accountability within the regulatory framework, ensuring an unbiased evaluation of risk management practices. By involving external experts, this safeguard not only mitigates potential conflicts of interest but also 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 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 resolute in 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, Nathan Lewandowski M.D.