Feb. 4, 2024
Hello, I am grateful for the chance to provide feedback on SR-OCC-2024-001 34-99393, titled “Proposed Rule Change by The Options Clearing Corporation to Modify Certain Aspects of Its Margin Calculation System During High Volatility Periods in the Markets and Products It Clears” (PDF, Federal Register) as a participant from the retail investment community. My review of the OCC's proposed rule has led me to oppose its adoption, for which I am thankful to express my views. The proposal's transparency, or lack thereof, raises significant concerns for me, as seen in the rule proposal and related documents. Critical sections of the proposal, notably Exhibit 5 and its supporting documents (refer to Exhibit 3), are heavily redacted, hindering the public's ability to conduct a thorough and meaningful analysis. The absence of complete transparency necessitates the rejection of this proposal. Transparency holds paramount importance, especially since the OCC's proposal criticizes the lack of mandatory cyclical controls by U.S. regulators that other international financial bodies enforce. The proposal suggests that during market stress, heightened margin requirements could strain Clearing Members' liquidity, posing financial risks to the OCC and potentially compromising the stability of its members and the broader U.S. financial system. The OCC's status as a Systemically Important Financial Market Utility (SIFMU) underscores the need for clear regulatory oversight and public trust, which this proposal fails to uphold by attributing regulatory shortcomings to U.S. authorities. The proposal seemingly aims to shield Clearing Members from the fallout of risky trades by facilitating easier margin requirement reductions. This approach could increase the OCC's risk exposure. It outlines how the OCC's proprietary STANS system calculates margin requirements, which might lead to procyclical outcomes that exacerbate member stability issues during volatile periods. The practice of reducing margin requirements, as described, could threaten the systemic integrity of the financial market by undercapitalizing Clearing Members, essentially making them too big to fail. The frequent use of "idiosyncratic" and "global" control adjustments to lower margin calls, as detailed in the proposal and its footnotes, indicates a recurring pattern that dilutes the effectiveness of such measures as truly exceptional. This leniency towards margin requirements during critical moments, including during the initial stages of the COVID-19 pandemic and during significant market events like the meme-stock surge, unfairly disadvantages other market participants and retail investors. The proposal's inherent conflict of interest, particularly concerning the Financial Risk Management (FRM) Officer's role, further complicates its potential adoption. By prioritizing Clearing Member stability over rigorous risk management, the proposal undermines the foundational principles of market integrity and OCC's protective measures against market volatility. Given these concerns, I suggest the following amendments for consideration: Strengthen and enforce stricter margin requirements that reflect the actual risks posed by Clearing Member positions, thereby promoting better risk management and discouraging the too-big-to-fail mentality. Implement external audits and increased public reporting as additional safeguards to identify and manage systemic risks effectively. Reevaluate the OCC’s Loss Allocation waterfall to prioritize the use of Clearing Member deposits before tapping into the OCC’s pre-funded resources, enhancing the overall stability and accountability within the financial ecosystem. I urge a thorough reevaluation of this rule proposal to ensure it serves the best interests of all market participants by fostering a transparent, equitable, and resilient financial market. Sincerely, Mark D. Wetzel