Feb. 4, 2024
I have deep concerns regarding SR-OCC-2024-001 and the proposal's potential impact to make our market less robust. The proposal will encourage irresponsible clearing members to take on additional leverage while increasing the financial risk to the broader market. This will create perverse incentives that protect dangerous trading practices rather than long term market growth. I oppose SR-OCC-2024-001 and recommend that risk-management practices require greater public transparency, accountability, and assign accountability for the growing counter-party risk that clearing members are seeking to avoid. First, the proposal's redacted details make thorough review and feedback impossible. How can we have fair and transparent markets if we do not have transparent governance? If rules are obscured, we are concentrating power through an imbalance of information and access to resources. This is an egregious practice and the proposal should not be approved on this basis alone. By making financial institutions reap the rewards of risk without paying the cost, we are damaging the households and individuals that feed our markets. The proposal enables brinkmanship, risking the stability of the financial system, by making clearing members "too big to fail". This will inevitably damage the majority of voters and workers by protecting irresponsible financial actors whose derivatives create idiosyncratic, contagion risk to our markets. The proposal implies that there are regulatory issues, but does not address the core issue of market participants exploiting positions with regulatory loopholes and lack of transparency.. Margin requirements are essential to protecting market integrity. The proposal protects clearing members by reducing margin requirements, which results in increasing the risk in the event of a member default, and increases the potential impact as there will be less collateral proportionate to the leverage to offset the financial risk imposed on the broader market. This also creates an uneven playing field by allowing clearing members to benefit from reduced margin requirements when compared to other market participants. Reducing margin requirements for at-risk Clearing Members is considered illogical and contradicts the OCC's established risk management framework. There are many issues with the proposed rule, as I have highlighted. Here are things that I recommend to remedy the significant issues above: - Increase and consistently enforce margin requirements to prevent excessive risk-taking. - Modify the Loss Allocation waterfall to prioritize Clearing fund deposits of non-defaulting firms over OCC's pre-funded financial resources. - Introduce external auditing and supervision as a "fourth line of defense" with public reporting. - Strengthen oversight mechanisms, actively involving regulatory bodies during heightened market volatility. - Establish industry-wide standards and best practices for consistent risk management. - Significantly penalize members who violate risk management practices, requiring removal of staff, closure of positions, and revocation of business licences in the event of repeat offenses. - Provide clearer guidelines for idiosyncratic controls, preventing misuse with a structured evaluation framework. - Advocate for public accessibility of stress testing results, showcasing effectiveness and building trust.