Feb. 5, 2024
Dear OCC Decision-Maker, I appreciate the opportunity to provide feedback on SR-OCC-2024-001 34-99393, addressing the proposed rule change by The Options Clearing Corporation regarding its margin requirement adjustment process during periods of market volatility. I find myself deeply concerned about the lack of transparency evident in this rule proposal and others within our financial system. Exhibit 5, along with supporting information in Exhibit 3, is heavily redacted, impeding public review and hindering our ability to offer meaningful input. Transparency is paramount, and without it, approving such proposals becomes untenable. The proposal places blame on U.S. regulators for not mandating prescriptive procyclicality controls, highlighting the potential risks associated with increased margin requirements during stressed market conditions. Given the systemic importance of the OCC, designated as a SIFMU, transparency becomes even more critical. The OCC's reliance on blaming regulators raises questions about the efficacy of our regulatory framework in safeguarding our financial markets. Examining the rule in detail reveals an inclination to protect Clearing Members from potentially costly trades by endorsing reductions in margin requirements, thereby increasing risks to the OCC. This approach, exemplified by the use of "idiosyncratic" and "global" control settings, raises concerns about systemic risks. Clearing Members, collectively undercapitalized and possibly over-leveraged, pose a significant threat to financial stability, especially in times of heightened volatility. The frequency with which the OCC implements "idiosyncratic" control settings—over 200 times in less than four years—seems excessive and challenges the notion of being truly idiosyncratic. This, coupled with the use of "global" control settings during significant market events, creates an uneven playing field for market participants, unfairly favoring Clearing Members over other investors, including retail participants. Moreover, the proposed rule inadvertently creates a conflict of interest for the Financial Risk Management Officer, compromising the intended protection from market risks associated with Clearing Member positions. The officer, tasked with safeguarding the OCC's interests, is forced to protect Clearing Members to prevent potential financial risks to the OCC. This conflict undermines the very purpose of margin collateral collected by the OCC. In light of these concerns, I propose the following modifications: 1. **Increase and enforce margin requirements:** Clearing Members should be incentivized to manage their portfolios effectively, considering stressed market conditions and long-tail risks. The current proposal encourages excessive risk-taking by Clearing Members, potentially leading to a "Too Big To Fail" scenario. 2. **External auditing and supervision:** Implement a "fourth line of defense" similar to the model described for financial institutions, with enhanced public reporting. This will ensure that risks are identified and managed before becoming systemically significant. 3. **Adjust the Loss Allocation waterfall:** Swap the order of loss allocation to prioritize Clearing fund deposits of non-defaulting firms before OCC's own pre-funded financial resources. This change would encourage Clearing Members to police each other and enhance protection for the OCC. I appreciate your attention to these matters, and I trust that these suggestions will contribute to a fair, transparent, and resilient market for all investors. [1] https://www.federalregister.gov/d/2024-01386/p-11 [2] https://www.federalregister.gov/d/2024-01386/p-8 [3] https://www.federalregister.gov/d/2024-01386/p-7 [4] https://www.federalregister.gov/d/2024-01386/p-50 [5] https://www.federalregister.gov/d/2024-01386/p-51 [6] https://en.wikipedia.org/wiki/Long_tail [7] https://www.federalregister.gov/d/2024-01386/p-45 [8] https://www.federalregister.gov/d/2024-01386/p-79 [9] https://www.theocc.com/getmedia/e8792e3c-8802-4f5d-bef2-ada408ed1d96/default-rules-and-procedures.pdf, which is publicly available and linked to from the OCC’s web page on Default Rules & Procedures at https://www.theocc.com/risk-management/default-rules-and-procedures [10] https://www.federalregister.gov/documents/2021/04/12/2021-07454/self-regulatory-organizations-the-options-clearing-corporation-notice-of-no-objection-to-advance [11] https://www.federalregister.gov/d/2024-01386/p-16 [12] https://www.bis.org/fsi/fsipapers11.pdf Sincerely, A Retail Investor