Feb. 7, 2024
I appreciate the opportunity to provide feedback on the proposed rule change by The Options Clearing Corporation (OCC), titled "Proposed Rule Change by The Options Clearing Corporation Concerning Its Process for Adjusting Certain Parameters in Its Proprietary System for Calculating Margin Requirements During Periods When the Products It Clears and the Markets It Serves Experience High Volatility" (SR-OCC-2024-001 34-99393). I am writing to express my strong opposition to this proposal for several reasons, and I firmly believe that it should not be approved in its current form. My primary concerns revolve around the lack of transparency in the financial system, the potential unfair advantage for market participants, especially retail investors, and the inherent conflicts of interest within the proposed rules. Lack of Transparency: The redaction of critical details in the proposal hampers public review and inhibits the ability of stakeholders, including retail investors, to provide meaningful feedback. I urge careful reconsideration and rejection of the proposal based on this significant transparency issue. Unfair Marketplace for Retail Investors: The proposed rule change places retail investors at a disadvantage by allowing Clearing Members to repeatedly waive margin calls. This creates an uneven playing field, leaving retail investors exposed to long-tail risks without similar protections. Clearing Members should be subject to well-defined margin requirements, leveling the field for all investors. Risk Management and Too Big To Fail: The proposal's rationale for reducing margin requirements to prevent a cascade of Clearing Member defaults raises concerns about the concept of "Too Big To Fail." Clearing Members should face the consequences of inadequate risk management to discourage excessive leverage. Rejecting this proposal would reinforce a natural disincentive against such practices. Conflicts of Interest: The proposal introduces a conflict of interest for the Financial Risk Management (FRM) Officer, whose role ostensibly involves protecting OCC's interests. However, the situation outlined in the proposal forces the FRM Officer to protect Clearing Members, potentially compromising the OCC's overall risk management. This conflict must be addressed before any approval. Illogical Reduction in Protection Measures: The proposal's focus on mitigating procyclical margin requirements directly reduces the primary line of protection for the OCC—margin collateral from at-risk Clearing Members. This is inherently illogical and poses a direct threat to the OCC's financial stability. In light of these concerns, I strongly recommend the following modifications: Increase and Enforce Margin Requirements: Implement margin requirements that align with the risks associated with Clearing Member positions. This will encourage Clearing Members to manage their portfolios more prudently and account for stressed market conditions and long-tail risks. Encourage Prudent Portfolio Positioning: Encourage Clearing Members to proactively position their portfolios to withstand challenging market conditions, thereby reducing the reliance on excessive risk and leverage. Address the Too Big To Fail Issue: Implement measures that discourage Clearing Members from becoming Too Big To Fail by holding them accountable for their risk management practices. This will help maintain a fair and stable marketplace. In conclusion, I urge careful consideration of these concerns and modifications before approving the proposed rule change. A transparent and equitable financial system is crucial for the well-being of all market participants, and these modifications will contribute to achieving that goal. Thank you for your attention to this matter. Sincerely, Reginald Larson Phone 2503019328