Feb. 7, 2024
Dear SEC Gov,
It is no surprise the US stock market has, and continues, to experience volatility. One of the major reasons for this comes from over-leveraged hedge funds and other institutions. As such, I think it is imperative the margin requirements are not only maintained, but also increased for market participants. The OCC recently implemented a new proposal that would reduce margin requirements for overleveraged firms. I do not agree with this proposal as I believe this makes it unfair for retail investors. Furthermore, this would also discourage retail investors from participating in the stock market due to an unfair advantage. Below are the reasons why I firmly believe you should deny this proposal set forth by the Options Clearing Corporation.
Regards,
The redaction of specific details, especially related to the calculation of parameters and margin thresholds, prevents market participants from assessing the fairness and effectiveness of these measures. This raises concerns about the transparency of the OCC's risk management processes.
The consistent use of idiosyncratic control settings, totaling over 200 within a span of less than four years, raises questions about whether they are applied uniformly or under varying circumstances.
The reliance on idiosyncratic control settings, especially during high volatility, poses potential systemic risks. The OCC waiving away margin calls for Clearing Members over 50 times a year is too often to be idiosyncratic. If these adjustments become a routine response, it might indicate a lack of robustness in the overall risk management framework.
The high frequency of adjustments in response to market conditions or specific challenges faced by Clearing Members raises concerns about the stability and predictability of the OCC's risk management practices. Such frequent interventions indicate a dynamic and reactive approach to risk management, leading to uncertainties in how risk is assessed, mitigated, and communicated to market participants.
The proposal appears to make Clearing Members, even those poorly managing risks, de facto "Too Big To Fail," risking financial system stability.
The reliance on GARCH parameters for forecasting risk and setting margin requirements assumes the accuracy and relevance of these parameters. Any shortcomings in the model or miscalculations could lead to inadequate risk coverage.
The FRM Officer, tasked with protecting OCC's interests, may paradoxically function as an administrative rubber stamp for reducing margin requirements, potentially compromising market risk protection as they seek to protect the Clearing Member from failure to protect the OCC.
Concentrating significant decision-making authority in a single individual, such as the FRM Officer, to approve the implementation of idiosyncratic control settings may inherently create the risk of conflicts of interest or potential abuse of power in their role.
The policy outlines general guidelines for the duration of idiosyncratic control settings, the discretionary power given to the FRM Officer to adjust the duration based on unforeseen situations introduces an element of uncertainty.
The proposal exposes the OCC to financial risks by potentially depleting its pre-funded financial resources in the event of a sufficiently large Clearing Member default - aka - the OCC’s Clearing Member Default Rules and Procedures, losses are allocated first to the OCC's own pre-funded financial resources ("skin-in-the-game") before utilising clearing fund deposits of non-defaulting firms. In the event of a sufficiently large Clearing Member default, if both the margin deposits and clearing fund deposits are depleted, it automatically poses a financial risk to the OCC.
If approved, the rule would undermine the first line of protection outlined in OCC's default rules and procedures—margin collateral from at-risk Clearing Members. This contradicts the usual risk management strategy of increasing collateral for higher-risk scenarios.
Focusing on potential liquidity issues for non-defaulting Clearing Members indicates the OCC's concern about risks depleting its pre-funded financial resources, raising questions about the sustainability of its risk management approach.