Feb. 7, 2024
Thank you for the opportunity to provide feedback on SR-OCC-2024-001 34-99393, 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." As a retail investor, I have several concerns about the OCC's rule proposal, do not support its approval, and appreciate the chance to express my views. My primary concern lies with the lack of transparency within our financial system, exemplified by this rule proposal among others. The extensive redaction of details hampers public review, rendering it impossible for the public to adequately assess and comment on the proposal. Given this lack of opportunity for comprehensive public review, the proposal should be rejected solely on this basis. Public review is especially crucial here as the OCC's Proposed Rule shifts blame onto U.S. regulators for not mandating the adoption of specific procyclicality controls, as observed in other financial jurisdictions. Procyclicality, as described, could lead to heightened margin requirements during periods of market stress, potentially jeopardizing the stability of both the OCC and its members. Given the OCC's designation as a Systemically Important Financial Market Utility (SIFMU), transparency is paramount for all stakeholders reliant on the U.S. financial system. The OCC's attempt to absolve itself by blaming regulators raises concerns about the adequacy of both the OCC and U.S. regulatory oversight in safeguarding our financial markets. This particular rule proposal seems tailored to shield Clearing Members from the risks of costly trades by routinely reducing margin requirements, as requested by Clearing Members themselves, thereby increasing risks to the OCC. The proposal's mechanics, including the use of the STANS system and the implementation of idiosyncratic and global control settings, raise significant questions about fairness and systemic risk. The frequency with which such adjustments are made, coupled with the rationale behind them, suggests a systemic issue where Clearing Members may be excessively leveraged, posing risks to the entire financial system. The proposal's reliance on "idiosyncratic" and "global" control settings to manage risk further exacerbates concerns regarding market fairness and systemic stability. By repeatedly reducing margin requirements for Clearing Members facing potential default, the OCC appears to be privileging certain market participants over others, creating an uneven playing field. This approach not only undermines market integrity but also exposes the OCC to greater financial risk, contrary to its mandate as a SIFMU. Additionally, the proposal's implications for the role of the Financial Risk Management (FRM) Officer raise serious questions about conflicts of interest. While tasked with protecting the OCC's interests, the FRM Officer's role in mitigating Clearing Member defaults places them in a precarious position, potentially compromising the OCC's risk management framework. This conflict undermines the effectiveness of margin requirements in mitigating market risks associated with Clearing Member positions, jeopardizing the stability of the entire financial system. In light of these concerns, I recommend the following modifications: Enforce stricter margin requirements reflective of the risks associated with Clearing Member positions, discouraging excessive leverage and incentivizing prudent risk management. Implement external auditing and supervision, akin to the "four lines of defence model" for financial institutions, to enhance transparency and accountability in risk management practices. Reorder the Loss Allocation waterfall to prioritize Clearing fund deposits of non-defaulting firms over OCC's pre-funded financial resources, incentivizing Clearing Members to monitor each other's risk-taking behaviour and reducing the likelihood of bailouts for systemically important clearing agencies. I appreciate the opportunity to provide feedback and emphasize the importance of a fair, transparent, and resilient market for all investors. Sincerely, A Concerned Retail Investor. Internal Use - Confidential