Feb. 7, 2024
Subject: Comments on SR-OCC-2024-001 34-99393 From: Richard Agrillo Affiliation: Feb. 5, 2024 Dear Securities and Exchange Commission, I appreciate the chance 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" (PDF, Federal Register) as a retail investor. I have various concerns regarding the OCC rule proposal, do not endorse its approval, and am grateful for the chance to express my views. My primary worry pertains to the lack of transparency within our financial system, exemplified by this rule proposal. The extensive redactions in Exhibit 5 and the limited details provided in supporting information (e.g., Exhibit 3) hinder public review, making it challenging for the public to thoroughly assess and comment on the proposal. Given the absence of a comprehensive public review, rejecting the proposal on this basis alone is warranted. Public scrutiny is particularly crucial, considering the OCC's Proposed Rule attributes blame to U.S. regulators for not mandating the adoption of prescriptive procyclicality controls. As stated, procyclicality, demonstrated by increasing margin in stressed market conditions, could strain a Clearing Member's ability to meet obligations, posing financial risks to the OCC. Given the OCC's designation as a SIFMU with potential implications for the U.S. financial system's stability, transparency becomes a necessity. The OCC's reliance on blaming regulators for not enforcing protective regulations raises concerns about the SRO and U.S. regulators' ability to safeguard our financial markets. This OCC rule proposal appears crafted to shield Clearing Members from potential losses by routinely endorsing reductions in margin requirements as requested by Clearing Members. The OCC collects margin collateral to address market risks associated with Clearing Members' positions, using the STANS system to calculate margin requirements. However, the proposal acknowledges the procyclical nature of the system, leading to increased margin requirements during volatile periods. To mitigate this, the OCC has implemented idiosyncratic and global control settings, significantly reducing aggregate margin requirements in various instances. This frequent reduction in margin calls for Clearing Members, coupled with global control settings triggered by significant events, creates an uneven playing field for market participants, including retail investors. Therefore, rejecting the proposal and enforcing consistent margin requirements for Clearing Members, similar to other investors, is essential. The proposal also establishes a conflict of interest for the Financial Risk Management (FRM) Officer, whose role ostensibly involves protecting the OCC's interests. However, the situation outlined in the proposal, where a Clearing Member's failure exposes the OCC to financial risk, necessitates the FRM Officer's protection of the Clearing Member to safeguard the OCC. This undermines the intended protection from market risks associated with Clearing Members' positions provided by margin collateral. Rejecting the proposal and ensuring the enforcement of adequate margin requirements is crucial to protecting the OCC and minimizing the potential need for bailouts. In light of these concerns, I propose the following modifications: Firstly, increase and enforce margin requirements proportionate to the risks associated with Clearing Member positions, discouraging excessive risk-taking by Clearing Members. Secondly, implement external auditing and supervision as a "fourth line of defense" with enhanced public reporting to identify and manage risks before they become systemically significant. Lastly, adjust the order of the OCC's Loss Allocation waterfall to prioritize Clearing fund deposits of non-defaulting firms over OCC's pre-funded financial resources, encouraging responsible risk management among Clearing Members. Once again, I appreciate the opportunity to provide feedback. I vehemently oppose the SR-OCC-2024-001 proposal and I believe the suggested modifications will contribute to a fair, transparent, and resilient market that benefits all investors. Sincerely, Richard Agrillo A Concerned Retail Investor