Feb. 7, 2024
Dear Sir or Madam, I am writing to express my concerns regarding SR-OCC-2024-001 34-99393, which addresses the "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 several reservations about the OCC's rule proposal, and I believe it should not be approved. My primary concern revolves around the lack of transparency in our financial system, which is evident in this rule proposal and others. The proposal, particularly in Exhibit 5 and supporting information like Exhibit 3, contains significant redactions. These redactions hinder public review and make it impossible for the public to adequately assess and comment on the proposal. The absence of full public review alone should be a reason to reject this proposal. Public review is crucial, especially given that the OCC's Proposed Rule places blame on U.S. regulators for not mandating prescriptive procyclicality controls. Procyclicality, as highlighted in the proposal, can lead to increased margin requirements during stressed market conditions, potentially straining Clearing Members' ability to meet their obligations to the OCC. Such actions could expose the OCC to financial risks, jeopardizing the stability of its members during periods of heightened volatility. As the OCC is designated as a Systemically Important Financial Market Utility (SIFMU), its failure or disruption could threaten the stability of the U.S. financial system. Therefore, transparency is essential for all stakeholders dependent on the U.S. financial system. The OCC's rule proposal appears to be designed to protect Clearing Members from costly trades by frequently reducing margin requirements, which can increase risks for the OCC. This approach is concerning, especially considering that Clearing Members, as a collective, may be undercapitalized and over-leveraged. A single Clearing Member's failure, particularly due to inadequate risk management during high volatility, could trigger a cascade of failures, potentially leading to a systemic financial crisis. To mitigate this risk, the OCC seeks to reduce margin requirements using "idiosyncratic" and "global" control settings, frequently waiving margin calls for Clearing Members. This approach creates an unfair marketplace for other participants, including retail investors, who are forced to bear the consequences of long-tail risks while Clearing Members benefit from reduced margin requirements. Additionally, the rule proposal introduces a conflict of interest for the Financial Risk Management (FRM) Officer, whose role is allegedly to protect 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 involvement in protecting the Clearing Member to safeguard the OCC. This dynamic undermines the purpose of margin collateral in protecting against market risks associated with Clearing Member positions. Given these concerns, I recommend the following modifications: Increase and enforce margin requirements commensurate with the risks associated with Clearing Member positions, rather than reducing them. This would encourage Clearing Members to prudently manage their portfolios in anticipation of stressed market conditions and long-tail risks. Implement external auditing and supervision as a "fourth line of defense," similar to the model described in "The Four Lines of Defence Model" for financial institutions. Enhanced public reporting should ensure that risks are identified and managed before they become systemically significant. Reorder the OCC's Loss Allocation waterfall to prioritize "4. Clearing fund deposits of non-defaulting firms" over "3. OCC's own pre-funded financial resources." This change would incentivize Clearing Members to oversee each other's risk management practices and allocate losses in a way that reduces the risk of needing to bail out a systemically important clearing agency. In conclusion, a fair, transparent, and resilient market benefits all investors. I urge you to consider these concerns and modifications in your evaluation of SR-OCC-2024-001 34-99393. Sincerely, A Concerned Retail Investor That's Tired of the Manipulaton