Feb. 7, 2024
I am reaching out to express my concerns regarding SR-OCC-2024-001 34-99393, a proposal by The Options Clearing Corporation (OCC) titled "Proposed Rule Change Concerning Its Process for Adjusting Margin Requirements During High Volatility Periods." As a retail investor, I have reservations about the OCC's proposal and believe it should not proceed. My primary concern lies in the lack of transparency within our financial system, as evidenced by this proposal and others like it. The document, notably in Exhibit 5 and supporting materials such as Exhibit 3, contains significant redactions, impeding public review and preventing adequate assessment and commentary. Adding to this issue is the absence of clarity in the censored documents that come with the proposition. Transparency plays a pivotal role in building confidence among investors and the broader public. The obscured content of these documents restricts our capacity to thoroughly assess the viability of the suggested regulation. This opacity not only prompts inquiries regarding the depth of the assessment procedure but also curtails the chance for well-informed public discussion. The absence of thorough public review alone warrants rejection of this proposal. Transparency is critical, particularly given the OCC's attribution of procyclicality issues to U.S. regulators for not mandating prescriptive controls. The proposed rule implicates increased margin requirements during market stress, potentially straining Clearing Members' ability to meet obligations and exposing the OCC to financial risks. Considering the OCC's designation as a Systemically Important Financial Market Utility (SIFMU), its failure could threaten the stability of the U.S. financial system, necessitating transparency for stakeholders reliant on it. Moreover, considering the concerns raised in the OCC Rule proposal, particularly regarding the unease surrounding the possibility of heightening margin requirements during turbulent market conditions and the potential domino effect of Clearing Member failures, I suggest a reevaluation of the OCC's loss allocation framework. As delineated in the proposal, the current setup positions Clearing Fund deposits of non-defaulting firms as the fourth line of defense in times of market strain, following the OCC's pre-funded financial resources. This configuration implies that the OCC expects losses to deplete the initial three layers, including its pre-funded resources, before tapping into non-defaulting Clearing Members' contributions. To address this potential imbalance and foster fairness, I recommend prioritizing Clearing Fund deposits of non-defaulting firms over the OCC's pre-funded resources. This adjustment ensures that Clearing Members' contributions play a more immediate and prominent role in absorbing losses, in line with principles of fairness and openness in the OCC's risk management framework. Such a modification would afford additional protection to non-defaulting Clearing Members and enhance the equilibrium and resilience of the financial landscape. The OCC's proposal seems geared towards protecting Clearing Members by frequently reducing margin requirements, potentially increasing risks for the OCC. This is troubling, especially considering the potential undercapitalization and over-leverage of Clearing Members. A single Clearing Member's failure during high volatility could trigger a systemic crisis. it is imperative to ensure that risk management measures do not inadvertently shelter bad bets. Adjusting parameters for calculating margin requirements is crucial for market stability, but this must be done in a way that aligns with broader market interests. To address these concerns, I propose the following modifications: Increase and enforce margin requirements according to Clearing Member position risks, rather than reducing them. Prioritize Clearing Fund deposits of non-defaulting firms over the OCC's pre-funded resources. These would both encourage prudent portfolio management in anticipation of market stress. Implement external auditing and supervision as a "fourth line of defense," akin to the model described in financial institutions' "Four Lines of Defense Model." Enhanced public reporting should identify and manage risks before they escalate. Rearrange 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 would incentivize Clearing Members to monitor each other's risk management and allocate losses to minimize reliance on a bailout. A fair, transparent, and resilient market benefits all investors. I urge you to consider these concerns and modifications in evaluating SR-OCC-2024-001 34-99393.