Feb. 8, 2024
Thank you for the opportunity to comment on SR-OCC-2024-00134-99393 entitled "Proposed Rule Change by The Options Clearing Corporation Concerning lts 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" (PDE, Federal Register) as a retail investor. I have several concerns about the OCC rule proposal, do not support its approval, and appreciate the opportunity to comment. I'm concerned about the lack of transparency in our financial system as evidenced by this rule proposal, amongst others The details of this proposal in Exhibit 5 along with supporting information (see, e.g., Exhibit 3) are significantly redacted which prevents public review making it impossible for the public to meaningfully review and comment on this proposal. Without opportunity for a full public review, this proposal should be REJECTED on that basis alone.
Public review is of particular importance as the OCC's Proposed Rule blames U.S. regulators for failing to require The OCC adopt prescriptive procyclicality controls ("U.S. regulators chose not to adopt the types of prescriptive procyclicality controls codified by financial regulators in other
jurisdictions." [1]). As "procyclicality may be evidenced by increasing margin in times of stressed market conditions" [2], an "increase in margin requirements could stress a Clearing
Member's ability to obtain liquidity to meet its obligations to OCC" [ld.] which "could expose OCC to financial risks If a Clearing Member fails to fulfil its obligations" [3] that "could threaten the stability of its members during periods of heightened volatility" [2)]. With the Occ designated as a SIFMU
whose failure or disruption could threaten the stability of the US financial system, everyone dependent on the US financial system is entitled to transparency. As the OCC is classified as a
self-regulatory organization, the OCC blaming U.S. regulators for not requiring the SRO adopt regulations to protect itself makes it apparent that the public can not fully rely upon the SRO and/or the U.S. regulators to safeguard our financial markets. This particular OCC rule proposal appears designed to protect Clearing Members from realizing the risk of potentially costly trades by rubber stamping reductions in margin requirements as required by Clearing Members; which would increase risks to the OCC. Per the OCC rule proposal: The OCC collects margin collateral from Clearing Members to address the market risk associated with a Clearing Member's
positions.[3] OCC uses a proprietary system, STANS ("System for Theoretical Analysis and Numerical Simulation"), to calculate each Clearing
Member's margin requirements with various models. One of the margin models may produce "procyclical" results where margin requirements are correlated with volatility which "could threaten
the stability of its members during periods of heightened volatility". [2] An increase in margin requirements could make it difficult for a Clearing Member to obtain liquidity to meet its obligations
to OCC. If the Clearing Member defaults, liquidating the Clearing Member positions could result in losses chargeable to the Clearing Fund which could create liquidity issues for non-defaulting Clearing Members. [2] Basically, a systemic risk exists because Clearing Members as a whole are insufficiently capitalized and/or over-leveraged such that a single Clearing Member failure (e.g., from insufficiently managing risks arising from high volatility) could cause a cascade of Clearing Member failures. In layman's terms, a Clearing Member who made bad bets on Wall St could trigger a systemic financial crisis because Clearing Members as a whole are all risking more than they can afford to lose. The OCC's rule proposal attempts to avoid triggering a systemic financial crisis by reducing margin requirements using "idiosyncratic" and "global" control settings; highlighting one instance for one individual risk factor that "[a]fter implementing idiosyncratic control settings for that risk factor, aggregate
margin requirements decreased $2.6 billion." [4] The OCC chose to avoid margin calling one or more Clearing Members at risk of default by implementing "idiosyncratic" control settings for a risk factor. According to footnote 35 [5], the OCC has made this idiosyncratic" choice over 200 times in less than 4 years (from December 2019 to August 2023) of varying durations up to 190
days (with a median duration of 10 days). The OCC is choosing to waive away margin calls for Clearing Members over 50 times a year; which seems too often to be idiosyncratic. In addition to waiving away margin calls for 50 idiosyncratic risks a year, the OCC has also chosen to implement "global" control settings in connection with long tail [6] events including the onset of the January COVID-19 27, 2021. pandemic [7]and and the so-called "meme-stock" episode on fundamentals, these rules create an unfair marketplace for other market participants, including retail investors, who are forced to face the consequences of long-tail risks while the OCC repeatedly waives margin calls for Clearing Members by repeatedly reducing their margin requirements. For this reason this rule proposal should be REJECTED and Clearing Members should be subject to strictly defined margin requirements as other investors are.
[1] https://www.federalregister.gov/d/202401386/p-11
[2] https://www.federalrecister.gov/d/202401386/p-8
[3] https://www.federalregister.gov/d/202401386/p-7
[4] https://www.federalregister.gov/d/202401386/p-50
[5] https://www.federalregister.gov/d/202401386/p-51
[6] https://en.wikipedia.org/wiki/Long_tail
[7] https://www.federalregister.gov/d/202401386/p-45
[8] https://www.federalregister.gov/d/202401386/p-79
[9] https://www.theocc.com/getmedia/e8792e3c-8802-4f5d-bef2-ada408ed1 d96/default-rules-and-procedures.pdf,
which is publicly available and linked to from the OCC's web page on
Default Rules & Procedures at https://www.theocc.com/riskmanagement/default-rulesla-procea U2S
[10] https://www.federalregister.gov/documents/2021/04/12
[2021-07454/self-regul la or' organiz > tions- the-options-clearing
-corporation-notice-of-no-obiection-to-advance
[11] https://www.federalregister.gov/d/202401386/p-16
[12] https://www.bis.org/fsi/fsipapers11.pdf
Sincerely,
A Concerned Retail Investor