Feb. 10, 2024
Thank you for the opportunity to comment on SR-OCC-2024-001 34-99393
entitled “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”.
I have several concerns about the OCC rule proposal, HIGHLY
OPPOSE THIS PROPOSAL, AND DO NOT SUPPORT IT'S APPROVAL!.
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 along with supporting information are significantly
redacted which prevents public review making it impossible for the
public to meaningfully review and comment on this proposal, and this
proposal should be rejected on that basis alone.
These rules create an unfair marketplace for market participants,
especially 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. Per the OCC, this rule proposal and these special
margin reduction procedures exist because a single Clearing Member
defaulting could result in a cascade of Clearing Member defaults
potentially exposing the OCC to financial risk. Thus, Clearing Members
who fail to properly manage their portfolio risk against long tail
events become de facto Too Big To Fail.
For this reason, this rule proposal should be rejected and
Clearing Members should face the consequences of failing to properly
manage their portfolio risk, including against long tail events.
Clearing Member failure is a natural disincentive against excessive
leverage and insufficient capitalization as others in the market will
not cover their loss.
This rule proposal codifies an inherent conflict of interest for
the Financial Risk Management (FRM) Officer. While the FRM Officer’s
position is allegedly to protect OCC’s interests, the situation
outlined by the OCC proposal where a Clearing Member failure exposes
the OCC to financial risk necessarily requires the FRM Officer to
protect the Clearing Member from failure to protect the OCC.
Unfortunately, rubber stamping margin requirement reductions for
Clearing Members at risk of failure vitiates the protection from
market risks associated with Clearing Member’s positions provided by
the margin collateral that would have been collected by the OCC. For
this reason, this rule proposal should be rejected and the OCC should
enforce sufficient margin requirements to protect the OCC and minimize
the size of any bailouts that may already be required.
As the OCC’s Clearing Member Default Rules and Procedures Loss
Allocation waterfall allocates losses to “3. OCC’s own pre-funded
financial resources” (OCC ‘s “skin-in-the-game” per SR-OCC-2021-801
34-91491 [10]) before “4. Clearing fund deposits of non-defaulting
firms”, any sufficiently large Clearing Member default which exhausts
both “1. The margin deposits of the suspended firm” and “2. Clearing
fund deposits of the suspended firm” automatically poses a financial
risk to the OCC. As this rule proposal is concerned with potential
liquidity issues for non-defaulting Clearing Members as a result of
charges to the Clearing Fund, it is clear that the OCC is concerned
about risk which exhausts OCC’s own pre-funded financial resources.
With the first and foremost line of protection for the OCC being “1.
The margin deposits of the suspended firm”, this rule proposal is
blatantly illogical and nonsensical.
If this rule proposal is approved, mitigating the procyclical
margin requirements directly reduces the first line of protection for
the OCC, margin collateral from at risk Clearing Member(s), so this
rule proposal should be rejected, made fully available for public
review, and approved only with significant amendments to address the
issues raised herein.
In light of the issues outlined above, please consider the
following modifications:
Increase and enforce margin requirements commensurate with risks
associated with Clearing Member positions instead of reducing margin
requirements. Clearing Members should be encouraged to position their
portfolios to account for stressed market conditions and long-tail
risks. This rule proposal currently encourages Clearing Members to
become Too Big To Fail in order to pressure the OCC with excessive
risk and leverage into implementing idiosyncratic controls more often
to privatize profits and socialize losses.