Feb. 11, 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" (PDF, 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.
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" (PDF, 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.
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
ndividual risk factor that "[a]fter implementing
idiosyncratic control settings for that risk factor,
aggregate margin requirements decreased $2.6
pillion." [4] The OCC chose to avoid margin calling
bne 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
nedian 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 COVID-19 pandemic and the so-cal
"meme-stock" episode on January 27, 2021. [7]
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. Thus,
the FRM Officer is no more than an administrative
rubber stamp to reduce margin requirements for
Clearing Members at risk of failure. 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.
In light of the issues outlined above, please consider
the following modifications:
1. 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,
2. External auditing and supervision as a "fourth line
of defense" similar to that described in The "four
lines of defence model" for financial institutions [1 2]
with enhanced public reporting to ensure that risks
are identified and managed before they become
systemically significant.
3. Swap 3. OCC's own pre-funded financial
resources" and "4. Clearing fund deposits of
non-defaulting firms" for the OCC's Loss Allocation
waterfall so that Clearing fund deposits of
non-defaulting firms are allocated losses before
OCC's own pre-funded financial resources and
the EDCP Unvested Balance. Changing the order
of loss allocation would encourage Clearing
Members to police each other with each Clearing
Member ensuring other Clearing Members take
appropriate risk management measures as their
Clearing Fund deposits are at risk after the deposits
of a suspended firm are exhausted. This would
also increase protection to the OcC, a SIFMU, by
allocating losses to the clearing corporation after
Clearing Member deposits are exhausted. By
extension, the public would benefit from lessening
the risk of needing to bail out a systemically
important clearing agency.
Thank you for the opportunity to comment as
all investors benefit from a fair, transparent, and
resilient market.
Thank You,
John Ryan Fry