Feb. 13, 2024
Introduction: I am writing to express my deep concerns regarding the Options Clearing Corporation's (OCC) proposed rule change SR-OCC-2024-001, which addresses the adjustment of parameters in its proprietary system for calculating margin requirements during periods of high market volatility. While I appreciate the need for effective risk management practices, I believe the proposed rule raises significant concerns regarding transparency, potential impact on market stability, and the inherent conflict of interest associated with the Financial Risk Management (FRM) Officer's role. Transparency Concerns: Extensive Redactions: The rule proposal contains extensive redactions, particularly in Exhibit 5 detailing how margin thresholds are calculated (205 pages removed). This lack of transparency hinders public review and informed comment, raising concerns about accountability and potential misuse of control settings. Limited Public Visibility: The OCC did not actively solicit comments from external stakeholders, further limiting public input and raising questions about inclusivity and representativeness in the rule-making process. Unclear Decision-Making: The section titled "Clearing Agency's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others" explicitly states that written comments were not solicited, suggesting a lack of openness to feedback and potential disregard for stakeholder perspectives. Recommendations: Full Disclosure: I urge the SEC to require the OCC to disclose all redacted information, particularly the details of margin threshold calculations, to ensure transparency and facilitate thorough public review. Enhanced Public Engagement: I encourage the OCC to actively solicit comments from a broad range of stakeholders, including public investors and advocacy groups, to ensure diverse perspectives are considered in the rule-making process. Clear Guidelines: I urge the OCC to implement clear, well-defined, and publicly accessible guidelines for calculating margin thresholds and applying control settings to ensure transparency and prevent potential abuse. Market Stability and Procyclicality: Credit and Procyclicality Risks: While effective risk management is crucial, the proposed rule raises concerns about insufficient margin requirements, potentially leading to liquidity challenges for non-defaulting members in case of defaults. Additionally, the observed procyclicality in the STANS model could exacerbate market downturns. Accountability of Clearing Members: While procyclicality should not excuse members from meeting financial obligations, I emphasize the need for stricter enforcement of margin requirements and accountability measures to incentivize responsible risk management and prevent a "Too Big To Fail" mentality. Idiosyncratic Control Settings: Frequency and Justification: The frequent use of idiosyncratic control settings (over 200 in less than four years) raises concerns about fairness and potential for selective application. Clear justification and documented review processes are necessary for each instance. Market Impact: Reducing margin requirements for individual securities can create market instability, as exemplified by the $2.6 billion decrease in aggregate margin requirements after applying control settings to a single risk factor. Transparent Application: I advocate for a detailed, transparent, and well-documented review process for applying both idiosyncratic and global control settings, with clear disclosure of criteria, considerations, and rationale behind each decision. Recommendations: Enhanced Review and Transparency: I urge the OCC to establish a rigorous review process for applying control settings, with detailed justifications and public disclosure of rationale and impact assessments. External Oversight: I support the implementation of an external oversight committee comprising industry experts and academics to evaluate the application of control settings and ensure fairness and effectiveness. Public Input and Framework: I encourage the OCC to engage in public consultations and hearings to gather diverse perspectives and develop a comprehensive framework defining the circumstances, duration, and impact assessment of control settings. Systemic Risk and Fairness: Insufficient Capitalization: I am concerned about the potential systemic risks arising from insufficiently capitalized Clearing Members and the domino effect of a single failure. Fairness of Discretionary Reductions: Reducing margin requirements for at-risk members raises concerns about fairness and potential undermining of market integrity. Loss Allocation Waterfall: Automatic Financial Risk to OCC: The rule proposal seems to prioritize protecting the OCC from financial risk over ensuring sufficient margin requirements, potentially compromising market stability and fairness. Impact on Margin Protection: Reducing margin requirements directly undermines the first line of defense against market risks associated with Clearing Member positions. Recommendations: Strengthen Loss Allocation: I urge the OCC to increase transparency in the Loss Allocation Waterfall process and prioritize margin deposits of non-defaulting firms over the OCC's pre-funded resources to incentivize responsible risk management. Thank you, Ramesh T Rajan rtrajan@hotmail.com