Feb. 13, 2024
To All Whom This Concerns, I am a retail investor submitting this comment for consideration regarding SR-OCC-2024-001 34-99393 (aka “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 do NOT support approval of this proposal. I’m concerned about the lack of transparency in our financial system, as evidenced in part by this rule proposal which has many details significantly redacted. This makes it impossible for the public to meaningfully review and comment on it. Public review is of particular importance, as the OCC’s Proposed Rule blames U.S. regulators for failing “to adopt the types of prescriptive procyclicality controls codified by financial regulators in other jurisdictions.” As “procyclicality may be evidenced by increasing margin in times of stressed market conditions” an “increase in margin requirements could stress a Clearing Member's ability to obtain liquidity to meet its obligations to OCC” which “could expose OCC to financial risks if a Clearing Member fails to fulfill its obligations” that “could threaten the stability of its members during periods of heightened volatility.” 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 to adopt regulations to protect itself makes it apparent that the public cannot fully rely upon the SRO and/or the U.S. regulators to safeguard our financial markets. This particular OCC rule proposal is ostensibly designed to protect Clearing Members from realizing the risk of potentially costly trades by rubber stamping reductions in margin requirements required by Clearing Members. In my opinion this would increase risks to the OCC, as a systemic risk exists when 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. Retail investors are beyond weary of being boxed out by institutions “too big to fail” and regulatory practices (or lack thereof) supporting such. 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 “after implementing idiosyncratic control settings for that risk factor, aggregate margin requirements decreased $2.6 billion.” 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, 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 is far too often to be idiosyncratic. In addition to waiving away margin calls numerous times a year, the OCC has also chosen to implement “global” control settings in connection with long tail events including the onset of the COVID-19 pandemic and the so-called “meme-stock” episode on January 27, 2021. Fundamentally, these rules create an unfair marketplace for other market participants, particularly 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 the same strictly defined margin requirements as other investors. The potential of Clearing Member failure is a natural disincentive against excessive leverage and insufficient capitalization. Moreover, others in the market should not be subject to covering losses as a consequence of Clearing Members failing to properly manage portfolio risk. This rule proposal also would codify 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 proposal necessarily prioritizes 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. This essentially corrupts the intended 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 allocates losses to “OCC’s own pre-funded financial resources” (aka “skin-in-the-game” per SR-OCC-2021-801 34-91491) before “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 to reduce margin requirements for at risk Clearing Members via idiosyncratic control settings is blatantly illogical and nonsensical. By the OCC’s own admissions regarding the potential scale of financial risk posed by a defaulting Clearing Member, the OCC should be increasing the amount of margin collateral required from the at risk Clearing Member(s) to increase their protection from market risks. Curiously, increasing margin requirements is exactly what the OCC admits is predicted by the allegedly “procyclical” STANS model that the OCC alleges is an overestimation and seeks to mitigate. 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. External auditing and supervision as a “fourth line of defense” similar to that described in The “four lines of defense model” for financial institutions with enhanced public reporting to ensure that risks are identified and managed before they become systemically significant. 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. Respectfully, Tim Carlfeldt Chickamauga, GA