Feb. 14, 2024
Dear SEC, I am writing to express my strong opposition to the implementation of rule SR-OCC-2024-001. As a concerned market participant, I am deeply troubled by the lack of transparency and external input during the development of this proposal. The limited disclosure of information, especially the extensive redaction, makes it extremely challenging for the public to fully understand the implications of this rule. One specific example of this lack of transparency is the 205 pages detailing margin threshold calculation methods, which have been heavily redacted. Such limited transparency severely hampers market participants' ability to make informed decisions, as demonstrated by a recent market event. The impact of this lack of transparency was evident in the confusion and uncertainty that prevailed, negatively affecting market stability and participants' confidence. To improve transparency, I urge the SEC to advocate for complete disclosure without redactions. Other regulatory bodies have actively sought external input during their rule-making processes, and the SEC should follow their example. Increased transparency fosters trust among market participants and allows for a more comprehensive assessment of the proposal's potential impact. We have seen successful cases where transparency has led to better decision-making and stronger market outcomes. Robust risk management is of critical importance, especially during times of market stress, to mitigate credit risks and maintain clearing system stability. However, this rule fails to adequately address risk management concerns. There are potential liquidity challenges for non-defaulting Clearing Members in the case of a defaulting member's failure, and potential losses chargeable to the Clearing Fund in such a scenario. It is essential to hold Clearing Members accountable for meeting their margin obligations, even in challenging market conditions. The use of procyclicality as an excuse to avoid financial responsibilities must be firmly discouraged. Stricter enforcement of obligations is necessary to ensure a fair and transparent market, as it discourages risky behavior and contributes to overall market stability. The measures put forth by the OCC play a crucial role in reinforcing consistent adherence to margin obligations. Another significant concern is the frequent use of idiosyncratic control settings by the OCC. In less than four years, there have been over 200 idiosyncratic decisions, leading to market instability due to frequent reductions in individual securities' margin requirements. This has resulted in a $2.6 billion decrease in aggregate margin requirements. Additionally, the waiving of margin calls over 50 times yearly challenges the concept of idiosyncrasy and raises concerns about the integrity of these decisions. To enhance transparency and oversight, I propose the establishment of a comprehensive framework for assessing the impact of idiosyncratic controls on the market. Scenario-based stress testing should be employed to evaluate the resilience of these controls. A transparent review process, public disclosure of idiosyncratic control criteria, regular reporting on idiosyncratic controls with external oversight and audits, and the inclusion of public consultations, clear guidelines, and periodic reviews are crucial elements to ensure effective risk management aligned with dynamic market conditions. Insufficiently capitalized Clearing Members pose a potential systemic risk, with the possibility of a single failure cascading through the system. Additionally, the discretionary reduction of margin requirements raises concerns about the fairness and integrity of the market. The loss allocation waterfall, charging non-defaulting firms before OCC's resources, entails significant financial risk and could trigger defaults among non-defaulting members due to insufficient liquidity. It is illogical to reduce margin requirements for at-risk Clearing Members, and increased margin collateral is necessary for effective risk management. Therefore, it is imperative to increase transparency in the loss allocation waterfall to clarify the distribution of losses. Enhanced communication channels should be implemented to keep stakeholders informed about any changes. Skin-in-the-game remains a primary safeguard for the OCC and should be reinforced. Measures to enhance sufficiency and effectiveness of OCC's pre-funded resources for absorbing losses are recommended, including scenario-based stress testing to bolster the resilience of the loss allocation waterfall. Educational initiatives for Clearing Members, with clear OCC guidelines, will foster understanding of margin adjustments and loss allocation. I am also concerned about the extensive authority granted to the Financial Risk Management Officer (FRM Officer) and the potential conflict of interest inherent in this role. The FRM Officer's discretionary decisions, without transparent guidelines, may compromise the integrity of margin collateral. Increased uncertainty arising from discretionary power could have adverse effects on market participants and erode trust. Transparency and clear guidelines are essential for decision-making processes to ensure market confidence. Moreover, the lack of a predefined schedule for idiosyncratic control settings poses additional challenges. In conclusion, I urge the SEC to thoroughly review the concerns raised in this email. By incorporating successful case studies, such as those from other regulatory environments, we can learn from best practices and ensure a more effective and transparent decision-making process. Public input through consultations has proven valuable in the past, and I recommend its implementation in this case. Dynamic financial markets require adaptive risk management measures, and I believe that by addressing the issues outlined above, we can achieve a fair and transparent market. Thank you for considering my comments and for providing this opportunity to express my opposition to the implementation of rule SR-OCC-2024-001. Sincerely, Jeremiah Putman Individual Investor