Feb. 20, 2024
Dear Chair Gary Gensler,
I hope this email finds you well. As a concerned participant in the financial markets and a supporter of transparent, fair, and stable market practices, I am writing to express my firm opposition to the proposed rule SR-OCC-2024-001.
While acknowledging the purpose of the rule to codify OCC’s process for making adjustments during high volatility periods, the lack of transparency, especially the redaction of specific details related to the calculation of parameters and margin thresholds, raises serious concerns. Transparency is essential for market participants to assess the fairness and effectiveness of risk management measures.
The consistent use of idiosyncratic control settings, the concentration of significant decision-making authority in the hands of a single FRM Officer, and the potential systemic risks associated with frequent adjustments during high volatility are alarming. The proposed rule, as it stands, poses a threat to reducing margin call requirements by granting the OCC extensive authority to adjust margin thresholds based on undisclosed parameters during critical events.
Furthermore, the lack of solicited comments for public input raises questions about the transparency and fairness of the rule-making process. In a regulatory environment, active engagement with stakeholders is crucial to ensure well-rounded rules that address potential concerns from different parties.
I urge you to consider the suggested improvements, including strengthening and enforcing margin requirements, introducing external auditing and supervision, incorporating public input, and enhancing transparency requirements. These measures are essential to fostering trust among market participants and maintaining the stability and integrity of our financial markets.
Specifically, I’ve itemized both my serious concerns with inefficient and idiosyncratic market practices, as well as proposed solutions for better market fairness and transparency.
Identified market inefficiencies, idiosyncratic practices, and investor risk:
The redaction of specific details, especially related to the calculation of parameters and margin thresholds, prevents market participants from assessing the fairness and effectiveness of these measures. this raises concerns about the transparency of the OCC's risk management processes. The consistent use of idiosyncratic control settings, totaling over 200 within a span of less than four years, raises questions about whether they are applied uniformly or under varying circumstances. The reliance on idiosyncratic control settings, especially during high volatility, poses potential systemic risks. The OCC waiving away margin calls for Clearing Members over 50 times a year is too often to be idiosyncratic. If these adjustments become a routine response, it might indicate a lack of robustness in the overall risk management framework. The high frequency of adjustments in response to market conditions or specific challenges faced by Clearing Members raises concerns about the stability and predictability of the OCC's risk management practices. Such frequent interventions indicate a dynamic and reactive approach to risk management, leading to uncertainties in how risk is assessed, mitigated, and communicated to market participants. The proposal appears to make Clearing Members, even those poorly managing risks, de facto "Too Big To Fail," risking financial system stability. The reliance on GARCH parameters for forecasting risk and setting margin requirements assumes the accuracy and relevance of these parameters. Any shortcomings in the model or miscalculations could lead to inadequate risk coverage. The FRM Officer, tasked with protecting OCC's interests, may paradoxically function as an administrative rubber stamp for reducing margin requirements, potentially compromising market risk protection as they seek to protect the Clearing Member from failure to protect the OCC. Concentrating significant decision-making authority in a single individual, such as the FRM Officer, to approve the implementation of idiosyncratic control settings may inherently create the risk of conflicts of interest or potential abuse of power in their role. The policy outlines general guidelines for the duration of idiosyncratic control settings, the discretionary power given to the FRM Officer to adjust the duration based on unforeseen situations introduces an element of uncertainty. The proposal exposes the OCC to financial risks by potentially depleting its pre-funded financial resources in the event of a sufficiently large Clearing Member default - aka - the OCC’s Clearing Member Default Rules and Procedures, losses are allocated first to the OCC's own pre-funded financial resources ("skin-in-the-game") before utilizing clearing fund deposits of non-defaulting firms. In the event of a sufficiently large Clearing Member default, if both the margin deposits and clearing fund deposits are depleted, it automatically poses a financial risk to the OCC. If approved, the rule would undermine the first line of protection outlined in OCC's default rules and procedures—margin collateral from at-risk Clearing Members. This contradicts the usual risk management strategy of increasing collateral for higher-risk scenarios. Focusing on potential liquidity issues for non-defaulting Clearing Members indicates the OCC's concern about risks depleting its pre-funded financial resources, raising questions about the sustainability of its risk management approach.
These are suggested improvements:
Strengthen and enforce margin requirements in alignment with the risks inherent in Clearing Member positions, as opposed to reducing these requirements. Clearing Members should be incentivized to structure their portfolios to withstand challenges posed by stressed market conditions and long-tail risks. The current rule proposal creates a potential incentive for Clearing Members to pursue a "Too Big To Fail" strategy, exerting pressure on the OCC through heightened risk and leverage, which may result in more frequent implementation of idiosyncratic controls, privatizing profits, and socializing losses. Introduce external auditing and supervision as a "fourth line of defense," enhancing transparency and proactive risk management with public reporting. Incorporate public input through consultations and hearings in the rule making process, fostering inclusivity and making regulatory actions more representative of diverse perspectives. Advocate for public accessibility of stress testing results, showcasing the effectiveness of risk management measures and building trust among market participants. Consider establishing an external oversight committee comprised of industry experts, academics, and investor advocacy representatives to ensure impartial evaluation and scrutiny of risk management practices. Reorder the Loss Allocation waterfall by prioritizing Clearing fund deposits of non-defaulting firms over OCC's pre-funded financial resources and the EDCP Unvested Balance. This adjustment aims to foster self-regulation among Clearing Members, ensuring they actively monitor and enforce risk management measures, as their Clearing Fund deposits would be at risk after a suspended firm's deposits are depleted. The proposed modification enhances protection for both the OCC, a Systemically Important Financial Market Utility (SIFMU), and the public by allocating losses to the clearing corporation after Clearing Member deposits are exhausted, thereby reducing the potential need for a bailout of the clearing agency. Enhance transparency requirements, ensuring clear and accessible disclosure in reporting and decision-making processes related to risk management measures. This includes public disclosure of how the OCC will ascertain parameters in its proprietary system for calculating margin requirements during high volatility, with specific details on how these parameters will be calculated. Strengthen oversight mechanisms, involving regulatory bodies more actively to maintain accountability and address emerging risks during periods of heightened market volatility. Provide clear guidelines for the application of idiosyncratic controls, preventing misuse and proposing a structured evaluation framework for consistency and full disclosure for public reviewal. Consider establishing an external oversight committee comprised of industry experts, academics, and investor advocacy representatives to ensure impartial evaluation and scrutiny of risk management practices.
In closing, I strongly oppose the adoption of proposed rule SR-OCC-2024-001 in its current form and encourage a thorough reconsideration of its implications. Finally, I have attached my local representatives House Rep Chris Pappas and Senator Jeanne Shaheen to this email as well, to ensure full transparency regarding these concerns.
Thank you for your attention to this matter.
Sincerely,
Andrew Menard
65 Cabot Street
Portsmouth, New Hampshire 03801
207-749-8825
andrewmenard@me.com