Feb. 21, 2024
To Whom It May Concern, 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 teh Markets it Serves Experience High Volatility." As a retail investor and a professional financial services representative, I have several concerns about the OCC rule proposal, do not support its approval, and appreciate the liberty to comment. Quite frankly, I'm concerned about the lack of transparency in our financial system as evidenced by this proposed rule proposal. The details of this proposal and supporting information are significantly redacted which prevents public review of this comment hindering the ability for transparency and fair markets. 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. \[[3](https://www.federalregister.gov/d/2024-01386/p-7)\] * 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”. \[[2](https://www.federalregister.gov/d/2024-01386/p-8)\] * 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. \[[2](https://www.federalregister.gov/d/2024-01386/p-8)\] 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 individual risk factor that “\[a\]fter implementing idiosyncratic control settings for that risk factor, aggregate margin requirements decreased $2.6 billion.” \[[4](https://www.federalregister.gov/d/2024-01386/p-50)\] 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](https://www.federalregister.gov/d/2024-01386/p-51) \[[5](https://www.federalregister.gov/d/2024-01386/p-51)\], 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 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](https://en.wikipedia.org/wiki/Long_tail) \[[6](https://en.wikipedia.org/wiki/Long_tail)\] events including the onset of the COVID-19 pandemic and the so-called “meme-stock” episode on January 27, 2021. \[[7](https://www.federalregister.gov/d/2024-01386/p-45)\] Fundamentally, these rules create an unfair marketplace for other market participants, including 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 strictly defined margin requirements as other investors are. Per the OCC, this rule proposal and these special margin reduction procedures exist because a single Clearing Member defaulting could result in a cascade of Clearing Member defaults potentially exposing the OCC to financial risk. (https://www.federalregister.gov/d/2024-01386/p-79)\] Thus, Clearing Members who fail to properly manage their portfolio risk against long tail events become de facto Too Big To Fail. For this reason, this rule proposal should be rejected and Clearing Members should face the consequences of failing to properly manage their portfolio risk, including against long tail events. Clearing Member failure is a natural disincentive against excessive leverage and insufficient capitalization as others in the market will not cover their loss. 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 order to protect the integrity of equity markets and capitalism in itself, it is imperative to reject this comment in its entirety. God Bless America. Thank you for the opportunity to comment as all investors benefit from a fair, transparent, and resilient market. \[1\] [https://www.federalregister.gov/d/2024-01386/p-11](https://www.federalregister.gov/d/2024-01386/p-11) \[2\] [https://www.federalregister.gov/d/2024-01386/p-8](https://www.federalregister.gov/d/2024-01386/p-8) \[3\] [https://www.federalregister.gov/d/2024-01386/p-7](https://www.federalregister.gov/d/2024-01386/p-7) \[4\] [https://www.federalregister.gov/d/2024-01386/p-50](https://www.federalregister.gov/d/2024-01386/p-50) \[5\] [https://www.federalregister.gov/d/2024-01386/p-51](https://www.federalregister.gov/d/2024-01386/p-51) \[6\] [https://en.wikipedia.org/wiki/Long\_tail](https://en.wikipedia.org/wiki/Long_tail) \[7\] [https://www.federalregister.gov/d/2024-01386/p-45](https://www.federalregister.gov/d/2024-01386/p-45) \[8\] [https://www.federalregister.gov/d/2024-01386/p-79](https://www.federalregister.gov/d/2024-01386/p-79) \[9\] [https://www.theocc.com/getmedia/e8792e3c-8802-4f5d-bef2-ada408ed1d96/default-rules-and-procedures.pdf](https://www.theocc.com/getmedia/e8792e3c-8802-4f5d-bef2-ada408ed1d96/default-rules-and-procedures.pdf), which is publicly available and linked to from the OCC’s web page on Default Rules & Procedures at [https://www.theocc.com/risk-management/default-rules-and-procedures](https://www.theocc.com/risk-management/default-rules-and-procedures) \[10\] [https://www.federalregister.gov/documents/2021/04/12/2021-07454/self-regulatory-organizations-the-options-clearing-corporation-notice-of-no-objection-to-advance](https://www.federalregister.gov/documents/2021/04/12/2021-07454/self-regulatory-organizations-the-options-clearing-corporation-notice-of-no-objection-to-advance) \[11\] [https://www.federalregister.gov/d/2024-01386/p-16](https://www.federalregister.gov/d/2024-01386/p-16) \[12\] [https://www.bis.org/fsi/fsipapers11.pdf](https://www.bis.org/fsi/fsipapers11.pdf) Respectfully, A concerned retail investor and U.S. Citizen