Feb. 25, 2024
Dear Commissioners, I am writing to comment on the proposed rule change SR-OCC-2024-001 by The Options Clearing Corporation (OCC). Thank you for giving household investors the opportunity to make comments. While I appreciate the efforts to enhance the financial stability of the markets, I have several concerns regarding transparency, risk management, and the potential impact on market participants. Transparency Concerns: The extensive redaction within the proposal, including the 205 pages detailing margin threshold calculation methods, significantly hinders public understanding and evaluation of the proposed changes. Such opacity limits market participants' ability to make informed decisions, as evidenced by recent market events. I urge the SEC to advocate for complete disclosure without redactions, aligning with practices of other regulatory bodies that actively seek external input during rule-making processes. Risk Management and Procyclicality: Effective risk management is crucial, especially during market stress. The proposed rule change's approach to procyclicality and liquidity challenges raises concerns. While I understand the OCC's intent to mitigate credit risks and maintain clearing system stability, the frequent use of idiosyncratic control settings—over 200 decisions in less than four years—suggests a potential for market instability. The discretionary reduction of margin requirements, particularly the $2.6 billion decrease linked to idiosyncratic controls, warrants a reevaluation of the approach to ensure it does not inadvertently exacerbate systemic risks. Accountability and Measures: The accountability of Clearing Members to meet margin obligations, even under challenging conditions, is paramount. The proposal should enforce obligations more strictly to discourage risky behaviour and ensure market stability. Additionally, the role of the Financial Risk Management (FRM) Officer in monopolising authority and the potential conflict of interest in balancing OCC's and Clearing Members' interests need to be addressed to maintain the integrity of margin collateral. Enhancing Transparency and Oversight: I propose establishing a comprehensive framework for assessing the impact of idiosyncratic controls on the market, including scenario-based stress testing and transparent review processes. Public consultations and clear guidelines are essential for adaptive risk management that aligns with dynamic market conditions. Systemic Risk and Fairness: The discretionary reduction of margin requirements raises fairness concerns and could impact market integrity. I argue for logical protection by increasing margin requirements based on OCC's own admissions regarding the potential for increased margin in stressed conditions. Proposed Enhancements: To enhance transparency and oversight, I recommend establishing an external oversight framework for the FRM Officer's discretionary decisions, transparent and well-defined guidelines, and external audits to ensure adherence to established guidelines. Conclusion and Recommendations: I hope the SEC will consider these concerns and recommendations to ensure the proposed rule change fosters a fair, transparent, and stable market environment. Public input through consultations and adaptive risk management measures are crucial for achieving these goals. Thank you for considering my comments on this matter. I look forward to the SEC's thorough and thoughtful review of the concerns raised. Kind regards, Russell.