Feb. 28, 2024
Dear Securities and Exchange Commission, I would like to express my gratitude for the opportunity to provide feedback on SR-OCC-2024-001 34-99393 titled "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." As an individual investor, I have several concerns regarding the OCC rule proposal and I am not in favor of its approval. Therefore, I am submitting my comments on the SR-OCC-2024-001 34-99393 rule. One of my main concerns is the lack of transparency within our financial system, which is evident in this rule proposal and others. The specific details of this proposal in Exhibit 5, as well as the supporting information (such as Exhibit 3), have been heavily redacted. This prevents the public from conducting a thorough review and providing meaningful comments on the proposal. Without the opportunity for a comprehensive public review, this proposal should be rejected based on this alone. Public review is particularly important because the OCC's Proposed Rule places blame on U.S. regulators for not mandating the adoption of prescriptive procyclicality controls. It states that "U.S. regulators chose not to adopt the types of prescriptive procyclicality controls codified by financial regulators in other jurisdictions." As stated in the proposal, "procyclicality may be evidenced by increasing margin in times of stressed market conditions." This increase in margin requirements could potentially strain a Clearing Member's ability to obtain liquidity and fulfill its obligations to the OCC. Consequently, this could expose the OCC to financial risks if a Clearing Member fails to meet its obligations, which in turn could threaten the stability of its members during periods of heightened volatility. Given that the OCC is designated as a SIFMU whose failure or disruption could jeopardize the stability of the U.S. financial system, it is crucial that transparency is provided to everyone who relies on the U.S. financial system. As the OCC falls under this classification, it is imperative that transparency is upheld. The specific OCC rule proposal seems to be aimed at safeguarding Clearing Members from facing the danger of potentially expensive trades by approving reductions in margin requirements as requested by Clearing Members; a move that could heighten risks for the OCC. According to the OCC rule proposal: The OCC acquires margin collateral from Clearing Members to manage the market risk linked to a Clearing Member’s positions. OCC utilizes a unique system, STANS (“System for Theoretical Analysis and Numerical Simulation”), to compute the margin requirements of each Clearing Member using different models. One of these models might yield “procyclical” outcomes where margin requirements are linked to volatility, potentially jeopardizing the stability of its members during periods of increased volatility. An escalation in margin requirements could hinder a Clearing Member from securing liquidity to fulfill its obligations to the OCC. In the event of a Clearing Member default, liquidating their positions could lead to losses that would be borne by the Clearing Fund, potentially causing liquidity problems for non-defaulting Clearing Members. Essentially, a systemic risk looms due to Clearing Members collectively being inadequately capitalized and/or excessively leveraged, making a single Clearing Member's failure (due to inadequate risk management in the face of high volatility) capable of triggering a chain reaction of Clearing Member failures. In simpler terms, a Clearing Member making poor investments on Wall Street could set off a systemic financial crisis because Clearing Members, as a whole, are taking on more risk than they can handle. The OCC has proposed a rule to prevent a systemic financial crisis by reducing margin requirements through the use of "idiosyncratic" and "global" control settings. By focusing on individual risk factors, the OCC was able to decrease aggregate margin requirements by $2.6 billion. The OCC's decision to implement "idiosyncratic" control settings for specific risk factors aims to prevent margin calls for Clearing Members at risk of default. This approach has been utilized over 200 times in less than 4 years, with durations ranging up to 190 days. Despite the frequency of these actions, the OCC continues to waive margin calls for Clearing Members over 50 times a year, raising questions about the true nature of these decisions. Furthermore, the OCC has also implemented "global" control settings in response to significant events such as the COVID-19 pandemic and the "meme-stock" episode on January 27, 2021. 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. [8] 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. The OCC's Clearing Member Default Rules and Procedures allocate losses to its own pre-funded financial resources before clearing fund deposits of non-defaulting firms in the event of a sufficiently large Clearing Member default. This poses a financial risk to the OCC, especially in terms of potential liquidity issues for non-defaulting Clearing Members due to charges to the Clearing Fund. The proposal to reduce margin requirements for at-risk Clearing Members through idiosyncratic control settings contradicts the primary protection line of the OCC, which is the margin deposits of the suspended firm. The OCC should actually increase the margin collateral required from at-risk Clearing Members to enhance their protection from market risks and ensure appropriate risk management of Clearing Member positions. Despite the OCC's concerns about the allegedly "procyclical" STANS model overestimation, increasing margin requirements is necessary to mitigate financial risks posed by defaulting Clearing Members. Approving the rule proposal to reduce procyclical margin requirements would weaken the OCC's first line of protection, the margin collateral from at-risk Clearing Members. Therefore, this proposal should be rejected, undergo thorough public review, and only be approved with significant amendments to address the highlighted issues. 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 defence model” for financial institutions [12] with enhanced public reporting to ensure that risks are identified and managed before they become systemically significant. To enhance the OCC's Loss Allocation waterfall, it is proposed to swap the positions of "3. OCC's own pre-funded financial resources" and "4. Clearing fund deposits of non-defaulting firms". This means that Clearing fund deposits of non-defaulting firms will be allocated losses before OCC's own pre-funded financial resources and the EDCP Unvested Balance. This change in the order of loss allocation would incentivize Clearing Members to monitor each other's risk management practices, as their Clearing Fund deposits would be at risk once the deposits of a suspended firm are depleted. Moreover, this adjustment would provide greater protection to the OCC, a SIFMU, by allocating losses to the clearing corporation only after Clearing Member deposits have been exhausted. Consequently, the general public would benefit from a reduced risk of having to financially support a systemically important clearing agency. Thank you for considering my concerns regarding the SR-OCC-2024-001 34-99393 rule and I hope that anyone reading this letter takes a moment to think about what is the right thing to do in order to ensure a fair and transparent market. Sincerely, Maria Goodman