Mar. 1, 2024
Dear Members of the Securities and Exchange Commission, I am writing to express my profound concerns regarding the proposed rule change by the Options Clearing Corporation (OCC) to adjust parameters for calculating margin requirements during periods of high market volatility. While I understand the necessity for adaptive risk management measures, the issues posed within the rule, as outlined below, raise significant apprehensions about the potential impact on market stability, transparency, and the inherent conflicts of interest associated with the Financial Risk Management (FRM) Officer's role. Issues Posed within the Rule: Lack of Transparency: The redaction of specific details impedes market participants from assessing the fairness and effectiveness of OCC measures, raising transparency concerns in risk management processes. Uniform Application Questions: Over 200 idiosyncratic control settings within four years prompt questions about their uniform application. Systemic Risks and Lack of Robustness: Reliance on idiosyncratic control settings, especially during high volatility, poses systemic risks. Frequent waivers of margin calls may indicate a lack of robustness in risk management. Stability and Predictability Concerns: Frequent adjustments in response to market conditions or Clearing Member challenges raise concerns about the stability and predictability of OCC risk management practices. "Too Big To Fail" Treatment: The proposal treats Clearing Members as "Too Big To Fail," risking financial system stability. Model Assumptions and Inadequate Risk Coverage: Reliance on GARCH parameters assumes accuracy; any model shortcomings or miscalculations could lead to inadequate risk coverage. Conflicts of Interest: The FRM Officer's role in reducing margin requirements compromises market risk protection while seeking to protect Clearing Members. Concentrating decision-making authority in the FRM Officer creates conflicts of interest or potential abuse of power. Uncertainty in Duration Guidelines: General guidelines for idiosyncratic control settings' duration introduce uncertainty with discretionary power given to the FRM Officer. Financial Risks to OCC: The proposal exposes OCC to financial risks by potentially depleting pre-funded resources in a large Clearing Member default. Undermining Default Rules: If approved, the rule undermines the first line of protection outlined in OCC's default rules—increasing collateral for higher-risk scenarios. Liquidity Issues for Non-defaulting Members: The potential liquidity issues for non-defaulting Clearing Members raise questions about the sustainability of OCC's risk management approach. Suggested Improvements to the Rule: In light of the aforementioned concerns, I would like to advocate for the following improvements to the proposed rule: Strengthen and Enforce Margin Requirements: Align margin requirements with Clearing Member risks, discouraging a "Too Big To Fail" strategy that could pressure the OCC, privatize profits, and socialize losses. External Auditing and Supervision: Introduce external auditing and supervision as a "fourth line of defense" for enhanced transparency and proactive risk management with public reporting. Inclusive Rule-making Process: Incorporate public input through consultations and hearings in the rule-making process for inclusive and representative regulatory actions. Public Accessibility of Stress Testing Results: Advocate for public accessibility of stress testing results to showcase risk management effectiveness and build trust among market participants. External Oversight Committee: Consider establishing an external oversight committee of industry experts, academics, and investor advocacy representatives for impartial evaluation of risk management practices. Reordering Loss Allocation Waterfall: Reorder the Loss Allocation waterfall, prioritizing Clearing fund deposits of non-defaulting firms over OCC's pre-funded financial resources and the EDCP Unvested Balance to foster self-regulation among Clearing Members. Enhanced Transparency Requirements: Enhance transparency requirements, ensuring clear and accessible disclosure in reporting and decision-making processes related to risk management measures. Strengthened Oversight Mechanisms: Strengthen oversight mechanisms, involving regulatory bodies more actively to maintain accountability and address emerging risks during periods of heightened market volatility. Clear Guidelines for Idiosyncratic Controls: Provide clear guidelines for the application of idiosyncratic controls, preventing misuse, and proposing a structured evaluation framework for consistency and full disclosure for public review. In conclusion, I urge the Securities and Exchange Commission to thoroughly reconsider the proposed rule change by the Options Clearing Corporation, taking into account the concerns raised and the suggested improvements. The importance of transparency, risk mitigation, and the broader market's well-being should be paramount in your considerations. Thank you for your attention to this matter. I trust that the Securities and Exchange Commission will act in the best interest of market participants and the overall integrity of the financial system. Sincerely, Daniel Shoupe