Mar. 3, 2024
Dear [SEC/Relevant Regulatory Body], I am writing to express my concerns regarding the proposed rule change SR-OCC-2024-001 by the Options Clearing Corporation (OCC), which aims to adjust parameters for calculating margin requirements during periods of high market volatility. I appreciate the opportunity to provide feedback on this matter and commend the [SEC/Relevant Regulatory Body] for facilitating public input. Transparency Concerns: I am particularly concerned about the lack of transparency surrounding the proposal. The extensive redactions in the materials provided by OCC make it challenging for the public to fully understand the implications of the proposed rule change. For instance, the redaction of 205 pages detailing margin threshold calculation methods significantly hampers stakeholders' ability to assess the proposal's potential impact accurately. Limited transparency undermines market participants' ability to make informed decisions, as evidenced by recent market events where lack of transparency exacerbated market volatility. Recommendations to Improve Transparency: I urge the [SEC/Relevant Regulatory Body] to advocate for complete disclosure without redactions. Other regulatory bodies actively seek external input during rule-making processes, and increased transparency fosters trust among market participants. Transparent rule-making processes are essential for maintaining market integrity and ensuring fair and efficient markets. Risk Management and Procyclicality: Robust risk management is crucial, especially during periods of market stress, to mitigate credit risks and maintain clearing system stability. I am concerned about the liquidity challenges for non-defaulting Clearing Members in case of a defaulting member's failure and the potential losses chargeable to the Clearing Fund in such scenarios. Accountability and Measures: Clearing Members must be held accountable for meeting margin obligations, even in challenging market conditions. It is imperative to enforce obligations to ensure a fair and transparent market and discourage risky behavior. Additionally, OCC's measures should reinforce consistent adherence to margin obligations to promote overall market stability. Idiosyncratic Control Settings: The frequent idiosyncratic control settings by OCC raise concerns about market instability. Over 200 idiosyncratic decisions in less than four years, resulting in a $2.6 billion decrease in aggregate margin requirements, are alarming. Waiving margin calls over 50 times yearly challenges the concept of idiosyncrasy and warrants comprehensive assessment and oversight. Enhancing Transparency and Oversight: I propose establishing a comprehensive framework for assessing the impact of idiosyncratic controls on the market and advocating for scenario-based stress testing to evaluate their resilience. Transparent review processes, public disclosure of criteria, and regular reporting with external oversight are essential to ensure accountability and mitigate risks. Systemic Risk and Fairness: Insufficiently capitalized Clearing Members pose systemic risks, and discretionary reduction of margin requirements may undermine market integrity. I am concerned about the fairness of such practices and their potential impact on market stability. Concerns Regarding Loss Allocation Waterfall: Loss allocation to non-defaulting firms before OCC's resources poses significant financial risk. While I acknowledge OCC's concerns about margin increases in stressed market conditions, logical protection necessitates increased margin requirements based on OCC's own admissions. Enhanced transparency in loss allocation and communication channels is vital to clarify distribution and keep stakeholders informed. Financial Risk Management Officer's Role: Granting extensive authority to the Financial Risk Management (FRM) Officer raises concerns about inherent conflicts of interest and administrative oversight. Clear guidelines, external oversight, and audits are essential to ensure transparency and maintain market confidence in decision-making processes. Proposed Enhancements: External oversight, transparent guidelines, and external audits are necessary to regulate the FRM Officer's discretionary decisions effectively. Improved communication channels and scenario-based stress testing tailored to evaluate the impact of discretionary choices are recommended to enhance market stability. Conclusion and Recommendations: In conclusion, I urge the [SEC/Relevant Regulatory Body] to thoroughly reconsider the proposed rule change in light of the concerns raised. Transparent and inclusive rule-making processes, robust risk management measures, and accountability mechanisms are essential for safeguarding market integrity and promoting investor confidence. I thank the [SEC/Relevant Regulatory Body] for the opportunity to provide feedback and express hope for a thoughtful review that prioritizes transparency, risk mitigation, and the broader market's well-being. Sincerely, Concerned guy