Mar. 4, 2024
To the SEC, I am writing to express my sincere appreciation for the opportunity to provide comments on the recent proposal. The chance to engage in this dialogue with the Securities and Exchange Commission (SEC) is invaluable, and I commend the SEC for facilitating such an open process. However, I must highlight some concerns regarding transparency throughout the proposal development phase. Specifically, there has been a notable absence of external input from the Options Clearing Corporation (OCC), which raises questions about the inclusivity and openness of the regulatory process. Transparency Concerns: The extensive redactions within the proposal have made it challenging for the public to fully comprehend its implications. For instance, the redaction of 205 pages detailing margin threshold calculation methods serves as a poignant example. Such limited transparency significantly hampers market participants' ability to make informed decisions, particularly evident in recent market events. Recommendations to Improve Transparency: I strongly urge the SEC to advocate for complete disclosure without redactions, following the lead of other regulatory bodies that actively seek external input during rule-making processes. Enhanced transparency not only fosters trust among market participants but also serves as a cornerstone for regulatory success, as evidenced by successful cases in other jurisdictions. Risk Management and Procyclicality: Robust risk management is paramount, particularly in times of market stress, to mitigate credit risks and uphold clearing system stability. It is crucial to outline the liquidity challenges faced by non-defaulting Clearing Members in the event of a defaulting member's failure and to highlight the potential losses chargeable to the Clearing Fund. Accountability and Measures: Clearing Members must be held accountable to meet margin obligations, even in challenging market conditions, and procyclicality should not serve as an excuse to shirk financial responsibilities. Stricter enforcement of obligations is essential for fostering a fair and transparent market environment, discouraging risky behavior, and ensuring overall stability. The OCC's measures play a crucial role in reinforcing consistent adherence to margin obligations. Idiosyncratic Control Settings: I am deeply concerned about the OCC's frequent idiosyncratic control settings, as evidenced by over 200 idiosyncratic decisions in less than four years. Market instability may arise from frequent reductions in individual securities' margin requirements, highlighted by a $2.6 billion decrease in aggregate margin requirements linked to idiosyncratic controls. Furthermore, the waiver of margin calls over 50 times yearly challenges the concept of idiosyncrasy. Enhancing Transparency and Oversight: To address these concerns, I propose a comprehensive framework for assessing the impact of idiosyncratic controls on the market. I advocate for scenario-based stress testing to evaluate the resilience of these controls and call for a transparent review process with public disclosure of idiosyncratic control criteria. External oversight and audits are imperative, along with public consultations, clear guidelines, and periodic reviews to ensure adaptive risk management aligning with dynamic market conditions. Systemic Risk and Fairness: Analyzing potential systemic risks arising from insufficiently capitalized Clearing Members and the fairness of discretionary reduction of margin requirements is crucial for maintaining market integrity and stability. Concerns Regarding Loss Allocation Waterfall: The allocation of losses to non-defaulting firms before OCC's resources poses significant financial risks, and measures must be taken to clarify loss distribution. Enhanced communication channels are necessary to keep stakeholders informed about changes, and scenario-based stress testing can bolster the resilience of the Loss Allocation Waterfall. Financial Risk Management Officer's Role: Concerns regarding the extensive authority granted to the FRM Officer and the inherent conflict of interest in their role must be addressed. Transparency and clear guidelines are essential for maintaining market confidence, and external oversight and audits of the FRM Officer's discretionary decisions are recommended. In conclusion, I reiterate my gratitude to the SEC for the opportunity to comment. I hope that these concerns will be thoroughly reviewed, as past experiences have shown that such reviews can lead to positive outcomes. I remain optimistic about the potential for constructive dialogue and meaningful change. Thank you for your attention to these matters. Sincerely, An anonymous Investor