Mar. 4, 2024
Dear Sir/Madam, it is worth noting that the Options Clearing Corporation (OCC) did not seek external input, which raises concerns about the inclusivity of the decision-making process. I am writing to express my concerns 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 a household investor. Upon reviewing the OCC's rule proposal, I have identified several concerns. I am unable to lend my support to its approval and wish to take this opportunity to articulate my reservations. In simpler terms, there's a big problem because the institutions that handle clearing trades don't have enough money or are taking on too much risk. If just one of these institutions fails because they made bad decisions during times of high market volatility, it could set off a chain reaction of failures among others like it. The proposed rule change from the Options Clearing Corporation (OCC) tries to prevent this chain reaction by lowering the amount of money these institutions need to have on hand as a safety net. They do this by adjusting certain settings in their system to lower the margin requirements, meaning the amount of money these institutions have to keep aside as a buffer. The OCC has done this many times in the past few years, basically excusing these institutions from having to put up more money when they're at risk of failing. They've done it so often that it doesn't seem like these instances are just random, one-off events anymore. On top of that, they've also relaxed the rules during major market events like the start of the COVID-19 pandemic and the "meme-stock" frenzy in January 2021. But here's the problem: By repeatedly letting these institutions off the hook for not having enough money to cover their risks, it creates an unfair situation for other investors, like regular people like you and me. We're left facing the consequences of market crashes and other unexpected events, while these institutions keep getting breaks. The OCC says they're doing this to prevent a domino effect of failures among these institutions, which could put the whole financial system at risk. But by constantly bailing them out, it's like these institutions are being treated as "too big to fail," meaning they're allowed to take on risky behavior without facing the full consequences. I urge you to consider the following adjustments: 1. Instead of reducing margin requirements, it's crucial to increase and rigorously enforce them in line with the risks associated with Clearing Member positions. Clearing Members must be incentivized to structure their portfolios to withstand challenging market conditions and long-term risks. The current proposal, by contrast, incentivizes Clearing Members to take on excessive risk and leverage, effectively positioning themselves as "Too Big To Fail." This pressure tactic aims to compel the OCC into implementing idiosyncratic controls more frequently, privatizing profits while socializing losses. 2. Rearrange the OCC's Loss Allocation waterfall by prioritizing "Clearing fund deposits of non-defaulting firms" before "OCC’s own pre-funded financial resources" and the "EDCP Unvested Balance." This reordering would prompt Clearing Members to hold one another accountable, with each Member ensuring others undertake appropriate risk management measures, as their Clearing Fund deposits would be at stake after those of a suspended firm are exhausted. Ultimately, such a restructuring would mitigate the risk of necessitating a public bailout of a systemically important clearing agency, thus benefiting the public interest. 3. Implement external auditing and supervision as a "fourth line of defense," akin to the model outlined in "The Four Lines of Defence Model" for financial institutions. This approach should involve enhanced public reporting to ensure timely identification and management of risks before they reach systemic proportions. I appreciate the chance to provide feedback, as it is crucial for all investors to have a fair, transparent, and robust market.