Mar. 4, 2024
Dear Members of the Securities and Exchange Commission,
Thank you for the opportunity to comment on rule proposal "SR-OCC-2024-001."
As a retail investor participating in the US financial market - and a supporter of fair and transparent markets - I am writing to express my concern and firm opposition of the proposed rule.
One of my main concerns is the lack of transparency in this proposal. Why are specific details redacted, especially related to the calculation of parameters and margin thresholds? This prevents all market participants from assessing the fairness and effectiveness of the proposed measures, and raises concerns about the transparency of the OCC's risk management process. Without understanding the intrinsic details inherent to the rule proposal, it makes it very difficult to fully understand and support this rule. Transparency is essential for market participants to assess the fairness and effectiveness of risk management measures.
The consistent use of idiosyncratic control settings, totaling over 200 within a span of less than four years, raises questions about whether they are applied uniformly or under varying circumstances. Also, the reliance on idiosyncratic control settings - especially during high volatility - poses potential systemic risks. The OCC waiving away margin calls for Clearing Members over 50 times a year is too often to be idiosyncratic(!). If these adjustments become a routine response, it might indicate a lack of robustness in the overall risk management framework.
The high frequency of adjustments in response to market conditions or specific challenges faced by Clearing Members raises concerns about the stability and predictability of the OCC's risk management practices. Frequent interventions such as these indicate a dynamic and reactive approach to risk management, leading to uncertainties in how risk is assessed, mitigated, and communicated to market participants The proposal appears to make Clearing Members, even those poorly managing risks, "Too Big To Fail". This may in my opinion increase risk in financial system stability
The reliance on GARCH parameters for forecasting risk and setting margin requirements assumes the accuracy and relevance of these parameters. Any shortcomings in the model or miscalculations could lead to inadequate risk coverage.
The FRM Officer, tasked with protecting OCC's interests, may paradoxically function as an 'administrative rubber stamp' for reducing margin requirements, potentially compromising market risk protection as they seek to protect the Clearing Member from failure to protect the OCC. This seems to undermine the main purpose of the FRM Officer.
This is a big red flag for me: Concentrating significant decision-making authority in a single individual, such as the FRM Officer, to approve the implementation of idiosyncratic control settings. This may inherently create the risk of conflicts of interest or potential abuse of power in their role, and does not seem like a fair and secure solution. This authority, presumably intended to protect the interests of the OCC, raises questions about potential conflicts of interest. If the FRM Officer is entrusted with safeguarding both the OCC's interests, while at the same time those of at-risk Clearing Members, this creates needless conflict of interest. This aspect of of the rule proposal truly needs to be re-evaluated.
The policy outlines general guidelines for the duration of idiosyncratic control settings, the discretionary power given to the FRM Officer to adjust the duration based on unforeseen situations introduces an element of uncertainty.
The proposal exposes the OCC to financial risks by potentially depleting its pre-funded financial resources in the event of a sufficiently large Clearing Member default - also know as the OCC’s Clearing Member Default Rules and Procedures -losses are allocated first to the OCC's own pre-funded financial resources ("skin-in-the-game") before utilising clearing fund deposits of non-defaulting firms. In the event of a sufficiently large Clearing Member default, if both the margin deposits and clearing fund deposits are depleted, it automatically poses a financial risk to the OCC. In the case of a prolonged period of worsened economic conditions, stressed markets, systemic events or similar, I think it would be wise to avoid risking the stability of the OCC as whole prior to its individual clearing members. The individual members is responsible for properly managing their risk, and should not primarily rely on the OCC taking on losses prior to an individual members own financial resources.
If approved, the rule would undermine the first line of protection outlined in OCC's default rules and procedures—margin collateral from at-risk Clearing Members. This contradicts the usual risk management strategy of increasing collateral for higher-risk scenarios.
Focusing on potential liquidity issues for non-defaulting Clearing Members indicates the OCC's concern about risks depleting its pre-funded financial resources, raising questions about the sustainability of its risk management approach.
Thank you for considering my comment on this important matter. If you are able to address these concerns, I truly believe we can help promote a more transparent and resilient financial system that serves the best interests of all market participants. Clear guidelines, transparency in calculations, checks and balances on discretionary authority - these are essential for maintaining the integrity and stability of the financial markets.
Sincerely,
Kevin S. Norwegian retail investor