Mar. 4, 2024
Hello SEC members, I am writing regarding SEC Rule SR-OCC-2024-001, which proposes adjustments to margin requirements during periods of heightened market volatility. As an engaged participant in financial markets, I am deeply concerned about the potential implications of this rule on market stability and investor protection. And just as concerned with the lack of information provided to the public in the rule. The proposed rule grants the Options Clearing Corporation (OCC) the authority to adjust margin thresholds, particularly during times of elevated market volatility. While the intention may be to provide flexibility in managing risk, there are significant concerns about the lack of transparency and accountability in this process. Reducing margin requirements during periods of high market volatility has the potential to exacerbate systemic risks and undermine market integrity, as highlighted in the public discourse surrounding this rule. Moreover, the lack of transparency in how margin thresholds are calculated and adjusted raises concerns about fairness and investor protection. The absence of clear criteria or disclosure regarding the OCC's decision-making process introduces uncertainty and undermines market participants' ability to assess and manage their risks effectively. Additionally, the proposed rule's potential impact on market dynamics, particularly in the context of high short interest and speculative trading activities, cannot be overlooked. Allowing for the reduction of margin requirements will incentivize excessive risk-taking behavior and contribute to market distortions, ultimately posing risks to financial stability. In light of these concerns, I urge the Securities and Exchange Commission (SEC) to carefully evaluate the proposed rule and consider the feedback from the thousands of individual investors commenting on this important subject. Transparency, accountability, and the equal protection of ALL investor interests should be paramount in any regulatory framework governing margin requirements and risk management practices. Furthermore, I encourage the SEC to explore alternative approaches that balance risk management objectives with the need to maintain market stability and fairness. Here is a list of issues and suggested improvements - ISSUES Redaction of specific details impedes market participants from assessing the fairness and effectiveness of OCC measures, raising transparency concerns in risk management processes. Over 200 idiosyncratic control settings within four years prompt questions about their uniform application. 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. Frequent adjustments in response to market conditions or Clearing Member challenges raise concerns about the stability and predictability of OCC risk management practices. The proposal treats Clearing Members as "Too Big To Fail," risking financial system stability. Reliance on GARCH parameters assumes accuracy; any model shortcomings or miscalculations could lead to inadequate risk coverage. 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. General guidelines for idiosyncratic control settings' duration introduce uncertainty with discretionary power given to the FRM Officer. The proposal exposes OCC to financial risks by potentially depleting pre-funded resources in a large Clearing Member default. If approved, the rule undermines the first line of protection outlined in OCC's default rules—increasing collateral for higher-risk scenarios. The potential liquidity issues for non-defaulting Clearing Members raises questions about the sustainability of OCC's risk management approach. SUGGESTED IMPROVEMENTS Strengthen and enforce margin requirements to align with Clearing Member risks, discouraging a "Too Big To Fail" strategy that could pressure the OCC, privatize profits, and socialize losses. Introduce external auditing and supervision as a "fourth line of defense" for enhanced transparency and proactive risk management with public reporting. Incorporate public input through consultations and hearings in the rule-making process for inclusive and representative regulatory actions. Advocate for public accessibility of stress testing results to showcase risk management effectiveness and build trust among market participants. Consider establishing an external oversight committee of industry experts, academics, and investor advocacy representatives for impartial evaluation of risk management practices. 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. Enhance transparency requirements, ensuring clear and accessible disclosure in reporting and decision-making processes related to risk management measures. Strengthen oversight mechanisms, involving regulatory bodies more actively to maintain accountability and address emerging risks during periods of heightened market volatility. 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. Consider establishing an external oversight committee comprised of industry experts, academics, and investor advocacy representatives for impartial evaluation and scrutiny of risk management practices. Thank you for considering these comments on SEC Rule SR-OCC-2024-001. I trust that the SEC will prioritize the interests of ALL market participants and try to reinvigorate the integrity of our financial markets by making the right decision on these important matters. Sincerely, A concerned American investor