May 4, 2024
This proposed rule modification by the Options Clearing Corporation (OCC) represents a severe challenge to the principles of fair and orderly markets and should be decisively rejected. Permitting the OCC to independently lower margin requirements for clearing members nearing default could potentially normalize fraud and increase moral hazard system-wide. The proposal's significant lack of transparency, highlighted by extensive redactions, already provides ample reason to dismiss it. Without comprehensive public disclosure, effective oversight and accountability are impossible. Such secrecy breeds widespread distrust in what many perceive to be a manipulated financial system. However, the disclosed aspects of the proposal are even more concerning. The OCC has controversially criticized regulators for their restrictions, ironically seeking permission to diminish its risk controls further, thereby increasing the potential for systemic failures. This stance is contrary to the responsibilities of a self-regulatory body committed to maintaining market integrity. The proposal to allow discretionary waiver of margin calls for financially weak clearing members is a clear move to privatize gains while socializing losses, undermining foundational risk models that advocate for higher requirements. Clearing members who take on excessive risks should face the consequences without exceptions, rather than having their risks systematically alleviated, as the OCC has done over 200 times in less than four years. This rule change fundamentally promotes a double standard, conflicting directly with the SEC’s core mission. Protecting certain clearing members from margin calls unfairly shifts the burden of extreme risks onto other investors, facilitated by opaque procedural maneuvers. The acknowledgment that a single member’s default could trigger a systemic crisis highlights the over-leverage and under-capitalization within these firms. Instead of mitigating this fundamental risk, the OCC seeks even greater flexibility to adjust risk parameters, perpetuating a 'too big to fail' scenario that erodes public trust. Arguing that lower margins could preempt defaults overlooks the primary responsibility of clearing members to manage their exposures. Such a blatant codification of moral hazard violates the OCC's mandate as a Systemically Important Financial Market Utility, which is to enhance stability. This proposal, if approved, would significantly weaken financial resilience by design and is a stark deviation from the prudent responsibilities of a SIFMU, failing to safeguard investors and the broader public interest. To ensure a more ethical financial system, it is crucial that: - The OCC enforces higher margin requirements that reflect actual risks. - External audits and oversight are mandated to reinforce accountability. - The hierarchy of loss-bearing responsibilities is restructured, prioritizing the OCC’s obligations. - A robust mechanism for promptly closing insolvent clearing members is implemented to prevent wider financial disruption. - The market structure is diversified to eliminate single points of failure, reducing systemic risks. This proposal represents a profound regulatory failure that should be met with clear disapproval. The SEC must remain committed to its principles by rejecting this rule change and pursuing a path toward a more transparent and accountable financial system.