May 4, 2024
To whom it may concern: This proposed rule change by the Options Clearing Corporation (OCC) is an utterly egregious affront to fair and orderly markets, and it must be vehemently rejected. Allowing the OCC to unilaterally reduce margin requirements for clearing members at risk of default is tantamount to institutionalizing fraud, and moral hazard, on a systemic scale. The lack of transparency alone, with vast swaths of critical information redacted, is already sufficient grounds for dismissing this proposal outright. Without full public disclosure, there can be no meaningful review or accountability. The opacity of these rule changes, made by a select few, behind closed doors, is precisely what fuels public distrust in the parity of our financial system. Further, the substantive details that have been revealed are even more damning. The OCC is blatantly blaming regulators for not allowing it to erode its own risk controls; shockingly, pleading for permission to expose itself, and the entire financial system, to increased failures. These changes would be contradictory to those of a self-regulatory organization intending to safeguard market integrity. The proposed ability to arbitrarily waive margin calls for undercapitalized clearing members appears to be a brazen attempt to privatize profits while socializing losses. Willfully disregarding risk models that calculate higher requirements is fiduciary malpractice. Clearing members placing reckless bets that endanger their solvency should be forced to accept the consequences, not have risk conveniently stretchered away over 200 times in under 4 years as the OCC proposes. Fundamentally, this rule codifies a farcical "rules for thee, but not for me" ethos, in diametric opposition to the SEC's mission. Shielding clearing members from margin calls forces other investors to unfairly bear the brunt of long-tail risks that the privileged can simply wish away with some backroom procedural contortions. Even more abhorrent is the explicit admission that a single clearing member default could initiate a systemic cascade imperiling the entire OCC. This underscores that these firms are dangerously overleveraged and undercapitalized. Rather than address that core vulnerability, the OCC instead proposes giving itself even more leeway to bend risk parameters for its dysfunctional members. This perpetuates the toxic "too big to fail" doctrine that crippled public trust after 2008. The rationale that reducing margins could prevent a default ignores the fact that properly managing exposure is a clearing member's sole responsibility. Codifying this rule change would be a moral hazard that egregiously conflicts with the OCC's very mandate as a Systemically Important Financial Market Utility, that literally grants the privilege to banks to act as fiduciaries, and should thusly be expected to act in a way to uphold public trust and stability of our banking infrastructures. It would seem that this proposal directly undermines financial resilience by design. Recent stock market activity has proved its models were inadequate, and by its own admission a single members’ default could cause a systemic implosion, yet this entity knowingly courting insolvency risk, demands even looser safeguards in what appears a cynical ploy to force liquidity backstops from pensions and insurers. This perverse attempt at rule change traipses into criminal territory, threatening the savings of millions, in a desperate bid to privatize profits while socializing losses (losses which could be prevented by sensible and calculated risk management policy that is consistently enforced). There are no reasonable grounds for the SEC to approve such a brazen license to amplify systemic peril. It eviscerates all prudential responsibilities demanded of a SIFMU, fails to protect investors, disregards public interests, ignores transparent governance, and flouts loss-bearing requirements. This proposal symbolizes everything rotten and broken about modern finance's addiction to moral hazard and socialized risk-taking. Rather than enable this shameful dereliction, regulators must unequivocally: Mandate higher margin requirements, truly commensurate to the risks clearing members incur. Subject the OCC to binding external audits and oversight as a true fourth line of defense. Shift the OCC's loss-bearing responsibilities below clearing members' skin-in-the-game. Instate a credible process for swiftly shuttering insolvent clearing members before toxicity spreads. Disperse systemic vulnerability across a decentralized market structure without single points of failure. In an ethical system, risky bets must be backed by commensurate capital - not coddled by backroom waivers that fleece the public. This proposal is a criminal abandonment of regulatory responsibility that deserves only unequivocal repudiation. The SEC must uphold its principles by rejecting the proposed rule change outright and instead, chart a course toward truly accountable markets.