May 7, 2024
Background and Purpose: The OCC is a central counterparty (CCP) that interposes itself as the buyer to every seller and the seller to every buyer for financial transactions. To manage risk exposure, the OCC requires its Clearing Members to provide collateral (margin) to cover potential changes in asset values. The proposed rule change aims to codify OCC’s process for adjusting margin requirements during periods of high volatility. Transparency Concerns: The proposal has raised concerns about transparency. Details in Exhibit 5 and supporting information (e.g., Exhibit 3) are significantly redacted, preventing meaningful public review and comment. Without full public review, the proposal should be rejected. Procyclicality Controls: The OCC’s proposed rule blames U.S. regulators for not requiring the adoption of prescriptive procyclicality controls. Procyclicality refers to margin increases during stressed market conditions. Increased margin requirements could stress Clearing Members’ liquidity and expose the OCC to financial risks. SIFMU Designation and Transparency: The OCC is designated as a Systemically Important Financial Market Utility (SIFMU). Transparency is crucial because the OCC’s failure or disruption could threaten the stability of the U.S. financial system. The OCC’s self-regulatory status raises questions about relying solely on SROs and U.S. regulators for safeguarding financial markets. Risk and Margin Models: The OCC collects margin collateral from Clearing Members to address market risk. OCC uses the proprietary STANS system to calculate margin requirements. Some margin models may produce “procyclical” results correlated with volatility. An increase in margin requirements could impact Clearing Members’ liquidity and create liquidity issues if a default occurs. In summary, the proposed rule change aims to address margin requirements during high volatility, but transparency concerns and potential systemic risks warrant careful consideration. The OCC’s role as an SRO and its reliance on proprietary models add complexity to the discussion. Clearing Members’ risk management practices are crucial to maintaining stability in the financial system.