May 16, 2024
Hi, I am writing to you regarding the proposed OCC rule 'SR-OCC-2024-001’, in support of your decision to reject this rule. As I and thousands of other individual investors outlined in our comments on the initial rule proposal, this rule creates an unfair advantage for large market participants and a significant imbalance to market mechanics. The rule is clearly designed to act as a safe haven for market participants which flaunt rules and regulations at the expense of the wider market and in particular, retail investors. Key reasons I support the rejection of this rule: - Undermines trust in capital markets; - Creates an imbalance of power; - Enables reckless investment behaviour from large market participants; - A fundamental conflict of interest between the OCC’s FRM Officer remit and the protection of the OCC’s own interests; This rule is yet another attempt at "rules for thee but not for me" that has plagued US markets for decades and the influx of comments on this proposal and many others shows just how seriously people are taking this type of unjust manipulation and corruption. In your response to this rule you highlighted several key reasons why this proposal does not serve better market structure and reliability. I have included these with my comments below each one: Section 17A(b)(3)(F) of the Exchange Act, which requires, among other things, that the rules of a clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts, and transactions; and to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible; [Refer to 15 U.S.C. 78q-1(b)(3)(F)] - This rule clearly undermines, without any due checks and balances, the prompt and accurate clearance and settlement of transactions. Being able to waive due fees from clearing members nullifies any logical arguments that can be made that this rule supports this section of the Exchange Act. Rule 17Ad-22(e)(2) of the Exchange Act, which requires that a covered clearing agency provide for governance arrangements that, among other things, specify clear and direct lines of responsibility; and [Refer to 17 CFR § 240.17Ad-22(e)(2)] - A large portion of this document was redacted from public scrutiny, and ironically this seems to be the main indicator that there are no clear lines of responsibility in the OCC’s view, in fact they seem to believe they can act with impunity and without questions to protect the interests of their own, this is highly undemocratic and undermines stability and trust in capital markets. Rule 17Ad-22(e)(6) of the Exchange Act, which requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to cover, if the covered clearing agency provides central counterparty services, its credit exposures to its participants by establishing a risk-based margin system that, among other things, (1) considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market, and (2) calculates sufficient margin to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. [Refer to 17 CFR § 240.17Ad-22(e)(6)] - This is a clear and very specific rule that is already part of the Exchange Act and which is in direct contradiction to the OCC’s proposal. The entire purpose of this proposed rule is to bend, without just cause, any credit risk or liability of the OCC and its clearing members. The fact that such a proposal would even be submitted when there is already an explicitly defined rule against, shows a complete disregard for market integrity, the SEC and normal market participants, i.e retail investors. Please consider the following counter measures in earnest, to further protect the market from unjust actions: 1) Increase and enforce margin requirements commensurate with risks associated with Clearing Member positions instead of reducing margin requirements. Clearing Members should be encouraged to position their portfolios to account for stressed market conditions and long-tail risks. This rule proposal currently encourages Clearing Members to become Too Big To Fail in order to pressure the OCC with excessive risk and leverage into implementing idiosyncratic controls more often to privatize profits and socialize losses. 2) External auditing and supervision as a “fourth line of defense” similar to that described in The “four lines of defence model” for financial institutions [25] with enhanced public reporting to ensure that risks are identified and managed before they become systemically significant. 3) Swap “3. OCC’s own pre-funded financial resources” and “4. Clearing fund deposits of non-defaulting firms” for the OCC’s Loss Allocation waterfall so that Clearing fund deposits of non-defaulting firms are allocated losses before OCC’s own pre-funded financial resources and the EDCP Unvested Balance. Changing the order of loss allocation would encourage Clearing Members to police each other with each Clearing Member ensuring other Clearing Members take appropriate risk management measures as their Clearing Fund deposits are at risk after the deposits of a suspended firm are exhausted. This would also increase protection to the OCC, a SIFMU, by allocating losses to the clearing corporation after Clearing Member deposits are exhausted. By extension, the public would benefit from lessening the risk of needing to bail out a systemically important clearing agency as non-defaulting Clearing Members would benefit from the suspension and liquidation of a defaulting Clearing Member prior to a risk of loss allocation to their contributions. 4) Immediately suspend and liquidate a Clearing Member as soon as their losses are projected to exceed “1. The margin deposits of the suspended firm” so that the additional resources in the loss allocation waterfall may be reserved for extraordinary circumstances. By contrast to the past approaches for reducing margin requirements which delays Clearing Member suspension and liquidation, earlier interventions minimize systemic risk by preventing problems from growing bigger and threatening the stability of the financial system. 5) Reduce “single points of failure” in our financial system by increasing redundancy (e.g., multiple Clearing Agencies in competition) and resiliency of our financial markets. TBTF must be eliminated. Failure must always be an option. I stand with the SEC in their rejection of the proposed OCC rule, and whole heartedly support the SEC’s work in ensuring that large market forces are not able to manipulate the mechanics of the US financial markets to their own personal gain. Sincerely, Jack Vanstone