May 17, 2024
I’m penning this letter to voice my apprehensions about the proposed
rule change SR-OCC-2024-001 by The Options Clearing Corporation. This
rule pertains to the adjustment of certain parameters in its proprietary
system for calculating margin requirements during periods of high
volatility in the products it clears and the markets it serves.
I’m grateful for the chance to share my thoughts on this issue. However,
I find myself unable to endorse this proposal for several reasons:
Absence of Transparency: The proposal is significantly redacted,
hindering a comprehensive public review and commentary.
Systemic Risk: The OCC's plan to lower margin requirements for
Clearing Members introduces greater risk to our financial system's
stability. If clearing members fail to fulfill their financial
commitments, they must liquidate their positions.
Conflict of Interest: The Financial Risk Management Officer's
role inherently conflicts with the duty to safeguard both the Clearing
Members and the agency itself.
Moral Hazard: The proposal transfers the costs of Clearing Member
defaults to the non-bank liquidity facility, thereby creating a moral
hazard and fostering an inequitable marketplace.
Insufficient Risk Management: The proposal does not adequately
manage liquidity risk and escalates systemic risk, as demonstrated by
the OCC's dependence on reducing margin requirements.
I acknowledge and appreciate the reasons for rejection provided by the
SEC when dismissing this rule:
Inability to facilitate prompt and accurate clearance and
settlement of securities transactions and protect securities and funds.
Absence of distinct and direct responsibility lines in governance
arrangements.
Inadequate policies and procedures to manage credit exposures to
participants and insufficient margin calculation to cover potential
future exposure.
In conclusion, I stand with the SEC in their decision to reject this
proposed rule change, to ensure the safeguarding of all investors and
the preservation of our financial markets’ integrity.
Thank you for taking my concerns into account and for your ongoing
efforts to safeguard our markets,