Jan. 30, 2024
I appreciate the opportunity to share my thoughts on SR-OCC-2024-001 34-99393, titled "Proposed Rule Change by The Options Clearing Corporation Concerning Its Process for Adjusting Certain Parameters in Its Proprietary System for Calculating Margin Requirements During Periods of High Volatility" (PDF, Federal Register). As a retail investor, I am against the approval of this rule and value the chance to express my concerns. The proposed rule's lack of transparency is alarming. Key details in Exhibit 5 and supporting data in Exhibit 3 are heavily redacted, preventing effective public review and discussion. This lack of transparency alone is a sufficient reason to reject the proposal. The OCC's attempt to blame U.S. regulators for not implementing strict procyclicality controls is concerning (referenced in [1]). The proposal's potential to increase financial risks and destabilize its members during volatile times, especially considering OCC's status as a SIFMU, calls for utmost transparency. The proposal seems to favor Clearing Members by advocating for reduced margin requirements, increasing risks for OCC. The systemic risk, highlighted by the potential cascading effect of a single Clearing Member's failure, is a significant concern. The frequent use of "idiosyncratic" and "global" controls to reduce margin requirements, as outlined in the proposal and footnotes [4], [5], and [7], underlines a pattern that could destabilize the market. This approach not only creates market instability but also presents a conflict of interest for the Financial Risk Management (FRM) Officer. Their role, ostensibly to protect OCC's interests, is compromised by the need to prevent Clearing Member failures, thus weakening market risk management. Moreover, the OCC's Loss Allocation waterfall, detailed in their default rules and procedures [9], inversely prioritizes loss allocation to OCC's resources before non-defaulting firms. This structure is counterproductive and undermines the primary defense mechanism – the margin deposits of the suspended firm. In light of these concerns, I propose the following amendments: Strengthen and enforce margin requirements in line with the risks associated with Clearing Member positions. This will encourage better portfolio management during stressed market conditions and mitigate the risk of them becoming too big to fail. Implement external auditing and enhanced public reporting, as suggested in the "four lines of defence model" [12], for improved risk management and early detection of systemic risks. Adjust the Loss Allocation waterfall to prioritize Clearing Member deposits before OCC's pre-funded resources, as this will foster mutual oversight among Clearing Members and enhance protection for the OCC. Thank you for considering my input. A fair, transparent, and resilient market is in the best interest of all investors. Sincerely, A Concerned Retail Investor [1] https://www.federalregister.gov/d/2024-01386/p-11 [2] https://www.federalregister.gov/d/2024-01386/p-8 [3] https://www.federalregister.gov/d/2024-01386/p-7 [4] https://www.federalregister.gov/d/2024-01386/p-50 [5] https://www.federalregister.gov/d/2024-01386/p-51 [6] https://en.wikipedia.org/wiki/Long_tail [7] https://www.federalregister.gov/d/2024-01386/p-45 [8] https://www.federalregister.gov/d/2024-01386/p-79 [9] https://www.theocc.com/getmedia/e8792e3c-8802-4f5d-bef2-ada408ed1d96/default-rules-and-procedures.pdf, which is publicly available and linked to from the OCC’s web page on Default Rules & Procedures at https://www.theocc.com/risk-management/default-rules-and-procedures [10] https://www.federalregister.gov/documents/2021/04/12/2021-07454/self-regulatory-organizations-the-options-clearing-corporation-notice-of-no-objection-to-advance [11] https://www.federalregister.gov/d/2024-01386/p-16 [12] https://www.bis.org/fsi/fsipapers11.pdf