Jan. 31, 2024
I appreciate the opportunity to provide feedback on the SR-OCC-2024-001 34-99393 Proposed Rule Change 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 When the Products It Clears and the Markets It Serves Experience High Volatility." As a retail investor committed to transparent markets and against market manipulation, I have several reservations about the OCC's rule proposal and wish to express my concerns. My primary concern revolves around the lack of transparency evident in the financial system, exemplified by this specific rule proposal. The extensive redaction of details in Exhibit 5, coupled with limited supporting information in Exhibit 3, obstructs public review, rendering meaningful commentary and analysis impossible. The absence of comprehensive public scrutiny alone warrants the rejection of this proposal. Public review is particularly crucial given the OCC's attribution of blame to U.S. regulators for not mandating prescriptive procyclicality controls, which could exacerbate margin increases during periods of market stress. Such increases in margin requirements could strain Clearing Members' liquidity and potentially endanger OCC's financial stability, posing systemic risks to the U.S. financial system. Given the OCC's designation as a Systemically Important Financial Market Utility (SIFMU), ensuring transparency is imperative for all stakeholders reliant on the U.S. financial system. The OCC's inclination to fault U.S. regulators for not mandating protective regulations underscores the inability to fully depend on either the SRO or U.S. regulators to safeguard our financial markets. This rule proposal seemingly aims to shield Clearing Members from the risks associated with costly trades by routinely endorsing reductions in margin requirements, as necessitated by Clearing Members. The OCC's reliance on its proprietary system, STANS, to calculate margin requirements introduces procyclical tendencies that correlate margin increases with heightened volatility, potentially jeopardizing member stability during volatile periods. The proposal's inclination towards frequent margin requirement reductions through "idiosyncratic" and "global" control settings, coupled with over 200 instances of such reductions within a four-year period, raises concerns about the fairness of the marketplace for other participants, including retail investors. Furthermore, the proposal's implication that Clearing Members failing to manage portfolio risks against long-tail events become de facto "Too Big To Fail" exacerbates systemic risks. This conflict of interest is further exemplified in the role of the Financial Risk Management (FRM) Officer, who, despite purportedly safeguarding OCC's interests, is compelled to shield Clearing Members from failure, undermining risk management mechanisms. In light of these concerns, I urge for the following modifications: Implement and enforce margin requirements commensurate with the risks associated with Clearing Member positions, discouraging excessive risk-taking and leveraging. Introduce external auditing and supervision akin to the "fourth line of defense" model for financial institutions, ensuring proactive risk identification and management. Rearrange the Loss Allocation waterfall to prioritize Clearing fund deposits of non-defaulting firms over OCC's pre-funded financial resources, thereby incentivizing Clearing Members to enforce risk management measures and reducing the burden on systemically important clearing agencies. Thank you for considering these recommendations. A fair, transparent, and resilient market benefits all investors. Sincerely, Daniel Gabor Retail Investor Sources: [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://www.federalregister.gov/d/2024-01386/p-45 [7] https://www.federalregister.gov/d/2024-01386/p-79 [8] 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 [9] https://www.federalregister.gov/documents/2021/04/12/2021-07454/self-regulatory-organizations-the-options-clearing-corporation-notice-of-no-objection-to-advance [10] https://www.federalregister.gov/d/2024-01386/p-16 [11] https://www.bis.org/fsi/fsipapers11.pdf