Feb. 3, 2024
Dear Securities and Exchange Commission, I am writing to express my concerns as a retail investor regarding the Options Clearing Corporation's (OCC) proposed rule change outlined in SR-OCC-2024-001. The suggested adjustments to margin requirements during periods of high market volatility raise significant issues that warrant careful consideration. 1. Lack of Transparency: The redactions in Exhibit 5 and supporting documents hamper public review, making it impossible for stakeholders to assess and comment meaningfully. Transparency is crucial, especially given the OCC's status as a Systemically Important Financial Market Utility (SIFMU). The blame-shifting towards U.S. regulators for not implementing procyclicality controls is concerning. 2. Systemic Risks and Too Big To Fail: The proposal acknowledges the potential cascade of Clearing Member defaults, classifying them as de facto Too Big To Fail. This creates an unfair marketplace, allowing Clearing Members to escape the consequences of long-tail risks through repeated margin requirement reductions. Rejecting this proposal is essential to ensure that members face repercussions for inadequate risk management. 3. Conflict of Interest for FRM Officer: The proposal introduces a conflict of interest for the Financial Risk Management (FRM) Officer. While their role is ostensibly to protect OCC's interests, the outlined scenario requires them to protect Clearing Members from failure, potentially compromising the protection afforded by margin collateral. This undermines the purpose of collecting margin collateral and should lead to the rejection of the proposal. 4. Illogical Reduction of Margin Requirements: The rule proposal to reduce margin requirements for at-risk Clearing Members through idiosyncratic control settings contradicts the OCC's Loss Allocation waterfall. Given that the OCC's first line of protection is the margin deposits of the suspended firm, mitigating procyclical margin requirements poses a blatant risk to the OCC's financial resources. The proposal should be rejected unless amendments address these logical inconsistencies. 5. Recommendations for Modification: Enforce margin requirements commensurate with risks associated with Clearing Member positions instead of reducing them. The goal is to discourage excessive risk-taking and unwind overleveraged positions through margin calls and proper market dynamics. Introduce external auditing and supervision, similar to the "four lines of defense" model for financial institutions, with enhanced public reporting. Transparency and regulation will prevent volatile market scenarios from occurring after toxic positions are unwound. Swap the order of loss allocation in the OCC's Loss Allocation waterfall to prioritize Clearing fund deposits of non-defaulting firms before OCC's pre-funded financial resources. 6. Additional Comments: Lowering margins during high volatility seems extremely counterintuitive, potentially enabling risky behavior. The proposed rule change could facilitate over-leveraging, raising concerns about the financial stability of Clearing Members and the economy as a whole. Clearing Members must be held accountable for their risky bets to avoid a catastrophic conclusion. The persistent reference to GameStop in rule changes raises questions about the motivations behind such proposals. The problem will not go away by reducing margin requirements, and this rule covers Clearing Members who are counterparty to extremely risky bets. In conclusion, I urge the SEC to scrutinize and reject the proposed rule change. A fair, transparent, and resilient market is crucial for all investors. This self-regulatory rule change may shift the fallout of risky bets onto retail investors and the general public rather than those most culpable. I hope the SEC investigates the motivation behind the proposals and recognizes the risks involved. The SEC can play a crucial role in mitigating the damage of trillions in derivative exposure by Clearing Members, a much lower cost than turning away when warning signs have been apparent for years. Thank you for considering my comments. Sincerely, A Concerned Retail Investor