Feb. 5, 2024
Dear Commissioners of the Securities and Exchange Commission, I write to articulate apprehensions pertaining to the proposed rule modification set forth by the Options Clearing Corporation (OCC) regarding the adjustment of parameters governing margin requirements during heightened market volatility. As a dedicated, long-term household investor deeply vested in the stability and equitability of financial markets, I avail myself of this opportunity to furnish insights on the subject matter at hand. Upon meticulous examination of the proposed rule alteration, discernible incongruities emerge, warranting meticulous scrutiny. The OCC's endeavor (SR-OCC-2024-001) to systematize the computation methodology for margin thresholds is disconcerting due to its potential inadvertent shielding of precarious financial positions during periods of elevated market volatility. The formalization of margin requirement adjustments based on market conditions may, in effect, curtail or diminish the customary risk management protocol associated with margin calls. This could permit investors harboring imprudent risks to evade essential adjustments, fostering an inadequate risk management mechanism. The OCC's proclivity for recurrent implementation of "idiosyncratic" and "global" control settings further exacerbates concerns, foreseeably contributing to substantial losses and jeopardizing long-term market stability. Of particular concern is the pivotal role ascribed to the Financial Risk Management (FRM) Officer. The proposal allocates substantial responsibilities to this individual, whose primary obligation is the protection of OCC's interests. This engenders an inherent conflict of interest, as safeguarding OCC’s interests may not invariably align with the broader market’s welfare. The proposal itself acknowledges potential divergences in risk factor coverage under idiosyncratic control settings versus regular control settings, underscoring the imperative need for meticulous examination. Aggravating this concern is the paucity of transparency in the redacted materials accompanying the proposal. Transparency is pivotal for instilling confidence among investors and the public. The redacted nature of the materials hampers a comprehensive evaluation of the efficacy of the proposed rule. This opacity not only impugns the thoroughness of the evaluation process but also curtails the potential for informed public discourse. While acknowledging the OCC's intent to mitigate risks during periods of high volatility, it is imperative to ensure that risk management measures do not inadvertently shield imprudent investments. Adjusting parameters for calculating margin requirements is indispensable for market stability; however, it must be executed in a manner congruent with broader market interests. Given the concerns elucidated in the OCC Rule proposal, especially apprehensions about reducing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I advocate a reevaluation of the OCC's loss allocation framework. The existing structure, as outlined in the proposal, prioritizes Clearing Fund deposits of non-defaulting firms as the fourth layer of defense in the event of market stress, following the OCC's pre-funded financial resources. This arrangement implies an expectation that losses will deplete the first three layers before reaching non-defaulting Clearing Members' contributions. To rectify this potential disparity and advocate for fairness, I propose prioritizing Clearing Fund deposits of non-defaulting firms over the OCC's pre-funded resources. This adjustment ensures that Clearing Members' contributions assume a more immediate and prominent role in covering losses, aligning with principles of equity and transparency in the OCC's risk management structure. Such a modification would furnish added protection to non-defaulting Clearing Members and contribute to a more balanced and resilient financial ecosystem. In light of these concerns, I propose additional safeguards and amendments to the rule. One such suggestion involves contemplating an independent review mechanism to evaluate the impact of control settings on both OCC's interests and the broader market. This measure is essential for reinforcing transparency and accountability within the regulatory framework, ensuring an impartial evaluation of risk management practices. Involving external experts not only mitigates potential conflicts of interest but also fosters public trust and confidence in the regulatory process. It aligns with the overarching objective of upholding market integrity, providing a robust mechanism for continuous improvement and adaptability in response to evolving market dynamics. Additionally, enhancing transparency by furnishing non-confidential summaries of redacted materials would facilitate a more informed public discourse and foster a more inclusive decision-making process. Further refinements to the proposed rule encompass prioritizing enhanced transparency requirements, advocating for increased transparency in reporting and decision-making processes related to risk management measures. Transparent disclosure fosters trust among market participants and enables a more comprehensive evaluation of margin calculations and adjustments, particularly during volatile periods. Strengthening oversight mechanisms, with a more active role for regulatory bodies, contributes to accountability in risk management practices. The incorporation of public input through consultations and hearings is proposed to foster inclusivity and democratic decision-making in the rulemaking process. Encouraging the establishment of industry-wide standards and best practices in collaboration with stakeholders emphasizes a commitment to market stability. Advocating for public accessibility of stress testing results showcases the effectiveness of risk management measures. Lastly, considering the establishment of an external oversight committee, comprised of industry experts, ensures impartial evaluation and scrutiny of risk management practices. These recommendations collectively aim to fortify oversight, enhance transparency, and uphold accountability, thereby ensuring the integrity and fairness of our financial markets. In conclusion, as a vigilant investor, my commitment lies in cultivating a financial environment that prioritizes fairness, transparency, and the well-being of all market participants. I trust that the SEC will thoroughly deliberate on these concerns during the rulemaking process and endeavor towards a rule that not only addresses risk management but also upholds the broader principles of market integrity. Sincerely, Mike van Dongen