Feb. 7, 2024
I strongly oppose the OCC rule proposal and believe it should not be approved. There are several concerns that need to be addressed regarding this proposal, particularly the lack of transparency in our financial system. The redacted details and limited supporting information make it impossible for the public to thoroughly review and provide meaningful comments on this proposal. This alone is a valid reason for rejecting it. Furthermore, these rules create an unfair marketplace for market participants, especially retail investors. While they are left to face the consequences of long-tail risks, the OCC repeatedly waives margin calls for Clearing Members by reducing their margin requirements. This disparity in treatment is unjust, and Clearing Members should be subject to the same strictly defined margin requirements as other investors. The OCC justifies this proposal and the special margin reduction procedures by stating that a single Clearing Member defaulting could trigger a chain reaction of defaults, posing a financial risk to the OCC. However, by repeatedly bailing out Clearing Members who fail to manage their portfolio risk properly, they essentially become "Too Big To Fail." This is not a sustainable approach. Therefore, it is crucial to reject this rule proposal and hold Clearing Members accountable for their actions. They should face the consequences of failing to manage their portfolio risk, including against long-tail events. Clearing Member failure should serve as a natural disincentive against excessive leverage and insufficient capitalization, as others in the market should not be expected to cover their losses. It is crucial to address the inherent conflict of interest faced by the Financial Risk Management (FRM) Officer through this rule proposal. While the FRM Officer's role is to safeguard the OCC's interests, the current situation outlined in the OCC proposal exposes the OCC to financial risk when a Clearing Member fails. This puts the FRM Officer in a position where they must prioritize protecting the Clearing Member to prevent OCC's vulnerability. However, blindly approving margin requirement reductions for Clearing Members at risk of failure undermines the protection against market risks associated with the Clearing Member's positions, which would have been secured through margin collateral collected by the OCC. Therefore, it is imperative to reject this rule proposal and instead enforce adequate margin requirements to safeguard the OCC and minimize the need for any potential bailouts. Given that the OCC's Clearing Member Default Rules and Procedures Loss Allocation waterfall assigns losses to the OCC's own pre-funded financial resources before the clearing fund deposits of non-defaulting firms, any significant default by a Clearing Member that depletes both the margin deposits and clearing fund deposits of the suspended firm automatically poses a financial risk to the OCC. It is evident that the OCC is deeply concerned about the potential liquidity issues that non-defaulting Clearing Members may face due to charges to the Clearing Fund. However, the proposed rule fails to address the OCC's own pre-funded financial resources, which are crucial for managing risks. The primary line of defense for the OCC, which is the margin deposits of the suspended firm, is undermined by this illogical and nonsensical proposal. If this rule is approved, it will directly weaken the OCC's first line of protection by reducing the margin collateral from at-risk Clearing Members. Therefore, it is imperative that this proposal is rejected, thoroughly reviewed by the public, and only approved with significant amendments to address the concerns raised. Considering the aforementioned issues, it is recommended to increase and strictly enforce margin requirements based on the risks associated with Clearing Member positions, rather than reducing them. Clearing Members should be incentivized to structure their portfolios in a way that accounts for market volatility and long-term risks. The current proposal inadvertently encourages Clearing Members to become "Too Big To Fail," exerting excessive risk and leverage on the OCC, which ultimately leads to more frequent implementation of idiosyncratic controls. This approach privatizes profits and socializes losses, which is not in the best interest of the financial system.