Mar. 4, 2024
I am writing to express my concerns about the proposed rule change by the Options Clearing Corporation (OCC) regarding the adjustment of parameters for calculating margin requirements during periods of high market volatility, as detailed in SR-OCC-2024-001. First and foremost, I would like to express my gratitude to the SEC for providing this commenting opportunity, allowing stakeholders to contribute valuable insights into the proposed changes. My primary concern revolves around the transparency of the proposal. The extensive redactions within the document, particularly the 205 pages detailing margin threshold calculation methods, make it challenging for the public to fully comprehend the implications of the proposed changes. This lack of transparency could hinder market participants' ability to make informed decisions, as demonstrated by the recent market event discussed in the proposal. I strongly urge all regulatory bodies to advocate for complete disclosure without redactions. I cite examples of other regulatory bodies actively seeking external input during rule-making processes, emphasizing how increased transparency can foster trust among market participants. Successful cases of enhanced transparency can serve as benchmarks for ensuring an open and informed market. Effective risk management is crucial, especially in times of market stress. I highlight the potential liquidity challenges for non-defaulting Clearing Members in case of a defaulting member's failure and stress the importance of robust risk management to maintain clearing system stability. I emphasize the need for accountability among Clearing Members to meet margin obligations, even in challenging market conditions. It is crucial to discourage risky behavior and ensure a fair and transparent market. Stricter enforcement of obligations is necessary, contributing to overall market stability. Frequent idiosyncratic control settings raise concerns about market instability. I express worry over the number of decisions made and the potential impact on margin requirements and margin calls. A $2.6 billion decrease in aggregate margin requirements linked to idiosyncratic controls is alarming and challenges the concept of idiosyncrasy. To address concerns over idiosyncratic control settings, I propose a comprehensive framework for assessing their impact on the market. Scenario-based stress testing can evaluate their resilience, and a transparent review process with external oversight and audits is essential. Public consultations, clear guidelines, and periodic reviews are necessary for adaptive risk management aligning with dynamic market conditions. Systemic Risk and Fairness: I analyze potential systemic risks arising from insufficiently capitalised Clearing Members and express concerns about the fairness of discretionary reduction of margin requirements and its impact on market integrity. The loss allocation to non-defaulting firms before OCC's resources poses significant financial risk. While acknowledging OCC's concerns, I express reservations about the illogical nature of reducing margin requirements for at-risk Clearing Members. Increased margin collateral is necessary for effective risk management, and logical protection is needed based on OCC's own admissions. I call for increased transparency in the Loss Allocation Waterfall to clarify loss distribution. Enhanced communication channels, skin-in-the-game as a primary safeguard, and measures to enhance pre-funded resources for absorbing losses are crucial. Scenario-based stress testing specific to Loss Allocation Waterfall resilience and educational initiatives for Clearing Members are also recommended. I express concerns over the extensive monopolising authority granted to the FRM Officer. Addressing the inherent conflict of interest, I highlight the paradox where the FRM Officer may act as an administrative rubber stamp, compromising margin collateral's integrity. Transparency and clear guidelines are essential for maintaining market confidence. To address concerns about the FRM Officer's role, I propose establishing an external oversight framework, transparent and well-defined guidelines, external audits, improved communication channels, and scenario-based stress testing. In conclusion, I reiterate the proposed solutions, drawing on successful case studies from other regulatory environments. Public input through consultations, adaptive risk management measures, and a thorough review of the concerns raised are crucial for the well-being of the broader market. I appreciate the SEC's attention to these concerns and express hope for a thorough and thoughtful review of the proposed rule change. Instances where such reviews led to positive outcomes serve as examples of the importance of a collaborative and transparent regulatory environment. Thank you for considering. Sincerely, JC