May 4, 2024
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule change by the Options Clearing Corporation (OCC) to adjust parameters for calculating margin requirements during periods of high market volatility. As a long-term household investor deeply invested in the stability and fairness of the financial market, I appreciate the opportunity to provide insights on this matter. In reviewing the proposed rule change, there are potential discrepancies that warrant careful consideration. The OCC's proposed rule change (SR-OCC-2024-001), aimed at codifying the calculation methodology for margin thresholds, is of concern due to its potential inadvertent shielding of risky financial positions during periods of high market volatility. By formalising the ability to adjust margin requirements based on market conditions, the proposal may restrict or reduce the normal risk management mechanism of margin calls, allowing investors with imprudent risks to avoid necessary adjustments. This lack of an effective risk management mechanism, coupled with the OCC's history of implementing frequent "idiosyncratic" and "global" control settings, raises concerns about the unchecked growth of risky positions, contributing to larger losses and posing risks to long-term market stability. One particular aspect that raises a red flag is the role of the Financial Risk Management (FRM) Officer. The proposal places significant responsibility on this individual, whose primary duty is to safeguard OCC's interests. This creates an inherent conflict of interest, as protecting OCC’s interests may not always align with the broader market’s well-being. The proposal itself acknowledges a scenario where risk factor coverage differs significantly under idiosyncratic control settings compared to regular control settings, emphasising the need for scrutiny. Compounding this concern is the lack of transparency in the redacted materials accompanying the proposal. Transparency is crucial for fostering trust among investors and the public. The redacted nature of the materials limits our ability to fully evaluate the effectiveness of the proposed rule. This lack of transparency not only raises questions about the thoroughness of the evaluation process but also diminishes the opportunity for informed public discourse. While acknowledging OCC's intent to mitigate risks during high volatility periods, it is imperative to ensure that risk management measures do not inadvertently shelter bad bets. Adjusting parameters for calculating margin requirements is crucial for market stability, but this must be done in a way that aligns with broader market interests. In light of the concerns highlighted in the OCC Rule proposal, particularly the apprehension about reducing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I recommend a reconsideration of the OCC's loss allocation framework. As outlined in the proposal, the current structure places Clearing Fund deposits of non-defaulting firms as the fourth layer of defense in the event of market stress, following the OCC's own pre-funded financial resources. This arrangement implies that the OCC anticipates losses to exhaust the first three layers, including its pre-funded resources, before reaching non-defaulting Clearing Members' contributions. To address this potential disparity and promote fairness, I propose that Clearing Fund deposits of non-defaulting firms be prioritised over the OCC's pre-funded resources. This adjustment ensures that Clearing Members' contributions play 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 provide additional 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 modifications to the rule. One example includes, considering an independent review mechanism to assess the impact of control settings on both OCC's interests and the broader market. This measure is essential to reinforce transparency and accountability within the regulatory framework, ensuring an unbiased evaluation of risk management practices. By involving external experts, this safeguard not only mitigates potential conflicts of interest but also fosters public trust and confidence in the regulatory process. It aligns with the broader goal of upholding market integrity, providing a robust mechanism for continuous improvement and adaptability in response to evolving market dynamics. Additionally, enhancing transparency by providing non-confidential summaries of redacted materials would enable a more informed public discourse and promote a more inclusive decision-making process. Other recommendations for refining the proposed rule include; Prioritising 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 allows for 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 emphasises 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 suggestions collectively aim to fortify oversight, enhance transparency, and uphold accountability, thereby ensuring the integrity and fairness of our financial markets. To conclude, as an engaged investor, I am committed to fostering a financial environment that prioritises fairness, transparency, and the well-being of all market participants. I trust that the SEC will thoroughly consider these concerns during the rule making process and work towards a rule that not only addresses risk management but also upholds the broader principles of market integrity. Sincerely, Rihards Gr?slis Concerned investor