May 6, 2024
As a retail investor, I appreciate the additional consideration and opportunity, and I SUPPORT the SEC's grounds for disapproval under consideration as I have several concerns about the OCC rule proposal, do not support its approval, and appreciate the opportunity to contribute to the rulemaking process to ensure all investors are protected in a fair, orderly, and efficient market. I’m concerned about the lack of transparency in our financial system as evidenced by this rule proposal, amongst others. The details of this proposal in Exhibit 5 along with supporting information (see, e.g., Exhibit 3) are significantly redacted which prevents public review making it impossible for the public to meaningfully review and comment on this proposal. Without opportunity for a full public review, this proposal should be rejected on that basis alone. The SEC is correct to have identified reasonable grounds for disapproval of this Proposed Rule Change with respect to Section 17A(b)(3)(F) for at least the following reasons: (1) the Proposed Rule fails to safeguard the securities and funds which are in the custody or control of the clearing agency or for which it is responsible by improperly reducing margin requirements for Clearing Members at risk of default which exposes the OCC and other market participants to increased financial risk, as described above; and (2) the Proposed Rule fails to protect investors and the public interest by shifting the costs of Clearing Member default(s) to the non-bank liquidity facility (including pension funds and insurance companies) and creates a moral hazard in expanding the scope of Too Big To Fail to any Clearing Member incurring losses beyond their margin deposits and clearing fund deposits, as described above. The SEC is correct to have identified reasonable grounds for disapproval of this Proposed Rule Change with respect to Rule 17Ad-22(e)(2) for at least the following reasons: (1) the Proposed Rule does not provide a governance arrangement that is clear and transparent as (a) the FRM Officer's role prioritizes the safety of Clearing Members rather than the clearing agency and (b) the repeated application of "idiosyncratic" and "global" control settings to reduce margin requirements is not clear and transparent, as described above; (2) the Proposed Rule does not prioritize the safety of the clearing agency, but instead prioritizes the safety of Clearing Members by rubber stamping margin requirement reductions, as described above; (3) the Proposed Rule does not support the public interest requirements, especially the requirement to protect of investors, by shifting the costs of Clearing Member default(s) to the non-bank liquidity facility (including pension funds and insurance companies), as described above; (4) the Proposed Rule does not specify clear and direct lines of responsibility as, for example, the FRM Officer's role is to be an administrative rubber stamp to reduce margin requirements for Clearing Members at risk of failure, as described above; and (5) the Proposed Rule does not consider the interests of customers and securities holders as (a) reducing margin requirements for Clearing Member(s) at risk of default increases already significant systemic risk which necessarily impacts all market participants and (b) perpetuates a "rules for thee, but not for me" environment in our financial system, as described above. The SEC is correct to have identified reasonable grounds for disapproval of this Proposed Rule Change with respect to Rule 17Ad-22(e)(6) for at least the following reasons: (1) the Proposed Rule fails to consider and produce margin levels commensurate with risks as reducing margin for Clearing Member(s) at risk of default is blatantly illogical and nonsensical, as described above; (2) the Proposed Rule fails to calculate margin sufficient to cover potential future exposure as margin requirements are already insufficient as Clearing Member default(s) could result in "losses chargeable to the Clearing Fund which could create liquidity issues for non-defaulting Clearing Members" yet proposing to further reduce margin requirements, as described above; (3) the Proposed Rule fails to provide a valid model for the margin system attempting to reduce margin requirements despite existing models predicting increased margin requirements are required while also admitting the potential scale of financial risk posed by a defaulting Clearing Member exceeds the current margin requirements such that losses will be allocated beyond suspended firm(s) to the OCC and non-defaulting members, as described above; In addition, the SEC may consider Rule 17Ad-22(e)(3), 17Ad-22(e)(4), and 17Ad-22(e)(6) as an additional grounds for disapproval as the Proposed Rule Change does not properly manage liquidity risk and increases systemic risk, as described above. Other grounds for disapproval may be applicable, but due to the heavy redactions, the public is unable to properly and fully review the Proposed Rule. In light of the issues outlined above, please consider the following: Increase and enforce margin requirements commensurate with risks associated with Clearing Member positions instead of reducing margin requirements. Clearing Members should be encouraged to position their portfolios to account for stressed market conditions and long-tail risks. This rule proposal currently encourages Clearing Members to become Too Big To Fail in order to pressure the OCC with excessive risk and leverage into implementing idiosyncratic controls more often to privatize profits and socialize losses. External auditing and supervision as a “fourth line of defense” similar to that described in The “four lines of defence model” for financial institutions [25] with enhanced public reporting to ensure that risks are identified and managed before they become systemically significant. Swap “3. OCC’s own pre-funded financial resources” and “4. Clearing fund deposits of non-defaulting firms” for the OCC’s Loss Allocation waterfall so that Clearing fund deposits of non-defaulting firms are allocated losses before OCC’s own pre-funded financial resources and the EDCP Unvested Balance. Changing the order of loss allocation would encourage Clearing Members to police each other with each Clearing Member ensuring other Clearing Members take appropriate risk management measures as their Clearing Fund deposits are at risk after the deposits of a suspended firm are exhausted. This would also increase protection to the OCC, a SIFMU, by allocating losses to the clearing corporation after Clearing Member deposits are exhausted. By extension, the public would benefit from lessening the risk of needing to bail out a systemically important clearing agency as non-defaulting Clearing Members would benefit from the suspension and liquidation of a defaulting Clearing Member prior to a risk of loss allocation to their contributions. Immediately suspend and liquidate a Clearing Member as soon as their losses are projected to exceed “1. The margin deposits of the suspended firm” so that the additional resources in the loss allocation waterfall may be reserved for extraordinary circumstances. By contrast to the past approaches for reducing margin requirements which delays Clearing Member suspension and liquidation, earlier interventions minimize systemic risk by preventing problems from growing bigger and threatening the stability of the financial system. Reduce “single points of failure” in our financial system by increasing redundancy (e.g., multiple Clearing Agencies in competition) and resiliency of our financial markets. TBTF must be eliminated. Failure must always be an option. Thank you for the opportunity to comment for the protection of all investors as all investors benefit from a fair, transparent, and resilient market. PS: Thank you, from the bottom of my heart, for all recent attempts at improving the markets with TRANSPARANCY and HONESTY, so that we stop this cycle of abuse caused by greed that stems from big banks, market makers, and other institutions. I look forward to the day that our markets work for ALL AMERICANS!