May 8, 2024
As a retail investor, I value immensely this platform that allows individuals such as myself to have a voice in the market regulation process. In particular, I would like to express concerns about the recent proposal SR-OCC-2024-001 Release No 34-100009. The SEC has put forward grounds for disapproval pertaining to the rule proposed by the OCC, with which I wholeheartedly agree. As per the SEC, the proposed rule is not in accordance with the following sections: Section 17A(b)(3)(F) of the Exchange Act Rule 17Ad-22(e)(2) Rule 17Ad-22(e)(6) As it pertains to Section 17A(b)(3)(F), the OCC's rule proposal aims to shift responsibility of Clearing Members defaults to non-bank liquidity facilities, which would allow said Clearing Members to incur losses beyond their margin deposits and having others pick up the slack. Shifting this responsibility onto others is a financial as well as a moral slippery slope, and it goes against the OCC's and Clearing Member's responsibility to safeguard their own assets. Furthermore, according to the proposed rule, the FRM's office role will be to rubber stamp requests for reduction of margin requirements ad-hoc, prioritising Clearing Members over the OCC despite the FRM's office belonging to the former. This is a clear conflict of interest. Additionally, the proposed rule relies on the application of "idiosyncratic" and "global" control settings which are not formally developed. Such vagueness blurs the lines of responsibility between distinct entities and creates a legal and moral grey area that is rife for abuse. This is a clear violation of Rule 17Ad-22(e)(2). Lastly, this proposal is in direct opposition with Rule 17Ad-22(e)(6) that protects against exactly the kind of risk that is promoted by the proposed OCC rule. The OCC requests the possibility to reduce margin requirements ad-hoc during volatile markets. All existing models for risk management warn against this. The rule does not discuss how such reduction in margin deposit requirements would affect potential future exposure of the Clearing Members. The reduction of margin deposit requirements would increase the risk of Clearing Member default, which is contradictory to the proposed rule's purpose of safeguarding said Clearing Members from defaulting. Based on the points discussed, I find the SEC's grounds for disapproval to be more than sufficient. Of further concern is the OCC's lack of transparency in these proceedings, given by their decision to redact Exhibit 3 and 5. It is essential for all market makers to openly discuss and participate in discussions that shape market regulation. I sincerely hope that the SEC will disapprove of proposal SR-OCC-2024-001 Release No 34-100009 and any similar future proposals that promote exceptional application of rules to market participants. Leonardo Cucinotta