May 9, 2024
The undersigned respectfully submits this comment letter urging the Securities and Exchange Commission ("Commission") to disapprove the Options Clearing Corporation's ("OCC") proposed rule change on its process for adjusting margin parameters during high volatility periods. While OCC aims to codify existing practices, the proposed changes raise significant concerns about consistency with the Securities Exchange Act of 1934 ("Exchange Act") and applicable regulations.
Inconsistent with Section 17A(b)(3)(F) - Prompt and Accurate Clearance The proposed rule change lacks sufficient detail on OCC's methodology and governance around adjusting volatility parameters in its margin models during stress periods. This lack of transparency makes it difficult to assess if the adjustments promote prompt and accurate clearance by ensuring adequate margins during extreme volatility. Discretionary parameter adjustments, if not prudently implemented, could undermine the integrity of OCC's risk management.
Failure to Meet Rule 17Ad-22(e)(2) - Governance Arrangements The proposal does not specify "clear and direct lines of responsibility" as required by Rule 17Ad-22(e)(2). While mentioning involvement of senior decision makers, it lacks critical details on the approval process, escalation criteria, oversight and challenging of parameter adjustments by risk management and other control functions. Weak governance could lead to imprudent adjustments driven by commercial interests rather than prudent risk management.
Non-Compliance with Rule 17Ad-22(e)(6) - Risk-Based Margin System The proposed rule change appears inconsistent with multiple aspects of Rule 17Ad-22(e)(6) on operating a comprehensive risk-based margin system:
a) Rule 17Ad-22(e)(6)(i) requires margins to be "commensurate with the risks and particular attributes of each relevant product, portfolio, and market." However, the proposal lacks transparency on OCC's approach to ensure parameter adjustments appropriately reflect the unique risk profiles across its cleared product suite.
b) Rule 17Ad-22(e)(6)(iii) mandates that margins cover "potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default." The proposal is silent on backtesting and calibration of parameter adjustments to ensure sufficient margins under sustained volatility scenarios.
In conclusion, OCC's proposal lacks critical risk management, governance and transparency elements required by the Exchange Act rules applicable to systemically important clearing agencies. We urge the Commission to disapprove this proposal to ensure robust safeguards around OCC's processes for managing risks during periods of market stress. OCC should re-propose with comprehensive amendments addressing the deficiencies outlined above.
Respectfully,
Martin Crass