May 13, 2024
Dear Commissioners, I am writing to express my strong support for the Securities and Exchange Commission's (SEC) decision to reject the proposed rule change submitted by The Options Clearing Corporation (OCC) concerning adjustments to margin calculation parameters during periods of high market volatility (File Number SR-OCC-2024-001). Protecting transparency, mitigating systemic risks, and ensuring investor protection are paramount in maintaining fair and orderly financial markets. For the reasons outlined below, I agree with the SEC's identification of reasonable grounds for disapproval under various provisions of the Exchange Act. Transparency is a cornerstone of fairness and investor confidence in our financial system. However, the OCC's proposal raises serious concerns in this regard due to significant redactions that prevent meaningful public review and comment. With details in exhibits redacted, as cited in the example support letter, the public lacks visibility into crucial aspects of the proposed changes. This lack of transparency alone provides sufficient justification to reject the proposal. In addition, the proposal's potential impacts on mitigating procyclicality and systemic risk warrant scrutiny. The OCC acknowledges margin requirements calculated by its STANS model may become procyclical, correlating with market volatility. While seeking to address this, the proposal facilitates margin requirement decreases through "idiosyncratic" and "global" controls applied over 200 times in just a few years. As the example letter outlines, applying these controls 50 times annually seems beyond idiosyncratic events. Repeatedly reducing members' collateral protections in this manner could encourage excessive risk-taking and leave the financial system more vulnerable to contagion from member defaults, especially during periods of heightened volatility when procyclical margin increases may be most prudent. Rather than mitigating systemic risk, the proposal appears to increase it by weakening existing safeguards. As the OCC itself states, a single member default could trigger other failures through losses charged to non-defaulting members' clearing fund deposits if liquidating the defaulter's position under volatile conditions. Yet the proposal aims to further decrease margin requirements for at-risk members, reducing the first line of defense for the OCC and shifting more costs to the clearing fund. Considering the OCC's designation as a systemically important financial market utility (SIFMU), changes that heighten the contagion risk of member defaults should face stringent review prior to approval. Conflicts of interest inherent in the OCC's governance model compound transparency and risk concerns. As noted in the example support letter, the Financial Risk Management Officer's role prioritizes member safety over the OCC due to the risk of member defaults exposing the OCC to losses. This necessarily requires rubber-stamping margin reductions for at-risk members, negating the function of collected margin collateral as a market risk buffer. Such governance deficiencies weaken protections for the OCC, its members, and the stability of the financial markets they serve. Finally, the OCC proposal comes shortly after previous changes to expand its access to non-bank liquidity facilities, as outlined comprehensively in the prior submission. In combination with this proposal, those changes could allow the OCC to effectively time the transfer of collateral values from facilities to the OCC's benefit following orchestrated member defaults, disadvantaging participants such as pensions. While non-banks voluntarily participate in the facilities, broader consequences must still be considered, like potential impacts on insurance solvency requiring taxpayer support. In rejecting this proposal while properly identifying reasonable grounds for disapproval, the SEC acts prudently to uphold principles of transparency, risk management, and investor protection that maintain fairness and confidence in our financial system. Rather than endorse changes that could encourage excessive risk and disproportionately socialize losses, appropriate regulatory oversight should reinforce financial stability by holding members accountable and avoiding unintended consequences. I strongly support the SEC's decision and hope regulators continue fortifying safeguards to protect all stakeholders in serving the public interest. In closing, I appreciate the careful review and diligent responsibility reflected in the SEC's rejection of this OCC proposal. Maintaining transparency while mitigating systemic risk and preventing conflicts from weakening inherent protections are non-negotiable foundations of an equitable and resilient financial market. The examples and evidence provided here reinforce that the SEC's decision adheres closely to provisions of the Exchange Act in fulfilling its mandate. Thank you for considering these views. Sincerely, A Concerned Investor