May 15, 2024
As a retail investor, I appreciate the chance to comment on SR-OCC-2024-001, Release No 34-100009, about changing how the OCC adjusts margin requirements during high volatility. I support the SEC's grounds for disapproval of this proposal because I have several concerns, and I value this opportunity to ensure all investors are protected. First, there's a big lack of transparency. The details in Exhibit 5 and supporting information in Exhibit 3 are so redacted that the public can't review or comment meaningfully. Without a full public review, this proposal should be rejected. Public review is crucial because the OCC blames U.S. regulators for not requiring it to adopt specific procyclicality controls. Procyclicality means increasing margin requirements during market stress, which could strain Clearing Members' liquidity and risk their failure, potentially destabilizing the financial system. The OCC, a critical part of the financial system, must be transparent, especially since it’s an SRO. Blaming regulators shows the public can't fully trust the OCC or U.S. regulators to safeguard our markets. The proposal seems designed to protect Clearing Members by reducing margin requirements, increasing risks to the OCC and the financial system. The OCC uses a system called STANS to calculate margin requirements, which sometimes produces procyclical results. Increasing margin requirements during volatility could make it hard for Clearing Members to get liquidity, risking default and financial instability. A systemic risk exists because Clearing Members might be undercapitalized or over-leveraged. If one fails, it could cause a domino effect. This proposal aims to avoid a financial crisis by reducing margin requirements, which is problematic. The OCC often uses "idiosyncratic" control settings to avoid margin calls, doing this over 200 times in less than four years. This frequent use suggests it’s not truly idiosyncratic. This creates an unfair market. While retail investors face the consequences of long-tail risks, the OCC repeatedly reduces margin requirements for Clearing Members. This proposal should be rejected, and Clearing Members should face strict margin requirements like everyone else. The OCC claims this rule is needed because a single Clearing Member default could cause a cascade of defaults, posing financial risks. But reducing margin requirements for at-risk Clearing Members is illogical. The OCC should increase these requirements to protect itself and minimize bailout sizes. The OCC's FRM Officer, meant to protect the OCC's interests, ends up protecting at-risk Clearing Members by reducing their margin requirements. This makes the FRM Officer more of an administrative rubber stamp. The proposal supports this, stating that high volatility control settings are applied each time certain thresholds are breached, which undermines market protection. The OCC’s own financial resources are at risk in case of Clearing Member defaults. Thus, reducing margin requirements for at-risk Clearing Members is nonsensical. The OCC should instead enforce higher margins to better manage risks. Interestingly, after the "meme-stock" episode, the OCC proposed changes to increase its financial contribution to cover losses before non-defaulting members are charged. Now, they seek to reduce financial safeguards, which is contradictory and illogical. The OCC's Master Repurchase Agreements give it control over when to sell and repurchase collateral, potentially timing these actions to benefit itself financially. This combination of rules allows the OCC to sell high and buy low, exploiting market conditions. These rules create a system where non-banks, including pension funds and insurance companies, bear the costs of Clearing Member defaults. This could harm pensions and insurance companies, leading to broader financial instability. In conclusion, the SEC should disapprove this proposal as it fails to safeguard securities, protect investors, and maintain market transparency. The proposal increases systemic risks by reducing necessary financial safeguards. Clearing Members should manage their risks without relying on reduced margin requirements. I recommend increasing and enforcing margin requirements, implementing external audits, swapping loss allocation priorities to encourage peer monitoring among Clearing Members, and liquidating at-risk Clearing Members early to minimize systemic risk. The financial system needs more redundancy and less dependence on single points of failure. Thank you for the chance to comment and support a fair, transparent, and resilient market. Sent with Proton Mail secure email.