Jan. 31, 2024
Dear Securities and Exchange Commission, I am reaching out to share my reservations about the suggested alteration in the rule by the Options Clearing Corporation (OCC), specifically related to adjusting parameters for computing margin requirements during periods of heightened market volatility. As a dedicated, long-term investor deeply vested in the stability and fairness of the financial market, I appreciate the opportunity to contribute my opinion on this matter. Upon reviewing the proposed rule change, there seem to be potential issues that warrant closer examination. The current form of the proposed rule appears to unintentionally shield risky financial positions from the typical risk management mechanism of margin calls during periods of elevated market volatility. Generally, margin calls act as a protective measure, necessitating investors to inject funds or securities to cover potential losses when the value of their positions drops below a certain threshold. By limiting or preventing margin calls during turbulent market conditions, the proposal might enable investors with imprudent risks to evade necessary adjustments. This absence of a robust risk management mechanism could result in unbridled growth in risky positions, potentially leading to more substantial losses and raising concerns about long-term market stability. Therefore, if the objective of the proposal is to manage risk, there is a legitimate concern that these protective measures might inadvertently facilitate the uncontrolled expansion of imprudent risks, posing a larger threat to market stability over time. One particular aspect causing apprehension is the role assigned to the Financial Risk Management (FRM) Officer. The proposal assigns significant responsibility to this individual, whose primary duty is safeguarding OCC's interests. This introduces an inherent conflict of interest, as protecting OCC’s interests may not always align with the broader market’s well-being. The proposal itself acknowledges a scenario where risk factor coverage differs significantly under idiosyncratic control settings compared to regular control settings, emphasizing the need for scrutiny. Compounding this concern is the lack of transparency in the redacted materials accompanying the proposal. Transparency plays a vital role in building trust among investors and the public. The redacted nature of the materials limits our ability to fully assess the efficacy of the proposed rule. This lack of transparency not only raises questions about the thoroughness of the evaluation process but also diminishes the opportunity for informed public discourse. While acknowledging OCC's intent to mitigate risks during high volatility periods, it is crucial to ensure that risk management measures do not inadvertently shelter imprudent bets. Adjusting parameters for calculating margin requirements is essential for market stability, but this must be done in a manner that aligns with broader market interests. Furthermore, considering the concerns highlighted in the OCC Rule proposal, particularly the anxiety about increasing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I suggest a reevaluation of the OCC's loss allocation framework. As outlined in the proposal, the current structure places Clearing Fund deposits of non-defaulting firms as the fourth layer of defense in the event of market stress, following the OCC's own pre-funded financial resources. This arrangement implies that the OCC anticipates losses to exhaust the first three layers, including its pre-funded resources, before reaching non-defaulting Clearing Members' contributions. To address this potential disparity and promote fairness, I propose prioritizing Clearing Fund deposits of non-defaulting firms over the OCC's pre-funded resources. This adjustment ensures that Clearing Members' contributions play a more immediate and prominent role in covering losses, aligning with principles of equity and transparency in the OCC's risk management structure. Such a modification would provide additional protection to non-defaulting Clearing Members and contribute to a more balanced and resilient financial ecosystem. In light of these concerns, I propose additional safeguards and modifications to the rule. One example includes considering an independent review mechanism to assess the impact of control settings on both OCC's interests and the broader market. This measure is essential to reinforce transparency and accountability within the regulatory framework, ensuring an unbiased evaluation of risk management practices. By involving external experts, this safeguard not only mitigates potential conflicts of interest but also fosters public trust and confidence in the regulatory process. It aligns with the broader goal of upholding market integrity, providing a robust mechanism for continuous improvement and adaptability in response to evolving market dynamics. Additionally, enhancing transparency by providing non-confidential summaries of redacted materials would enable a more informed public discourse and promote a more inclusive decision-making process. Other recommendations for refining the proposed rule include: -Prioritizing enhanced transparency requirements, advocating for increased transparency in reporting and decision-making processes related to risk management measures. -Strengthening oversight mechanisms, with a more active role for regulatory bodies, contributes to accountability in risk management practices. -The incorporation of public input through consultations and hearings is proposed to foster inclusivity and democratic decision-making in the rulemaking process. -Encouraging the establishment of industry-wide standards and best practices in collaboration with stakeholders emphasizes a commitment to market stability. -Advocating for public accessibility of stress testing results showcases the effectiveness of risk management measures. -Lastly, considering the establishment of an external oversight committee, comprised of industry experts, ensures impartial evaluation and scrutiny of risk management practices. -These suggestions collectively aim to fortify oversight, enhance transparency, and uphold accountability, thereby ensuring the integrity and fairness of our financial markets. To conclude, as an engaged investor, I am committed to fostering a financial environment that prioritizes fairness, transparency, and the well-being of all market participants. I trust that the SEC will thoroughly consider these concerns during the rule-making process and work towards a rule that not only addresses risk management but also upholds the broader principles of market integrity. Sincerely, James DeWitt