Jan. 31, 2024
Dear Securities and Exchange Commission, I am reaching out to express my apprehensions regarding the proposed rule modification by the Options Clearing Corporation (OCC) concerning the adjustment of parameters for calculating margin requirements during periods of heightened market volatility. As a dedicated long-term investor deeply concerned about the stability and equity of the financial market, I appreciate the opportunity to provide my perspectives on this matter. Upon reviewing the proposed rule modification, I have identified potential inconsistencies that merit careful examination. The current iteration of the proposed rule seems to unintentionally shield precarious financial positions from the standard risk management mechanism of margin calls during turbulent market conditions. Margin calls typically act as a safeguard, compelling investors to inject funds or securities to cover potential losses when their positions' value falls below a specified threshold. By limiting or preventing margin calls in volatile market scenarios, the proposal may enable investors with imprudent risks to avoid necessary adjustments. This absence of a risk management mechanism could result in uncontrolled growth of risky positions, potentially leading to larger losses and raising concerns about the long-term stability of the market. If the proposal aims to manage risk, there is a concern that these protective measures may inadvertently permit imprudent risks to escalate, posing heightened risks to market stability over time. A specific aspect triggering concern is the role assigned to the Financial Risk Management (FRM) Officer. Placing substantial responsibility on an individual whose primary duty is to safeguard OCC's interests creates an inherent conflict of interest. This conflict arises as protecting OCC’s interests may not always align with the broader market’s well-being. The proposal acknowledges a scenario where risk factor coverage significantly differs under idiosyncratic control settings compared to regular control settings, underscoring the need for scrutiny. This concern is compounded by the lack of transparency in the redacted materials accompanying the proposal. Transparency is crucial for fostering trust among investors and the public. The redacted nature of the materials limits our ability to fully evaluate the effectiveness of the proposed rule, raising questions about the thoroughness of the evaluation process and diminishing opportunities for informed public discourse. While acknowledging OCC's intent to mitigate risks during periods of high volatility, it is essential to ensure that risk management measures do not inadvertently shelter risky positions. Adjusting parameters for calculating margin requirements is crucial for market stability, but it must align with broader market interests. Given the concerns highlighted in the OCC Rule proposal, especially regarding increasing margin requirements during stressed market conditions and the potential cascade of Clearing Member failures, I recommend a reevaluation of the OCC's loss allocation framework. The current structure places Clearing Fund deposits of non-defaulting firms as the fourth layer of defense, following the OCC's pre-funded financial resources. 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. For instance, consider implementing an independent review mechanism to assess the impact of control settings on both OCC's interests and the broader market. This measure is essential for reinforcing 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 to advocate for increased transparency in reporting and decision-making processes related to risk management measures. Transparent disclosure fosters trust among market participants and allows for a more comprehensive evaluation of margin calculations and adjustments, particularly during volatile periods. Strengthening oversight mechanisms with a more active role for regulatory bodies, contributing to accountability in risk management practices. Incorporating public input through consultations and hearings 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, emphasizing a commitment to market stability. Advocating for public accessibility of stress testing results to showcase the effectiveness of risk management measures. Considering the establishment of an external oversight committee comprised of industry experts to ensure 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. In conclusion, as a committed investor, I am dedicated 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 rulemaking process and work towards a rule that not only addresses risk management but also upholds the broader principles of market integrity. Sincerely, Aleksi J Åkers