This is in response to The SEC “no objection” to OCC proposals may not be as bad as you think which plays Devil’s Advocate to my post SEC: “No Objection” to OCC Proposals so MOASS can happen, pensions pay for it, and Wall St keeps their collateral.
On the upside, u/dmurrieta72 and I both agree that:
Clearing Members can still default,
The SEC proposals are about how the OCC handles a Clearing Member default (“Aftermath”),
And, we’re both bullish.
In particular, how much of the $35+ Trillion in pensions funds can the OCC tap? $1 Billion? $2.5 Billion? 🤷♂️
It’s undisputed that the OCC is looking to add $2.5 billion in external liquidity:
SR-OCC-2022-803 34-95327 pg 8
And, here’s where the OCC says “well, that $2.5 billion might all come from the Non-Bank Liquidity Facility”:
SR-OCC-2022-803 34-95327 pg 9
Basically, if banks don’t want to give us money, we’ll go to our Non-Bank Liquidity Facility which taps institutional investors that are not Clearing Members or an affiliated bank, such as pension funds or insurance companies:
SR-OCC-2022-803 34-95327 pg 5
Increasing the OCC’s ability to tap pensions funds and insurance companies for $2.5 billion dollars is only an increase from their current ability to tap them for $1 billion dollars. And currently, to get access to more money, the OCC needs to ask permission to exceed the current $1 billion dollar cap.
Which is why the OCC is also asking for “Removing the present $1 billion dollar cap to the Non-Bank Liquidity Facility program”.
SR-OCC-2022-803 34-95327 “Proposed Change” pg 9
After all, if you’re going to ask to more than double your access to money from pension funds and insurance companies, you might as well ask to remove the limits and not have to ask again. And that’s what they did:
SR-OCC-2022-803 34-95327 “Anticipated Effect On and Management of Risk” pls 12-13
Basically, the OCC is asking to up their limit from $1 billion to $2.5 billion and remove the pesky limit to “allow OCC to seek an aggregate commitment amount for up to the amount determined by the Board of the Directors”.
OCC: Can we remove the limits and just use however much we decide is necessary?
SEC: Sure thing. We trust you bro!
The SEC understood the OCC’s proposal the same way, “OCC is proposing to remove the $1 billion funding limit and increase the capacity of its Non-Bank Liquidity Facility to an amount to be determined by OCC’s Board from time to time, based on OCC’s liquidity needs”:
SR-OCC-2022-803 34-95670 pg 4
The fox is guarding the hen house. OCC’s Board decides the OCC’s funding limit from pension funds and insurance companies in their Non-Bank Liquidity Facility.
Pension funds were valued at over $35 TRILLION (as of 2020). The OCC’s Board now decides how much of that the OCC can access. The OCC was limited to $1 billion and they asked to up that limit to $2.5 billion and remove the limit. The SEC has granted OCC’s request to remove the limit because the “OCC has been designated as a SIFMU” (Systemically Important Financial Market Utility [Wikipedia, Investopedia, OCC, Federal Reserve]) Basically, the US Government will protect it at all costs. Regardless of whatever perverse incentives this creates for financial industry participants to lie, cheat, steal, sell assets that don’t exist, or fail to deliver on securities sold.
SR-OCC-2022-803 34-95670 pgs 14-15
The OCC’s stated intention for their proposed change was very clear:
SR-OCC-2022-803 34-95327 pg 15
“[T]he proposed change would allow OCC to seek a readily available liquidity resource that would enable it to, among other things, continue to meet its obligations in a timely fashion and as an alternative to selling Clearing Member collateral under what may be stressed and volatile market conditions.”
The OCC explicitly stated their proposal expanding the Non-Bank Liquidity Facility (with pension funds and insurance companies) is “an alternative to selling Clearing Member collateral
under what may be stressed and volatile market conditions” during a market crash. The SEC approved it. What is the point of having Clearing Member collateral???