Notice2023-15266
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Provide Relief Relating to Specified Option Transactions Under FINRA Rule 4210 (Margin Requirements)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 19, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 137 (Wednesday, July 19, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 137 (Wednesday, July 19, 2023)]
[Notices]
[Pages 46204-46206]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-15266]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97898; File No. SR-FINRA-2023-010]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Provide
Relief Relating to Specified Option Transactions Under FINRA Rule 4210
(Margin Requirements)
July 13, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 30, 2023, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 4210 (Margin Requirements)
to provide margin relief for specified index option transactions, known
as ``protected options,'' and to make other minor conforming revisions
with regard to the margin relief.
The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
[[Page 46205]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Cboe Exchange, Inc. (``Cboe'' or the ``Exchange'') filed with the
SEC a proposed rule change to amend Cboe Rule 10.3 regarding margin
requirements related to cash-settled index options written against
exchange-traded funds (``ETF(s)'') that track the same index underlying
the option.\3\ The SEC has approved Cboe's proposed rule change.\4\
Cboe Rule 10.3 sets forth margin requirements, and certain exceptions
to those requirements, that apply to the customers of Trading Permit
Holders (``TPHs'').\5\ Cboe stated that, under paragraph (c)(5) of Rule
10.3, TPHs generally are required to obtain from a customer, and
maintain, a margin deposit for short cash-settled index options in an
amount equal to 100% of the current market value of the option plus 15%
(if overlying a broad-based index) or 20% (if overlying a narrow-based
index) of the amount equal to the index value multiplied by the index
multiplier minus the amount, if any, by which the option is out-of-the-
money.\6\ Cboe stated the minimum margin required for such an option is
100% of the option current market value plus 10% of the index value
multiplied by the index multiplier for a call or 10% of the exercise
price multiplied by the index multiplier for a put.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 96395 (November 28,
2022), 87 FR 74199 (December 2, 2022) (Notice of Filing of a
Proposed Rule Change to Amend Rule 10.3 Regarding Margin
Requirements; File No. SR-CBOE-2022-058) (``Cboe Proposal'').
\4\ See Securities Exchange Act Release No. 97019 (March 2,
2023), 88 FR 14416 (March 8, 2023) (Order Approving a Proposed Rule
Change to Amend Rule 10.3 Regarding Margin Requirements; File No.
SR-CBOE-2022-058) (``Cboe Approval Order'').
\5\ Under Cboe rules, a TPH is a holder of a license to access
the facilities of the Exchange for the purpose of effecting
transactions in securities traded on the Exchange without the
services of another person acting as broker.
\6\ Cboe noted that the out-of-the-money amount for a call is
any excess of the aggregate exercise price of the option or warrant
over the product of the current (spot or cash) index value and the
applicable multiplier. The out-of-the-money amount for a put is any
excess of the product of the current (spot or cash) index value and
the applicable multiplier over the aggregate exercise price of the
option or warrant. See Cboe Proposal, 87 FR 74199, 74201 n.8.
---------------------------------------------------------------------------
The Cboe rule change establishes a new exception to these
requirements that Cboe stated is tailored to a ``protected option''
strategy, as set forth in new paragraph (c)(5)(C)(iv)(e) under Cboe
Rule 10.3.\7\ Subject to specified conditions, the exception is
applicable to short option positions or warrants on indexes that are
offset by positions in an underlying stock basket, non-leveraged index
mutual fund, or non-leveraged ETF that is based on the same index
option.\8\ Cboe stated it believes that the rule change will help
reduce operational costs for customers that use the protected option
strategy, while at the same time providing an effective safeguard
against the risk of a short option position.\9\ Similarly, in approving
Cboe's rule change, the SEC stated it believes the rule change will
facilitate the use of protected options and reduce associated costs and
burdens.\10\ In the interest of regulatory harmony and ensuring that
the potential benefits of protected option treatment are available to
FINRA members and their customers, FINRA is proposing to conform
FINRA's margin rule to the new provisions adopted by Cboe and to make
other minor conforming revisions.
---------------------------------------------------------------------------
\7\ See Cboe Proposal, 87 FR 74199, 74200.
\8\ Cboe distinguishes the ``protected option'' strategy from a
``covered call,'' which is a strategy of writing an option against a
position in an underlying security and is addressed by separate
margin requirements under Cboe rules. See Cboe Proposal, 87 FR
74199, 74201.
\9\ See Cboe Proposal, 87 FR 74199, 74203.
\10\ See Cboe Approval Order, 88 FR 14416, 14418.
---------------------------------------------------------------------------
Specifically, FINRA proposes to establish under Rule 4210 new
paragraph (f)(2)(H)(v)f. (``Protected Options'').\11\ The new paragraph
would provide that
---------------------------------------------------------------------------
\11\ See Exhibit 5.
---------------------------------------------------------------------------
when an index call (put) option or warrant is carried ``short''
(the ``protected option or warrant position'') and there is carried in
the same account a long (short) position in an underlying stock basket,
non-leveraged index mutual fund or non-leveraged ETF (each, referred to
as the ``protection'') that is based on the same index underlying the
index option or warrant, the protected option or warrant position is
not subject to the requirements set forth in paragraphs (f)(2)(E)(i)
and (f)(2)(E)(iii) of Rule 4210 \12\ if the following conditions, which
conform to the Cboe rule, are met:
---------------------------------------------------------------------------
\12\ The exception from the margin requirements under Cboe's new
rule is as to the margin requirements set forth in Cboe Rule
10.3(c)(5)(A), which sets forth margin requirements for listed
options. Paragraph (f)(2)(E)(i) under FINRA Rule 4210
correspondingly addresses listed options and is virtually identical
to the Cboe provisions. Paragraph (f)(2)(E)(iii) under Rule 4210
addresses margin requirements for over-the-counter (``OTC'')
products. As such, FINRA is proposing to include both listed and OTC
products within the scope of the exception. Both types of products
would be subject to the conditions specified under the rule which,
again, are virtually identical to Cboe's provisions. FINRA believes
this harmonized approach to both listed and OTC options is
appropriate for purposes of the rule change so as to broaden
availability of the benefits of the protected option strategy to,
for example, non-Cboe FINRA members. This would thereby prevent a
potential gap between listed and OTC options.
---------------------------------------------------------------------------
1. When the protected option or warrant position is created, the
absolute value of the protection is not less than 100 percent of the
aggregate current underlying index value associated with the protected
option or warrant position determined at either:
A. The time the order that created the protected option or warrant
position was entered or executed; or
B. The close of business on the trading day the protected option or
warrant position was created;
2. The absolute value of the protection is at no time less than 95
percent of the aggregate current underlying index value associated with
the protected option or warrant position; and
3. Margin is maintained in an amount equal to the greater of:
A. The amount, if any, by which the aggregate current underlying
index value is above (below) the aggregate exercise price of the
protected call (put) option or warrant position; or
B. The amount, if any, by which the absolute value of the
protection is below 100 percent of the aggregate current underlying
index value associated with the protected option or warrant.
In proposing the margin exception for protected options, Cboe noted
that the exception is not intended to and does not apply to leveraged
instruments.\13\
---------------------------------------------------------------------------
\13\ See Cboe Proposal, 87 FR 74199, 74201; see also Cboe
Approval Order, 88 FR 14416, 14417.
---------------------------------------------------------------------------
In addition, FINRA is proposing minor revisions to paragraphs
(f)(2)(H)(v)a. through d. under Rule 4210 to conform with the usage of
the term ``in the same account'' as used in proposed paragraph
(f)(2)(H)(v)f. Specifically:
<bullet> In paragraph (f)(2)(H)(v)a., the phrase ``in an account in
which there is also carried . . .'' would be changed to read ``in the
same account as . . .''
<bullet> In paragraphs (f)(2)(H)(v)b. through d., the phrase ``is
also carried with . . .'' would be changed to read ``there is carried
in the same account . . .''
FINRA believes these changes are appropriate because they clarify
the rule text and conform with the new proposed protected option
provisions.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice. The effective date will be no later than 30 days following
publication of the Regulatory Notice announcing
[[Page 46206]]
Commission approval of the proposed rule change.\14\
---------------------------------------------------------------------------
\14\ FINRA notes that the proposed rule change would not impact
funding portal members and would not impact members that have
elected to be treated as capital acquisition brokers (``CABs'').
These members are not subject to Rule 4210.
---------------------------------------------------------------------------
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\15\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that, by conforming FINRA Rule 4210
with Cboe's new provisions relating to protected options, the proposed
rule change would promote regulatory clarity and harmonization with
respect to use by customers of the protected option strategy. This
would help facilitate the use of protected options and reduce
associated costs and burdens while providing effective safeguards,
thereby conducing to the protection of investors and the public
interest. Further, for the reasons set forth in the Cboe Approval
Order, the Commission found that the Cboe rule change is consistent
with the provisions of Section 6(b)(5) \16\ and Section 6(c)(3) \17\ of
the Act. Because the proposed rule change conforms with Cboe's
protected options amendments, FINRA believes the proposed rule change
is consistent with the corresponding provisions under Section 15A(b)(6)
\18\ and Section 15A(g)(3) \19\ of the Act.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78o-3(b)(6).
\16\ 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the
rules of an exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system
and, in general to protect investors and the public interest, and
not be designed to permit unfair discrimination between customers,
issuers, brokers or dealers.
\17\ 15 U.S.C. 78f(c)(3). Section 6(c)(3) authorizes, among
other things, a national securities exchange to prescribe standards
of financial responsibility or operational capability.
\18\ 15 U.S.C. 78o-3(b)(6).
\19\ 15 U.S.C. 78o-3(g)(3).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
FINRA believes that conforming FINRA Rule 4210 with Cboe's
protected option provisions would benefit FINRA members and their
customers. The proposed rule change provides an additional options
strategy to investors, allowing them to adopt certain options positions
at potentially lower cost than is possible under the current margin
requirement. The required protection that is the alternative to the
margin requirement incorporates reasonable safeguards against the risks
of short open positions, as proposed by Cboe and approved by the
Commission. The proposed rule change would also promote competition
between FINRA members and any members of Cboe (or any other exchange
that adopts the Cboe rule) that are not FINRA members, by allowing
FINRA members to use the protected option strategy instead of posting
margin.
The proposed rule change would also expand the protected options
treatment to unlisted, OTC options, so they are subject to the same
conditions as for listed options. FINRA believes that harmonizing the
FINRA margin requirements for OTC options with the amended Cboe rule
would reduce potential regulatory arbitrage that would favor listing
options on Cboe. While FINRA does not have sufficient information on
how many investors or members would choose to make use of the protected
options treatment for either listed or unlisted options, it believes
the number is small and would be limited to institutional investors.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#2b595e474e06484446464e455f586b584e48054c445d"><span class="__cf_email__" data-cfemail="3644435a531b55595b5b535842457645535518515940">[email protected]</span></a>. Please include
File Number SR-FINRA-2023-010 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2023-010. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FINRA-2023-010 and should be submitted on or
before August 9, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15266 Filed 7-18-23; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on July 19, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.