Notice2023-21956
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove 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
October 4, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 191 (Wednesday, October 4, 2023)</title>
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[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68855-68857]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21956]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98628; File No. SR-FINRA-2023-010]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Provide Relief Relating
to Specified Option Transactions Under FINRA Rule 4210 (Margin
Requirements)
September 28, 2023.
I. Introduction
On June 30, 2023, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities and
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change 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 proposed
rule change was published for comment in the Federal Register on July
19, 2023.\3\ The Commission received two comment letters on the
proposal.\4\ On August 31, 2023, FINRA extended the time period in
which the Commission must approve the proposed rule change, disapprove
the proposed rule change, or institute proceedings to determine whether
to approve or disapprove the proposed rule change to October 17,
2023.\5\ The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \6\ to solicit comments on the proposed
rule change and to institute proceedings to determine whether to
approve or disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 97898 (Jul. 13, 2023), 88 FR
46204 (``Notice'').
\4\ Comments received on the proposed rule change are available
at <a href="https://www.sec.gov/comments/sr-finra-2023-010/srfinra2023010.htm">https://www.sec.gov/comments/sr-finra-2023-010/srfinra2023010.htm</a>.
\5\ See Letter from Adam Arkel, Associate General Counsel,
FINRA, to Sheila Swartz, Division of Trading and Markets, Commission
(Aug. 31, 2023).
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change
In its filing with the Commission, FINRA stated that Cboe Exchange,
Inc. (``Cboe'' or the ``Exchange'') filed with the Commission 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,\7\ which the Commission approved on March 2, 2023.\8\
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\7\ See Exchange Act Release No. 96395 (Nov. 28, 2022), 87 FR
74199 (Dec. 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''). See also Notice at 46205, n.3.
\8\ See Exchange Act Release No. 97019 (Mar. 2, 2023), 88 FR
14416 (Mar. 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'').
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FINRA stated that the Cboe rule change established a new exception
to those margin requirements with respect to a ``protected option''
strategy, as set forth in new paragraph (c)(5)(C)(iv)(e) of Cboe Rule
10.3.\9\ 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.\10\
In approving Cboe's rule change, FINRA observed that the Commission
stated it believes the rule change will facilitate the use of protected
options and reduce associated costs and burdens.\11\ FINRA stated that,
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 proposed to conform its margin rule to the
provisions Cboe adopted and to make other minor conforming
revisions.\12\
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\9\ See Notice at 46205.
\10\ 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 at 74201.
See also Notice at 46205, n.8.
\11\ See Cboe Approval Order at 14418.
\12\ See Notice at 46205.
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Specifically, FINRA proposes to add new paragraph (f)(2)(H)(v)f.
(``Protected Options'') to FINRA Rule 4210.\13\ The new paragraph would
provide that 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 \14\ if the
following conditions, which conform to the Cboe rule, are met: \15\
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\13\ See Exhibit 5 to the proposed rule change, available at
<a href="https://www.sec.gov/files/rules/sro/finra/2023/34-97898-ex5.pdf">https://www.sec.gov/files/rules/sro/finra/2023/34-97898-ex5.pdf</a>.
\14\ FINRA stated that the exception from the margin
requirements under Cboe's new rule is virtually identical to the
margin requirements set forth in Cboe Rule 10.3(c)(5)(A), which sets
forth margin requirements for listed options. According to FINRA,
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) of FINRA Rule 4210 addresses
margin requirements for over-the-counter (``OTC'') products. As
such, FINRA proposed to include both listed and OTC products within
the scope of the exception. FINRA stated that both types of products
would be subject to the conditions specified under the rule which,
according to FINRA, are virtually identical to Cboe's provisions.
FINRA stated that it believes this harmonized approach to both
listed and OTC options is appropriate for purposes of the rule
change to broaden availability of the benefits of the protected
option strategy to, for example, non-Cboe FINRA members, and would
thereby prevent a potential gap between listed and OTC options. See
also Notice at 46205, n.12.
\15\ See id. at 46205.
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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.\16\
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\16\ See id.
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FINRA also proposes to expand the protected options treatment to
OTC options, so they are subject to the same conditions as listed
options. FINRA stated that it 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. FINRA stated that while it does not have sufficient
information on how many investors or
[[Page 68856]]
members would choose to make use of the protected options treatment for
either listed or OTC options, it believes the number is small and would
be limited to institutional investors.\17\
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\17\ See id. at 46206. See also supra note 14.
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FINRA stated that in proposing the margin exception for protected
options, Cboe emphasized that the exception is not intended to and does
not apply to leveraged instruments.\18\
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\18\ See Cboe Proposal at 74201; see also Cboe Approval Order at
14417 and Notice at 46205.
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In addition, FINRA proposes minor revisions to paragraphs
(f)(2)(H)(v)a. through d. of FINRA Rule 4210 to conform with the usage
of the term ``in the same account'' as used in proposed paragraph
(f)(2)(H)(v)f.\19\ Specifically:
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\19\ See Notice at 46205.
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<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 . . .'' \20\
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\20\ See id.
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FINRA stated that it believes these changes are appropriate because
they clarify the rule text and conform with the new proposed protected
option provisions.\21\
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\21\ See id.
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Lastly, FINRA stated that if the Commission approves the proposed
rule change, FINRA will announce the effective date of the proposed
rule change in a Regulatory Notice.\22\ The effective date will be no
later than 30 days following publication of the Regulatory Notice
announcing Commission approval of the proposed rule change.\23\
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\22\ See id.
\23\ See id. at 46205-46206. FINRA stated 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''). According to FINRA, these members are not
subject to Rule 4210. See id. at 46205, n.14.
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III. Proceedings to Determine Whether To Approve or Disapprove SR-
FINRA-2023-010 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule
change should be approved or disapproved.\24\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to the proposed rule change.
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\24\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\25\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis and input concerning whether the proposed rule
change is consistent with the Exchange Act and the rules thereunder.
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\25\ Id.
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In particular, the Commission seeks comment on the following
questions and asks commenters to submit data where appropriate to
support their views:
<bullet> What are commenters' views on FINRA's proposal to expand
the protected options treatment to OTC options so they are subject to
the same conditions as listed options? Would the expansion of the
protected options treatment to OTC options help to reduce potential
regulatory arbitrage that may favor listing options on certain
exchanges?
<bullet> What are commenters' views on the types of market
participants that would utilize the protected options treatment for
either listed or OTC options? For example, would use of the protected
options treatment for either listed or OTC options be generally limited
to institutional investors? Please explain why or why not.
IV. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposed rule change. In particular, the Commission invites
the written views of interested persons concerning whether the proposed
rule change is consistent with the Exchange Act and the rules
thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4 under the Exchange Act,\26\ any request for an opportunity
to make an oral presentation.\27\
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\26\ 17 CFR 240.19b-4.
\27\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by October 25, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
November 8, 2023.
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#a7d5d2cbc28ac4c8cacac2c9d3d4e7d4c2c489c0c8d1"><span class="__cf_email__" data-cfemail="3341465f561e505c5e5e565d4740734056501d545c45">[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="https://www.sec.gov/rules/sro.shtml">https://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 October 25, 2023. Rebuttal comments
[[Page 68857]]
should be submitted by November 8, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21956 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P
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