Options Account Approval, Supervision and Margin
With the recent increase in the number of customers seeking to open brokerage accounts and trade options, FINRA reminds members of the requirements for determining whether to approve a customer to trade options. Regardless of whether the account is self-directed or options are being recommended, members must perform due diligence on the customer and collect information about the customer to support a determination that options trading is appropriate for the customer. In addition, FINRA reminds members that options accounts are subject to specific supervisory reviews, including, among others, reviewing the compatibility of options transactions with investment objectives and with the types of transactions for which the account was approved, and are subject to other FINRA rules that apply when opening customer accounts, including among others, customer identification requirements under anti-money laundering rules.
FINRA also reminds members of the margin requirements for options transactions.
FINRA Regulatory Notice 21-15 (April 9, 2021): FINRA Reminds Members About Options Account Approval, Supervision and Margin Requirements
October 2018 Supplement to the Options Disclosure Document
The SEC approved the October 2018 supplement to the Options Disclosure Document (ODD). The ODD contains general disclosures on the characteristics and risks of trading standardized options. The October 2018 supplement (i) amends and restates in its entirety the April 2015 Supplement, which accommodated foreign index options and certain implied volatility index options;2 (ii) provides additional contract adjustment disclosures regarding the determination of contract adjustments by OCC rather than adjustment panels and the manner in which certain adjustments may affect an option’s value; and (iii) reflects T+2 settlement. As with other supplements to the ODD, this should be read in conjunction with the current ODD, Characteristics and Risks of Standardized Options.
• FINRA Information Notice (January 17, 2019): October 2018 Supplement to the Options Disclosure Document
Minor Rule Violation Plan Provisions for CAT Compliance Rules
As outlined in Regulatory Circular RC20-045, the Exchanges, FINRA and all other CAT NMS Plan Participants have entered into an amended plan pursuant to Rule 17d-2 under the Securities Exchange Act of 1934 (the “Rule 17d-2 Plan”) and related regulatory services agreements (“RSAs”) to coordinate regulation of the CAT Compliance Rules. The changes to the Exchanges’ Minor Rule Violation Plans for CAT Compliance Rule violations discussed in this Regulatory Circular are consistent with coordinated regulation under the Rule 17d-2 Plan and the RSAs.
• Cboe Regulatory Circular 20-047 (August 6, 2020): Minor Rule Violation Plan Provisions for CAT Compliance Rules
Regulatory Coordination Concerning CAT Reporting Compliance
Cboe Exchange, Inc. and FINRA, as CAT NMS Plan Participants, have entered into an amended plan pursuant to Rule 17d-2 under the Securities Exchange Act of 1934 (the “Rule 17d-2 Plan”) and related regulatory services agreements to coordinate regulation of the CAT Compliance Rules. Relatedly, the Participants have developed a coordinated approach to enforcement of the CAT Compliance Rules under Participants’ respective Minor Rule Violation Plans.
• Cboe Regulatory Circular 20-045 (July 9, 2020): Regulatory Coordination Concerning CAT Reporting Compliance
Cboe Receives Regulatory Approval to Launch Periodic Auctions for U.S. Equities Trading
Cboe's U.S. periodic auctions are designed to allow market participants to access frequent, price-forming auctions throughout the course of the trading day, thereby helping them find liquidity in a short time-frame with low market impact, while prioritizing price and size. Periodic auctions of one-hundred milliseconds will be initiated when there are matching auctionable buy and sell orders available to trade in the auction. The message identifying when an auction is available will be randomized, helping to mitigate any potential adverse selection. Periodic auctions will not interrupt trading in the continuous market and will execute at a price level that maximizes volume executed in the auction, including any orders posted on the BYX order book.
FINRA has recently observed an increase in fraudulent options trading being facilitated by (1) account takeover schemes (sometimes referred to as account intrusions), through which a bad actor gains unauthorized entry to a customer’s brokerage account; and (2) the use of new account fraud by a bad actor who fraudulently establishes a brokerage account through identity theft. This Notice provides member firms and associated persons with information regarding options transactions in connection with these account takeover and new account fraud schemes to help identify, prevent and respond to such activity.
• FINRA Regulatory Notice 20-32 (September 17, 2020): FINRA Reminds Firms to Be Aware of Fraudulent Options Trading in Connection With Potential Account Takeovers and New Account Fraud
Cboe Options Rule 6.9 – In-Kind Exchanges of Options and ETF Shares
Cboe Exchange, Inc. is issuing this Regulatory Circular to advise Trading Permit Holders (“TPHs”) of the procedures for effecting transfers under Rule 6.9, which allows for certain off-floor transfers of options positions associated with in-kind exchanges of options and ETF shares.
• Cboe Regulatory Circular 20-032 (April 15, 2020): In-Kind Exchanges of Options and ETF Shares
Cboe Options Rule 6.8 – Off-Floor RWA Transfers
Cboe Exchange, Inc. is issuing this circular to provide further information with regard to Rule 6.8, which is intended to facilitate the reduction of risk-weighted assets attributable to open positions by permitting certain off-floor transfers. This circular provides an overview of the rule, information on effecting the transfers through The Options Clearing Corporation, and some examples and responses to frequently asked questions.
• Cboe Regulatory Circular 20-031 (April 15, 2020): Off-Floor RWA Transfers
Cboe Options Rule 6.7 – Off-Floor Transfers of Positions
Cboe Exchange, Inc. is issuing this Regulatory Circular to advise Trading Permit Holders (“TPHs”) that changes to Rule 6.7, which allows for certain off-floor transfers of options positions, were recently approved by the SEC (see approval order for Cboe Options Rule Filing SR-CBOE-2019-035, Amendment 1 and Amendment 2). The criteria and procedures related to off-floor position transfers under Rule 6.7, as amended, are described in this notice.
• Cboe Regulatory Circular 20-030 (April 15, 2020): Off-Floor Transfers of Positions
Best Execution Rule
In light of the increasingly automated market for equity securities and standardized options, and recent advances in trading technology and communications in the fixed income markets, FINRA issued Regulatory Notice 15-46 to reiterate the best execution obligations that apply when firms receive, handle, route or execute customer orders in equities, options and fixed income securities. FINRA reminds firms of their obligations, as previously articulated by the SEC and FINRA, to regularly and rigorously examine execution quality likely to be obtained from the different markets trading a security.
• FINRA Regulatory Notice 15-46 (November 2015): Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets