Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to Amendments to FINRA Rules 2360 and 4210 in Connection With OCC Cleared Over-the-Counter Options, 41149-41154 [2013-16379]
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Federal Register / Vol. 78, No. 131 / Tuesday, July 9, 2013 / Notices
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws and
that these procedures are adequate to
properly monitor Exchange trading of
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws.
(4) Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit (‘‘ETP’’) Holders
in an Information Bulletin of the special
characteristics and risks associated with
trading the Shares. Specifically, the
Information Bulletin will discuss the
following: (a) The procedures for
purchases and redemptions of Shares in
Creation Units (and that Shares are not
individually redeemable); (b) NYSE
Arca Equities Rule 9.2(a), which
imposes a duty of due diligence on its
ETP Holders to learn the essential facts
relating to every customer prior to
trading the Shares; (c) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated Portfolio Indicative
Value will not be calculated or publicly
disseminated; (d) how information
regarding the Portfolio Indicative Value
will be disseminated; (e) the
requirement that ETP Holders deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
(5) For initial and/or continued
listing, the Fund will be in compliance
with Rule 10A–3 under the Exchange
Act,30 as provided by NYSE Arca
Equities Rule 5.3.
(6) The Fund will not invest in any
non-U.S. equity securities (other than
shares of the Subsidiary and Underlying
ETFs listed on HKSE), to the extent that
the Fund may not invest directly in
China A-Shares. To the extent that the
Fund invests directly in China AShares, not more than 10% of the
weight of the Fund’s portfolio in the
aggregate shall consist of such China AShares whose principal trading market
is not a member of ISG or is a market
with which the Exchange does not have
a comprehensive surveillance sharing
agreement.
(7) The Fund will invest solely in
SGX-listed futures contracts on the
Benchmark. It is possible that the
futures contracts on the Benchmark may
become listed on other exchanges that
are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement, at
which time the Fund may invest in
those futures contracts listed on such
30 17
CFR 240.10A–3.
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exchanges. To the extent that the Fund
or the Subsidiary were to invest in
futures contracts on the Benchmark that
were traded on exchanges other than
SGX, not more than 10% of the weight
of such futures contracts held by the
Fund or the Subsidiary in the aggregate
would consist of components whose
principal trading market is not a
member of ISG or is a market with
which the Exchange does not have a
comprehensive surveillance sharing
agreement. The Fund will not invest in
options or swaps. The Fund’s
investments will be consistent with its
investment objective and will not be
used to enhance leverage.
(8) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid securities (calculated
at the time of investment).
(9) Should the Fund invest in the
Subsidiary, that investment may not
exceed 25% of the Fund’s total assets at
each quarter end of the Fund’s fiscal
year.
(10) A minimum of 100,000 Shares of
the Fund will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations and
description of the Fund, including those
set forth above and in the Notice.31
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 32 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,33 that the
proposed rule change (SR–NYSEArca–
2013–56) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–16382 Filed 7–8–13; 8:45 am]
BILLING CODE 8011–01–P
31 The Commission notes that it does not regulate
the market for futures in which the Fund plans to
take positions. Limits on the positions that any
person may take in futures may be directly set by
the CFTC or by the markets on which the futures
are traded. The Commission has no role in
establishing position limits on futures even though
such limits could impact an exchange-traded
product that is under the jurisdiction of the
Commission.
32 15 U.S.C. 78f(b)(5).
33 15 U.S.C. 78s(b)(2).
34 17 CFR 200.30–3(a)(12).
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41149
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69913; File No. SR–FINRA–
2013–027]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change Relating to
Amendments to FINRA Rules 2360 and
4210 in Connection With OCC Cleared
Over-the-Counter Options
July 2, 2013.
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 28,
2013, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
FINRA is proposing to amend: (1)
FINRA Rule 2360 (Options) to treat
over-the-counter (‘‘OTC’’) options
cleared by The Options Clearing
Corporation (‘‘OCC’’) as conventional
options for purposes of the rule; and (2)
FINRA Rule 4210 (Margin
Requirements) to treat OTC options
cleared by the OCC as listed options
with respect to applicable margin
requirements.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, 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.
1 15
2 17
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Federal Register / Vol. 78, No. 131 / Tuesday, July 9, 2013 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
FINRA proposes amendments to its
rules on options and margin
requirements to address new rules
established by The Options Clearing
Corporation (‘‘OCC’’) to clear and
guarantee OTC options on the S&P 500
index.3 Given the expansion of the
OCC’s business to include clearing and
guaranteeing certain OTC options,
FINRA is proposing amendments to
FINRA Rule 2360 (Options) and FINRA
Rule 4210 (Margin Requirements), as
discussed below, to provide for the
proper application of existing rules to
OTC options cleared by the OCC.
Amendments to Rule 2360
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FINRA Rule 2360 generally classifies
options as either standardized or
conventional. A standardized equity
option is ‘‘any equity options contract
issued, or subject to issuance, by The
[OCC] that is not a FLEX Equity
Option.’’ 4 A conventional option is
‘‘any option contract not issued, or
subject to issuance, by The [OCC].’’ 5
Historically, all standardized options
have been traded on an exchange, and
all conventional options have been
traded OTC. In addition, FINRA Rule
2360 recognizes FLEX Equity Options,
which are options contracts ‘‘issued, or
subject to issuance, by The [OCC]
whereby the parties to the transaction
have the ability to negotiate the terms of
the contract consistent with the rules of
the exchange on which the options
contract is traded.’’ 6 The OCC’s
proposal to clear and guarantee OTC
options on the S&P 500 index (and
thereby become the issuer of such
options) raises interpretive issues under
FINRA Rule 2360. For the reasons
discussed more fully below, FINRA
proposes to amend FINRA Rule 2360 to
treat OCC cleared OTC options as
3 See Securities Exchange Act Release No. 68434
(December 14, 2012), 77 FR 75243 (December 19,
2012) (Order Approving Proposed Rule Change, as
Modified by Amendment No. 1 Thereto, and Notice
of No Objection to Advance Notice, Modified by
Amendment No. 1 Thereto, Relating to the
Clearance and Settlement of Over-the-Counter
Options; File No. SR–OCC–2012–14). The OCC has
not yet implemented clearing of OTC options on the
S&P 500 index.
4 See FINRA Rule 2360(a)(31). See also FINRA
Rule 2360(a)(32) for the definition of standardized
index option.
5 See FINRA Rule 2360(a)(9). See also FINRA
Rule 2360(a)(8) for the definition of conventional
index option.
6 See FINRA Rule 2360(a)(16).
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conventional options for purposes of the
rule.
Background
FINRA Rule 2360 was adopted to
address the specific risks that pertain to
trading in options and implement
provisions of the federal securities laws
and SEC rules. The rule includes,
among other things, provisions
requiring specific disclosure documents,
additional diligence in approving the
opening of accounts, and specific
requirements for confirmations, account
statements, suitability, supervision,
recordkeeping and reporting. The rule
also contains provisions imposing limits
on the size of an options position and
on the number of contracts that can be
exercised during a fixed period. The
rule generally treats the categories of
options (i.e., standardized, conventional
or FLEX Equity options) the same,
except in the case of position limits,7
reporting, and the delivery of disclosure
documents.
Position Limits
Position limits are intended to
prevent the establishment of options
positions that can be used or might
create incentives to manipulate or
disrupt the underlying market so as to
benefit the options position. They are
designed to minimize the potential for
mini-manipulation and for corners or
squeezes of the underlying market.8 In
addition, position limits serve to reduce
the possibility for disruption of the
options market itself, especially in
illiquid options classes.9
With respect to conventional and
standardized equity options, FINRA
Rule 2360(b)(3)(A) imposes a position
limit on the number of options contracts
in each class on the same side of the
market (i.e., aggregating long calls and
short puts, or long puts and short calls)
7 FINRA Rule 2360(b)(4) specifies exercise limits
through incorporating by reference options position
limits under the rule; the provision does not further
differentiate by category of option. Accordingly, the
treatment of an option with respect to its position
limit is the same with respect to exercise limits. For
example, if an option (regardless of category—
standardized, conventional or FLEX Equity Option)
is subject to a 25,000 contract position limit, then
a member may not exercise within five consecutive
business days more than 25,000 contracts.
8 See Securities Exchange Act Release No. 40087
(June 12, 1998), 63 FR 33746, 33748 (June 19, 1998)
(Order Granting Approval and Notice of Filing and
Order Granting Accelerated Approval to
Amendment No.1 and Amendment No. 2 to
Proposed Rule Change Relating to an Amendment
to the NASD’s Options Position Limit Rule File No.
SR–NASD–98–23).
Note 16 defined mini manipulation as an attempt
to influence, over a relatively small range, the price
movement in a stock to benefit a previously
established derivatives position.
9 See note 8.
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that can be held or written by a member,
a person associated with a member, a
customer or a group of customers acting
in concert. In general, position limits for
standardized equity options are
determined according to a five-tiered
system in which more actively traded
stocks with larger public floats are
subject to higher position limits.10
FINRA Rule 2360 does not specifically
govern how a particular equity option
falls within one of the tiers. Rather, the
position-limit provision provides that
the position limit established by the
rules of an options exchange for a
particular equity option is the
applicable position limit for purposes of
FINRA Rule 2360.
In general, position limits for
conventional equity options are the
same as the limits for the applicable
standardized equity options.11 In
instances where an equity security is
not subject to a standardized option, the
applicable position limit for the
conventional option is the lowest tier
(25,000 contracts) unless the security is
in an index designated by FINRA that
meets the volume and float criteria
specified by FINRA12 or the member can
otherwise demonstrate to FINRA’s
Market Regulation Department that the
underlying security meets the standards
for a higher position limit.13
Conventional index options are not
subject to position limits 14 while
standardized index options are subject
to the position limit as specified on the
exchange on which the option trades.15
Position limits for FLEX Equity Options
are governed by the rules of the
exchange on which such options trade
as specified in FINRA Rule 2360(b)(2).
The position limits for standardized
equity options and conventional equity
options are calculated separately.
10 However, the position limits for standardized
and conventional options overlying specified
exchange-traded funds are established in FINRA
Rule 2360, Supplemental Material .03.
11 See FINRA Rule 2360(b)(3)(A)(vii) for the
available equity option hedge exemptions. For
specified hedge strategies (for example, conversions
and reverse conversions), standardized options are
exempt from position limits. However, if one of the
options components in the hedge strategy consists
of a conventional option, the position limit is five
times that of the established position limit. For the
same specified hedge strategies (for example,
conversions and reverse conversions), conventional
options are subject to a position limit five times that
of the established limits.
12 See e.g., Notice to Members 07–03 (January
2007), which provides that the FTSE All-World
Index Series is a designated index for this purpose
and Regulatory Notice 13–20 (May 2013), which
provides that, effective June 27, 2013, the NASDAQ
Global Large Mid Cap Index is an additional
designated index for this purpose.
13 See FINRA Rule 2360(b)(3)(A)(viii)b.
14 See Notice to Members 94–46 (June 1994).
15 See FINRA Rule 2360(b)(3)(B).
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Standardized equity options contracts of
the put class and call class on the same
side of the market overlying the same
security are not aggregated 16 with the
conventional equity options contracts or
FLEX Equity Options contracts
overlying the same security on the same
side of the market.17
In considering the proper
categorization for OCC cleared OTC
options for position limit purposes,
FINRA notes that it previously
determined that FLEX Equity Options
were economically equivalent to
conventional options because they are
non-uniform and individually
negotiated.18 FINRA believes that OCC
cleared OTC options are similar to FLEX
Equity Options in that they are cleared
by the OCC, are non-uniform and give
investors the ability to designate certain
terms of the option. Unlike FLEX Equity
Options, OCC cleared OTC options are
not traded on an exchange, which
FINRA believes makes such options
even more analogous to conventional
options (also not traded on an
exchange). FINRA also notes, as
discussed below, that the counterparties
to OCC cleared OTC options must be
‘‘eligible contract participants’’ as
defined in the Act and thus are more
sophisticated investors likely to be
aware of the risk of options trading.
FINRA believes it is appropriate to treat
OCC cleared OTC options as
conventional options for position limit
purposes to ensure that any OCC cleared
OTC option would be subject to
appropriate position limits, consistent
with other OTC options. At this time,
the OCC has only been approved by the
SEC to clear OTC options on the S&P
500 index. Options on S&P 500 index,
whether standardized or conventional
are not subject to a position limit.19 The
16 See FINRA Rule 2360(b)(3)(A)(viii)a. FINRA
Rule 2360 does not address aggregation of index
options because, as noted above, conventional
index options are not subject to position limits.
17 The SEC approved disaggregating conventional
equity options from standardized equity options
and FLEX Equity Options to allow market
participants in the OTC options market to compete
effectively with the participants using standardized
options or with entities not subject to position limit
rules. See note 8 at 33748.
18 See note 8 at 33747.
19 See CBOE Rule 24.4. See also Securities
Exchange Act Release No. 40969 (January 22, 1999),
64 FR 4911 (February 1, 1999) (Order Granting
Approval to Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to
Amendment Nos. 1, 2 and 3 Relating to An
Elimination of Position and Exercise Limits for
Certain Broad Based Index Options File No. SR–
CBOE–98–23) and Securities Exchange Act Release
No. 44994 (October 26, 2001), 66 FR 55722
(November 2, 2001) (Order Approving Proposed
Rule Change by the Chicago Board Options
Exchange, Incorporated Relating to Permanent
Approval of the Pilot Program To Eliminate
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proposed rule change is intended to
cover any OCC cleared OTC option.20
Accordingly, an OCC cleared OTC
option on an equity security would be
subject to the position limit of the
greater of: (1) 25,000 contracts or (2) any
standardized equity options position
limit for which the underlying security
qualifies,21 and would not be aggregated
with any standardized option
counterpart. An OCC cleared OTC
option on an index would not be subject
to position limits, consistent with
conventional index options.
Reporting
FINRA Rule 2360(b)(5) outlines
members’ options position reporting
requirements. FINRA’s Market
Regulation staff uses the options
position information reported to FINRA
as part of its ongoing market
surveillance operations and this
information supports FINRA’s
monitoring efforts for any market
manipulation or disruption related to
the accumulation or disposition of large
options positions. It also enables FINRA
to identify large positions held or
written by a member that could pose a
financial risk to the member or its
clearing firm. Currently, firms satisfy
the reporting obligation by reporting
positions to the Large Options Position
Reporting (‘‘LOPR’’) system that is
operated by the OCC. This system
allows firms to submit their LOPR files
to OCC to maintain compliance with
FINRA Rule 2360(b)(5) and the
corresponding exchanges’ rules. FINRA
receives the LOPR reports on a daily
basis.
FINRA Rule 2360(b)(5)(A)(i)a.
requires that members report to FINRA
with respect to each account that has
established an aggregate position of 200
or more conventional option contacts
(whether long or short) of the put class
and the call class on the same side of
the market covering the same
underlying security or index, provided,
Position and Exercise Limits for OEX, SPX, and DJX
Index Options and Flex Options on These Indexes
File No. SR–CBOE–2001–22).
20 In this regard, FINRA notes that the definition
of ‘‘options contract’’ in FINRA Rule 2360(a)(22)
provides that ‘‘[i]f a stock option is granted covering
some other number of shares, then for purposes of
paragraphs (b)(3) through (12), it shall be deemed
to constitute as many option contracts as that other
number of shares divided by 100 (e.g., an option to
buy or sell five hundred shares of common stock
shall be considered as five option contracts).’’
21 As noted above, if the equity security is not
subject to a standardized option, the applicable
position limit is 25,000 contracts unless the security
is in an index designated by FINRA that meets the
volume and float criteria specified by FINRA or the
member can demonstrate to FINRA that the
underlying security meets the standards for a higher
position limit.
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41151
that such reporting with respect to
positions in conventional index options
shall apply only to an option that is
based on an index that underlies, or is
substantially similar to an index that
underlies, a standardized index
option.22 In addition, FINRA Rule
2360(b)(5)(A)(i)b. has a similar reporting
requirement with respect to
standardized options, but the
requirement to report standardized
options positions to FINRA only applies
to members that are not members of the
options exchange on which the
standardized options are listed and
traded. Because there is not a
comparable exchange regulatory regime
that applies to members trading OCC
cleared OTC options as exists with
standardized options, FINRA believes
that it is appropriate and
straightforward to categorize these
options as conventional options such
that all members must report positions
of 200 or more contracts on the same
side of the market covering the same
underlying security or index to FINRA
as is the case for all conventional
options.
Disclosure Documents
FINRA Rule 2360(b)(11)(A)(i) requires
members to deliver to customers the
Characteristics and Risks of
Standardized Options, which is also
known as the Options Disclosure
Document (‘‘ODD’’), if the customer
engages in transactions in options
issued by the OCC (as noted above such
options have historically been traded on
an exchange). This provision
implements Rule 9b–1 under the Act,
which applies only to standardized
options and further defines
standardized options to include options
that trade on an exchange.23
Accordingly, standardized options and
FLEX Equity Options are described in
the ODD and if a customer engages in
transactions in such options, a member
is subject to the requirement to deliver
the ODD. In contrast, the ODD does not
address conventional options
(historically OTC options), and
members are not required to deliver the
22 FINRA’s reporting requirements do not
currently apply to FLEX Equity Options; however,
the LOPR reports contain members’ FLEX Equity
Options position reports.
23 Rule 9b–1(a)(4) under the Act defines a
‘‘standardized option’’ as ‘‘options contracts trading
on a national securities exchange, an automated
quotation system of a registered securities
association, or a foreign securities exchange which
relate to options classes the terms of which are
limited to specific expiration dates and exercise
prices, or such other securities as the Commission
may, by order, designate.’’ The SEC has not
designated OCC cleared OTC options as
standardized options under Rule 9b–1 under the
Act.
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ODD with respect to transactions in
such options. FINRA believes it is
consistent to treat transactions in OCC
cleared OTC options, which are
similarly not addressed in the ODD, the
same as transactions in conventional
options, and not subject members to the
requirement to deliver the ODD for such
transactions. FINRA also believes that
the ODD delivery requirement is not
necessary because the OCC requires that
the counterparties to OCC cleared OTC
options must be ‘‘eligible contract
participants’’ as defined in the Act and
thus are more sophisticated investors
likely to be aware of the risks of OTC
options.24
In addition, FINRA Rule
2360(b)(11)(A)(ii) requires members to
deliver to customers that are approved
to write uncovered short option
transactions the Special Statement for
Uncovered Option Writers (the ‘‘Special
Written Statement’’) that describes the
risk related to writing uncovered short
options. Similar to the ODD delivery
requirements, the requirement to deliver
the Special Written Statement applies
with respect to transactions in options
issued by the OCC (listed options).
Accordingly, FINRA believes it is
consistent to treat transactions in OCC
cleared OTC options with transactions
in conventional options, and not require
members to deliver the Special Written
Statement for such transactions. FINRA
believes that the Special Written
Statement delivery requirement is
unnecessary in light of the OCC
requirement that the counterparties to
OCC cleared OTC options must be
‘‘eligible contract participants’’ as
defined in the Act and thus are more
sophisticated investors likely to be
aware of the risks of writing uncovered
short options.25
Proposal
As noted above, FINRA Rule 2360
generally treats the categories of options
the same, except in the case of position
limits, reporting, and the delivery of
disclosure documents. FINRA believes
that in these enumerated areas it is
appropriate to treat OCC cleared OTC
options as conventional options for the
reasons discussed above. FINRA
believes that OCC cleared OTC options
should otherwise be subject to the same
sales practice and other requirements
that apply to transactions in any
category of options (including, among
other requirements, suitability, approval
of account opening and supervision).
24 See note 3 and proposed Section 6(f), Article
XVII of the OCC By-Laws.
25 See note 3 and proposed Section 6(f), Article
XVII of the OCC By-Laws.
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FINRA proposes a series of definition
changes to explain this treatment.
Specifically, FINRA proposes to define
an ‘‘OCC Cleared OTC Option’’ as ‘‘any
put, call, straddle or other option or
privilege that meets the definition of an
‘option’ under Rule 2360(a)(21) and is
cleared by The Options Clearing
Corporation, is entered into other than
on or through the facilities of a national
securities exchange, and is entered into
exclusively by persons who are ‘eligible
contract participants’ as defined in the
Exchange Act.’’ 26 In addition, FINRA
proposes to clarify that the definitions
of ‘‘conventional option’’ and
‘‘conventional index option’’ would
include ‘‘OCC Cleared OTC Options’’ in
amended FINRA Rule 2360(a)(8) and
(a)(9), respectively. FINRA would
further amend the definitions of
‘‘standardized equity option,’’
‘‘standardized index option’’ and ‘‘FLEX
Equity Option’’ in FINRA re-numbered
Rule 2360(a)(32), (a)(33) and (a)(16),
respectively, to specifically exclude
OCC Cleared OTC Options. Finally,
FINRA proposes minor amendments to
the definition of ‘‘expiration date’’ in
Rule 2360(a)(14) to reflect that the
expiration date of OCC Cleared OTC
Options may be customized by the
parties to the trade in accordance with
the rules of the OCC, and not fixed by
the OCC’s rules.27
FINRA also proposes minor
amendments to paragraphs (b)(11)(A)(i)
and (ii) and paragraph (b)(16) of FINRA
Rule 2360 to provide, as noted above,
that the ODD and Special Written
Statement are not required to be
delivered by members effecting a
transaction in OCC Cleared OTC
Options. As noted above, the OCC
Cleared OTC Options would otherwise
be subject to the same sales practice and
other requirements that apply to
transactions in conventional options
(including, among other requirements,
suitability, approval of account opening
and supervision). In addition, the
proposed rule change would make
technical, non-substantive changes to
FINRA Rule 2360(b)(11)(A) to reflect
FINRA Manual style convention.
Amendments to FINRA Rule 4210
For purposes of margin treatment,
FINRA proposes to treat OCC Cleared
26 The definition reflects the OCC proposed rule
requirement that counterparties to OCC Cleared
OTC Options must be ‘‘eligible contract
participants’’ as defined in the Act. See note 3 and
proposed Section 6(f), Article XVII of the OCC ByLaws.
27 FINRA notes that the expiration date of FLEX
Equity Options also may be customized and
accordingly the proposed rule change also clarifies
this definition for purposes of FLEX Equity
Options.
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Frm 00128
Fmt 4703
Sfmt 4703
OTC Options as it treats other cleared
and guaranteed options, which to date
have always been listed options,28 in
light of the clearing and guaranteeing
functions performed by the OCC. FINRA
Rule 4210(f)(2) and FINRA Rule 4210(g)
sets forth the strategy-based margin and
portfolio margin requirements for
transactions in options. In general, the
margin requirement for options listed on
an exchange (and cleared and
guaranteed by the OCC) is lower than
the margin requirement for OTC
options 29 (not cleared or guaranteed by
the OCC). The reasons underlying the
more favorable margin treatment for
listed (and OCC cleared and guaranteed)
options apply with equal force to OCC
Cleared OTC Options. The clearing and
guaranteeing functions performed by the
OCC reduce the counterparty credit risk
of the otherwise OTC nature of these
options, likening them to the same level
of risk as listed options.
The proposed beneficial margin
treatment for OCC cleared OTC option
may only be applied by a member after
the OTC option has been accepted for
clearing and guaranteed by the OCC.
FINRA understands that the OCC’s
proposal provides that the trade data for
an OTC option trade would be
submitted to an approved OCC vendor
that would process the trade and submit
it as a confirmed trade to OCC for
clearing. The OCC would then confirm
if the OTC option trade meets OCC’s
validation requirements and will notify
the vendor, which will notify the
submitting parties.30 The OCC proposal
also provides that parties may submit
trades for clearance that were entered
into bilaterally at any time in the past,
provided that the eligibility for
clearance will be determined as of the
date the trade is submitted to OCC for
clearance.31 Upon confirmation from
28 See FINRA Rule 4210(f)(2)(A)(xxiv) and FINRA
Rule 4210(g)(2)(A) for the definition of ‘‘listed’’ and
‘‘listed option,’’ respectively.
29 See FINRA Rule 4210(f)(2)(A)(xxvii) for the
definition of ‘‘OTC’’ and FINRA Rule 4210(g)(2)(H)
for ‘‘unlisted derivative.’’
30 FINRA further understands that, if the option
trade is rejected for clearing, the option would
remain subject to any applicable agreement between
the original parties to the transaction, which may
provide that (1) such rejected transaction shall
remain a bilateral transaction between the parties
subject to such agreement or other documentation
as the parties have entered into for that purpose or
(2) may be terminated. See note 3 and proposed
interpretation .02 of Section 6, Article VII of the
OCC By-Laws. If the OTC option was rejected for
clearing, but the option contract was not terminated
by the parties and remained an OTC option
contract, the member would be required to apply
the applicable OTC option margin requirements,
not the listed option margin requirements.
31 See note 3. OCC’s license agreement with S&P
imposes certain minimum requirements relating to
time remaining to expiration of the OTC option, as
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Federal Register / Vol. 78, No. 131 / Tuesday, July 9, 2013 / Notices
the OCC vendor that the OTC option has
been accepted for clearance and
guaranteed by the OCC, the member
may apply the applicable listed option
margin requirements.
Accordingly, FINRA proposes to
amend the definition of ‘‘listed’’ in
FINRA Rule 4210(f)(2)(A)(xxiv) to
provide that a listed option means an
option that is traded on a national
securities exchange or issued and
guaranteed by a registered clearing
agency and shall include an OCC
Cleared OTC Option as defined in
FINRA Rule 2360. FINRA proposes to
amend the definition of ‘‘OTC’’ in
FINRA Rule 4210(f)(2)(A)(xxvii) to
provide that OTC options shall not
include an OCC Cleared OTC Option as
defined in FINRA Rule 2360. FINRA
proposes conforming amendments to
FINRA Rule 4210(g)(2)(A) regarding
portfolio margin requirements to
provide that a ‘‘listed option’’ means an
option that is traded on a national
securities exchange or issued and
guaranteed by a registered clearing
agency and shall include an OCC
Cleared OTC Option as defined in
FINRA Rule 2360. Finally, FINRA Rule
4210(g)(2)(H) would be amended to
clarify that an ‘‘unlisted derivative’’
would include among other things, an
index-based option that is neither
traded on a national securities exchange
nor issued or guaranteed by a registered
clearing agency and shall not include an
OCC Cleared OTC Option as defined in
FINRA Rule 2360.
FINRA requests comment on the
proposed rule change. Among other
matters that commenters may wish to
address, FINRA is particularly
interested in the following question: Do
commenters believe that different or
amended margin provisions, including
higher requirements, would be superior
to those set forth in the proposed rule
change?
FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice, which will be no
later than 90 days following
Commission approval.
mstockstill on DSK4VPTVN1PROD with NOTICES
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,32 which
requires, among other things, that
detailed in proposed Interpretation and Policy .01
of Section 6, Article XVII of the OCC By-Laws. See
also proposed Section 5, Article VI of the OCC ByLaws specifying that the OCC will not accept
certain trades for clearance that were entered into
bilaterally at any time in the past if such a trade
is received after 4:00 p.m. Central Time on the
business day that is four business days prior to the
expiration date of such option.
32 15 U.S.C. 78o–3(b)(6).
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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 the
proposed rule change fosters innovation
in the market by accommodating a new
product in OCC Cleared OTC Options
while balancing the need to protect
investors and the public interest by
regulating such product in a rational
regulatory framework. FINRA believes
that treating OCC Cleared OTC Options
as conventional options ensures that
OCC Cleared OTC Options are subject to
position and exercise limits and
reporting consistent with the treatment
of OTC options generally. FINRA
believes requiring OCC Cleared OTC
Options to be subject to position limits
is consistent with Act and the purpose
of position limits generally: To prevent
the establishment of options positions
that can be used or might create
incentives to manipulate or disrupt the
underlying market so as to benefit the
options position; to minimize the
potential for mini-manipulation and for
corners or squeezes of the underlying
market; and to reduce the possibility for
disruption of the options market itself,
especially in illiquid options classes.
FINRA believes that it is consistent to
treat transactions in OCC cleared OTC
options as conventional options and not
require delivery of the ODD or the
Special Written Statement because the
options are not addressed in the ODD,
and because counterparties to such OCC
cleared OTC options are ‘‘eligible
contract participants’’ as defined in the
Act and are more sophisticated
investors likely to be aware of the risks
of options trading. OCC Cleared OTC
options will also be subject to the same
options sales practice and other
requirements (such as account opening
procedures and standards for
supervision and suitability) as are all
categories of options. For purposes of
margin treatment, FINRA believes that
the clearing and guaranteeing functions
performed by the OCC support a
determination to treat OCC cleared OTC
options as the margin rule treats other
cleared and guaranteed options, which
to date have always been listed options.
The clearing and guaranteeing functions
performed by the OCC greatly reduce
the counterparty credit risk of the
otherwise OTC nature of these options,
likening them to the same level of risk
as listed options.
In addition, FINRA believes the
proposed rule change facilitates OCC’s
ability to clear OTC options subject to
the same basic rules, procedures and
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
41153
risk management practices that have
been used by OCC in clearing
transactions in listed options. The
clearance and settlement of OTC options
by the OCC is consistent with OCC’s
obligations with respect to the prompt
and accurate clearance and settlement of
securities transactions and the
protection of securities investors and
the public interest.
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 does
not anticipate that the proposed rule
change would impose any additional
costs on members that trade OCC
Cleared OTC Options. FINRA believes
that the proposed rule change fosters
innovation in the market by
accommodating a new product in OCC
Cleared OTC Options while balancing
the need to protect investors and the
public interest by regulating such
product in a rational regulatory
framework. FINRA believes that treating
OCC Cleared OTC Options as
conventional options ensures clarity
and consistency in that OCC Cleared
OTC Options are subject to position and
exercise limits and reporting as well as
other sales practice and other
requirements on par with the treatment
of OTC options generally. FINRA
believes that the clearing and
guaranteeing function provided by OCC
benefits members by reducing the
counterparty credit risk of the otherwise
OTC nature of these options and the
proposed rule change reflects such
reduction in risk by permitting members
to margin these options consistent with
the margin requirements for listed
options.
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:
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Federal Register / Vol. 78, No. 131 / Tuesday, July 9, 2013 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Elizabeth M. Murphy,
Secretary.
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:
[FR Doc. 2013–16379 Filed 7–8–13; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–FINRA–2013–027 on the
subject line.
mstockstill on DSK4VPTVN1PROD with NOTICES
(A) By order approve or disapprove
such proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending the NYSE Arca
Equities Schedule of Fees and
Charges for Exchange Services To
Modify the Credits for Certain MidPoint Passive Liquidity Orders, Add
Two New Tiers Applicable to
Transactions in Tape B Securities, Add
a Pricing Tier Applicable to Orders of
ETP Holders for Tape A and Tape C
Securities That Are Eligible To Be
Routed Away From the Exchange, and
Modify the Equity Threshold
Applicable to the Cross-Asset Tier
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2013–027. 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 Web site (https://www.sec.gov/
rules/sro.shtml ). 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 Web site 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
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2013–027, and should be submitted on
or before July 30, 2013.
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Jkt 229001
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69926; File No. SR–
NYSEArca-2013–67]
July 3, 2013.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on June 20,
2013, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend the
NYSE Arca Equities Schedule of Fees
and Charges for Exchange Services (the
‘‘Fee Schedule’’) to (i) modify the
credits for certain Mid-Point Passive
Liquidity (‘‘MPL’’) Orders, (ii) add two
new tiers applicable to transactions in
Tape B Securities, (iii) add a pricing tier
applicable to orders of ETP Holders for
Tape A and Tape C Securities that are
eligible to be routed away from the
Exchange, and (iv) modify the equity
threshold applicable to the Cross-Asset
PO 00000
33 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
Frm 00130
Fmt 4703
Sfmt 4703
Tier. The Exchange proposes to
implement the fee changes on July 1,
2013. The text of the proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, 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, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule to (i) modify the credits
for certain MPL Orders, (ii) add two new
tiers applicable to transactions in Tape
B Securities, (iii) add a pricing tier
applicable to orders of ETP Holders for
Tape A and Tape C Securities that are
eligible to be routed away from the
Exchange, and (iv) modify the equity
threshold applicable to the Cross-Asset
Tier.4 The Exchange proposes to
implement the fee changes on July 1,
2013.
MPL Orders
The Exchange proposes to add an
‘‘MPL Order Tier’’ applicable to MPL
Orders that provide liquidity on the
Exchange and modify an existing credit
for such orders.5
Currently, under various tiers and
Basic Rates, MPL Orders that provide
liquidity on the Exchange receive a
credit of $0.0015 per share for Tape A
and Tape B Securities and a credit of
$0.0020 per share for Tape C Securities.
The Exchange proposes to add a new
tier under which MPL Orders that
provide liquidity on the Exchange
would receive a credit of $0.0020 per
4 The proposed changes would apply to securities
with a per share price of $1.00 or above.
5 A Passive Liquidity (‘‘PL’’) Order is an order to
buy or sell a stated amount of a security at a
specified, undisplayed price. See Rule 7.31(h)(4).
An MPL Order is a PL Order executable only at the
midpoint of the Protected Best Bid and Offer. See
Rule 7.31(h)(5).
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]]>Agencies
[Federal Register Volume 78, Number 131 (Tuesday, July 9, 2013)]
[Notices]
[Pages 41149-41154]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16379]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69913; File No. SR-FINRA-2013-027]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
Amendments to FINRA Rules 2360 and 4210 in Connection With OCC Cleared
Over-the-Counter Options
July 2, 2013.
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 28, 2013, 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 the
Substance of the Proposed Rule Change
FINRA is proposing to amend: (1) FINRA Rule 2360 (Options) to treat
over-the-counter (``OTC'') options cleared by The Options Clearing
Corporation (``OCC'') as conventional options for purposes of the rule;
and (2) FINRA Rule 4210 (Margin Requirements) to treat OTC options
cleared by the OCC as listed options with respect to applicable margin
requirements.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, 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 41150]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes amendments to its rules on options and margin
requirements to address new rules established by The Options Clearing
Corporation (``OCC'') to clear and guarantee OTC options on the S&P 500
index.\3\ Given the expansion of the OCC's business to include clearing
and guaranteeing certain OTC options, FINRA is proposing amendments to
FINRA Rule 2360 (Options) and FINRA Rule 4210 (Margin Requirements), as
discussed below, to provide for the proper application of existing
rules to OTC options cleared by the OCC.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 68434 (December 14,
2012), 77 FR 75243 (December 19, 2012) (Order Approving Proposed
Rule Change, as Modified by Amendment No. 1 Thereto, and Notice of
No Objection to Advance Notice, Modified by Amendment No. 1 Thereto,
Relating to the Clearance and Settlement of Over-the-Counter
Options; File No. SR-OCC-2012-14). The OCC has not yet implemented
clearing of OTC options on the S&P 500 index.
---------------------------------------------------------------------------
Amendments to Rule 2360
FINRA Rule 2360 generally classifies options as either standardized
or conventional. A standardized equity option is ``any equity options
contract issued, or subject to issuance, by The [OCC] that is not a
FLEX Equity Option.'' \4\ A conventional option is ``any option
contract not issued, or subject to issuance, by The [OCC].'' \5\
Historically, all standardized options have been traded on an exchange,
and all conventional options have been traded OTC. In addition, FINRA
Rule 2360 recognizes FLEX Equity Options, which are options contracts
``issued, or subject to issuance, by The [OCC] whereby the parties to
the transaction have the ability to negotiate the terms of the contract
consistent with the rules of the exchange on which the options contract
is traded.'' \6\ The OCC's proposal to clear and guarantee OTC options
on the S&P 500 index (and thereby become the issuer of such options)
raises interpretive issues under FINRA Rule 2360. For the reasons
discussed more fully below, FINRA proposes to amend FINRA Rule 2360 to
treat OCC cleared OTC options as conventional options for purposes of
the rule.
---------------------------------------------------------------------------
\4\ See FINRA Rule 2360(a)(31). See also FINRA Rule 2360(a)(32)
for the definition of standardized index option.
\5\ See FINRA Rule 2360(a)(9). See also FINRA Rule 2360(a)(8)
for the definition of conventional index option.
\6\ See FINRA Rule 2360(a)(16).
---------------------------------------------------------------------------
Background
FINRA Rule 2360 was adopted to address the specific risks that
pertain to trading in options and implement provisions of the federal
securities laws and SEC rules. The rule includes, among other things,
provisions requiring specific disclosure documents, additional
diligence in approving the opening of accounts, and specific
requirements for confirmations, account statements, suitability,
supervision, recordkeeping and reporting. The rule also contains
provisions imposing limits on the size of an options position and on
the number of contracts that can be exercised during a fixed period.
The rule generally treats the categories of options (i.e.,
standardized, conventional or FLEX Equity options) the same, except in
the case of position limits,\7\ reporting, and the delivery of
disclosure documents.
---------------------------------------------------------------------------
\7\ FINRA Rule 2360(b)(4) specifies exercise limits through
incorporating by reference options position limits under the rule;
the provision does not further differentiate by category of option.
Accordingly, the treatment of an option with respect to its position
limit is the same with respect to exercise limits. For example, if
an option (regardless of category--standardized, conventional or
FLEX Equity Option) is subject to a 25,000 contract position limit,
then a member may not exercise within five consecutive business days
more than 25,000 contracts.
---------------------------------------------------------------------------
Position Limits
Position limits are intended to prevent the establishment of
options positions that can be used or might create incentives to
manipulate or disrupt the underlying market so as to benefit the
options position. They are designed to minimize the potential for mini-
manipulation and for corners or squeezes of the underlying market.\8\
In addition, position limits serve to reduce the possibility for
disruption of the options market itself, especially in illiquid options
classes.\9\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 40087 (June 12,
1998), 63 FR 33746, 33748 (June 19, 1998) (Order Granting Approval
and Notice of Filing and Order Granting Accelerated Approval to
Amendment No.1 and Amendment No. 2 to Proposed Rule Change Relating
to an Amendment to the NASD's Options Position Limit Rule File No.
SR-NASD-98-23).
Note 16 defined mini manipulation as an attempt to influence,
over a relatively small range, the price movement in a stock to
benefit a previously established derivatives position.
\9\ See note 8.
---------------------------------------------------------------------------
With respect to conventional and standardized equity options, FINRA
Rule 2360(b)(3)(A) imposes a position limit on the number of options
contracts in each class on the same side of the market (i.e.,
aggregating long calls and short puts, or long puts and short calls)
that can be held or written by a member, a person associated with a
member, a customer or a group of customers acting in concert. In
general, position limits for standardized equity options are determined
according to a five-tiered system in which more actively traded stocks
with larger public floats are subject to higher position limits.\10\
FINRA Rule 2360 does not specifically govern how a particular equity
option falls within one of the tiers. Rather, the position-limit
provision provides that the position limit established by the rules of
an options exchange for a particular equity option is the applicable
position limit for purposes of FINRA Rule 2360.
---------------------------------------------------------------------------
\10\ However, the position limits for standardized and
conventional options overlying specified exchange-traded funds are
established in FINRA Rule 2360, Supplemental Material .03.
---------------------------------------------------------------------------
In general, position limits for conventional equity options are the
same as the limits for the applicable standardized equity options.\11\
In instances where an equity security is not subject to a standardized
option, the applicable position limit for the conventional option is
the lowest tier (25,000 contracts) unless the security is in an index
designated by FINRA that meets the volume and float criteria specified
by FINRA\12\ or the member can otherwise demonstrate to FINRA's Market
Regulation Department that the underlying security meets the standards
for a higher position limit.\13\ Conventional index options are not
subject to position limits \14\ while standardized index options are
subject to the position limit as specified on the exchange on which the
option trades.\15\ Position limits for FLEX Equity Options are governed
by the rules of the exchange on which such options trade as specified
in FINRA Rule 2360(b)(2).
---------------------------------------------------------------------------
\11\ See FINRA Rule 2360(b)(3)(A)(vii) for the available equity
option hedge exemptions. For specified hedge strategies (for
example, conversions and reverse conversions), standardized options
are exempt from position limits. However, if one of the options
components in the hedge strategy consists of a conventional option,
the position limit is five times that of the established position
limit. For the same specified hedge strategies (for example,
conversions and reverse conversions), conventional options are
subject to a position limit five times that of the established
limits.
\12\ See e.g., Notice to Members 07-03 (January 2007), which
provides that the FTSE All-World Index Series is a designated index
for this purpose and Regulatory Notice 13-20 (May 2013), which
provides that, effective June 27, 2013, the NASDAQ Global Large Mid
Cap Index is an additional designated index for this purpose.
\13\ See FINRA Rule 2360(b)(3)(A)(viii)b.
\14\ See Notice to Members 94-46 (June 1994).
\15\ See FINRA Rule 2360(b)(3)(B).
---------------------------------------------------------------------------
The position limits for standardized equity options and
conventional equity options are calculated separately.
[[Page 41151]]
Standardized equity options contracts of the put class and call class
on the same side of the market overlying the same security are not
aggregated \16\ with the conventional equity options contracts or FLEX
Equity Options contracts overlying the same security on the same side
of the market.\17\
---------------------------------------------------------------------------
\16\ See FINRA Rule 2360(b)(3)(A)(viii)a. FINRA Rule 2360 does
not address aggregation of index options because, as noted above,
conventional index options are not subject to position limits.
\17\ The SEC approved disaggregating conventional equity options
from standardized equity options and FLEX Equity Options to allow
market participants in the OTC options market to compete effectively
with the participants using standardized options or with entities
not subject to position limit rules. See note 8 at 33748.
---------------------------------------------------------------------------
In considering the proper categorization for OCC cleared OTC
options for position limit purposes, FINRA notes that it previously
determined that FLEX Equity Options were economically equivalent to
conventional options because they are non-uniform and individually
negotiated.\18\ FINRA believes that OCC cleared OTC options are similar
to FLEX Equity Options in that they are cleared by the OCC, are non-
uniform and give investors the ability to designate certain terms of
the option. Unlike FLEX Equity Options, OCC cleared OTC options are not
traded on an exchange, which FINRA believes makes such options even
more analogous to conventional options (also not traded on an
exchange). FINRA also notes, as discussed below, that the
counterparties to OCC cleared OTC options must be ``eligible contract
participants'' as defined in the Act and thus are more sophisticated
investors likely to be aware of the risk of options trading. FINRA
believes it is appropriate to treat OCC cleared OTC options as
conventional options for position limit purposes to ensure that any OCC
cleared OTC option would be subject to appropriate position limits,
consistent with other OTC options. At this time, the OCC has only been
approved by the SEC to clear OTC options on the S&P 500 index. Options
on S&P 500 index, whether standardized or conventional are not subject
to a position limit.\19\ The proposed rule change is intended to cover
any OCC cleared OTC option.\20\ Accordingly, an OCC cleared OTC option
on an equity security would be subject to the position limit of the
greater of: (1) 25,000 contracts or (2) any standardized equity options
position limit for which the underlying security qualifies,\21\ and
would not be aggregated with any standardized option counterpart. An
OCC cleared OTC option on an index would not be subject to position
limits, consistent with conventional index options.
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\18\ See note 8 at 33747.
\19\ See CBOE Rule 24.4. See also Securities Exchange Act
Release No. 40969 (January 22, 1999), 64 FR 4911 (February 1, 1999)
(Order Granting Approval to Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to Amendment Nos. 1,
2 and 3 Relating to An Elimination of Position and Exercise Limits
for Certain Broad Based Index Options File No. SR-CBOE-98-23) and
Securities Exchange Act Release No. 44994 (October 26, 2001), 66 FR
55722 (November 2, 2001) (Order Approving Proposed Rule Change by
the Chicago Board Options Exchange, Incorporated Relating to
Permanent Approval of the Pilot Program To Eliminate Position and
Exercise Limits for OEX, SPX, and DJX Index Options and Flex Options
on These Indexes File No. SR-CBOE-2001-22).
\20\ In this regard, FINRA notes that the definition of
``options contract'' in FINRA Rule 2360(a)(22) provides that ``[i]f
a stock option is granted covering some other number of shares, then
for purposes of paragraphs (b)(3) through (12), it shall be deemed
to constitute as many option contracts as that other number of
shares divided by 100 (e.g., an option to buy or sell five hundred
shares of common stock shall be considered as five option
contracts).''
\21\ As noted above, if the equity security is not subject to a
standardized option, the applicable position limit is 25,000
contracts unless the security is in an index designated by FINRA
that meets the volume and float criteria specified by FINRA or the
member can demonstrate to FINRA that the underlying security meets
the standards for a higher position limit.
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Reporting
FINRA Rule 2360(b)(5) outlines members' options position reporting
requirements. FINRA's Market Regulation staff uses the options position
information reported to FINRA as part of its ongoing market
surveillance operations and this information supports FINRA's
monitoring efforts for any market manipulation or disruption related to
the accumulation or disposition of large options positions. It also
enables FINRA to identify large positions held or written by a member
that could pose a financial risk to the member or its clearing firm.
Currently, firms satisfy the reporting obligation by reporting
positions to the Large Options Position Reporting (``LOPR'') system
that is operated by the OCC. This system allows firms to submit their
LOPR files to OCC to maintain compliance with FINRA Rule 2360(b)(5) and
the corresponding exchanges' rules. FINRA receives the LOPR reports on
a daily basis.
FINRA Rule 2360(b)(5)(A)(i)a. requires that members report to FINRA
with respect to each account that has established an aggregate position
of 200 or more conventional option contacts (whether long or short) of
the put class and the call class on the same side of the market
covering the same underlying security or index, provided, that such
reporting with respect to positions in conventional index options shall
apply only to an option that is based on an index that underlies, or is
substantially similar to an index that underlies, a standardized index
option.\22\ In addition, FINRA Rule 2360(b)(5)(A)(i)b. has a similar
reporting requirement with respect to standardized options, but the
requirement to report standardized options positions to FINRA only
applies to members that are not members of the options exchange on
which the standardized options are listed and traded. Because there is
not a comparable exchange regulatory regime that applies to members
trading OCC cleared OTC options as exists with standardized options,
FINRA believes that it is appropriate and straightforward to categorize
these options as conventional options such that all members must report
positions of 200 or more contracts on the same side of the market
covering the same underlying security or index to FINRA as is the case
for all conventional options.
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\22\ FINRA's reporting requirements do not currently apply to
FLEX Equity Options; however, the LOPR reports contain members' FLEX
Equity Options position reports.
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Disclosure Documents
FINRA Rule 2360(b)(11)(A)(i) requires members to deliver to
customers the Characteristics and Risks of Standardized Options, which
is also known as the Options Disclosure Document (``ODD''), if the
customer engages in transactions in options issued by the OCC (as noted
above such options have historically been traded on an exchange). This
provision implements Rule 9b-1 under the Act, which applies only to
standardized options and further defines standardized options to
include options that trade on an exchange.\23\ Accordingly,
standardized options and FLEX Equity Options are described in the ODD
and if a customer engages in transactions in such options, a member is
subject to the requirement to deliver the ODD. In contrast, the ODD
does not address conventional options (historically OTC options), and
members are not required to deliver the
[[Page 41152]]
ODD with respect to transactions in such options. FINRA believes it is
consistent to treat transactions in OCC cleared OTC options, which are
similarly not addressed in the ODD, the same as transactions in
conventional options, and not subject members to the requirement to
deliver the ODD for such transactions. FINRA also believes that the ODD
delivery requirement is not necessary because the OCC requires that the
counterparties to OCC cleared OTC options must be ``eligible contract
participants'' as defined in the Act and thus are more sophisticated
investors likely to be aware of the risks of OTC options.\24\
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\23\ Rule 9b-1(a)(4) under the Act defines a ``standardized
option'' as ``options contracts trading on a national securities
exchange, an automated quotation system of a registered securities
association, or a foreign securities exchange which relate to
options classes the terms of which are limited to specific
expiration dates and exercise prices, or such other securities as
the Commission may, by order, designate.'' The SEC has not
designated OCC cleared OTC options as standardized options under
Rule 9b-1 under the Act.
\24\ See note 3 and proposed Section 6(f), Article XVII of the
OCC By-Laws.
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In addition, FINRA Rule 2360(b)(11)(A)(ii) requires members to
deliver to customers that are approved to write uncovered short option
transactions the Special Statement for Uncovered Option Writers (the
``Special Written Statement'') that describes the risk related to
writing uncovered short options. Similar to the ODD delivery
requirements, the requirement to deliver the Special Written Statement
applies with respect to transactions in options issued by the OCC
(listed options). Accordingly, FINRA believes it is consistent to treat
transactions in OCC cleared OTC options with transactions in
conventional options, and not require members to deliver the Special
Written Statement for such transactions. FINRA believes that the
Special Written Statement delivery requirement is unnecessary in light
of the OCC requirement that the counterparties to OCC cleared OTC
options must be ``eligible contract participants'' as defined in the
Act and thus are more sophisticated investors likely to be aware of the
risks of writing uncovered short options.\25\
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\25\ See note 3 and proposed Section 6(f), Article XVII of the
OCC By-Laws.
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Proposal
As noted above, FINRA Rule 2360 generally treats the categories of
options the same, except in the case of position limits, reporting, and
the delivery of disclosure documents. FINRA believes that in these
enumerated areas it is appropriate to treat OCC cleared OTC options as
conventional options for the reasons discussed above. FINRA believes
that OCC cleared OTC options should otherwise be subject to the same
sales practice and other requirements that apply to transactions in any
category of options (including, among other requirements, suitability,
approval of account opening and supervision). FINRA proposes a series
of definition changes to explain this treatment. Specifically, FINRA
proposes to define an ``OCC Cleared OTC Option'' as ``any put, call,
straddle or other option or privilege that meets the definition of an
`option' under Rule 2360(a)(21) and is cleared by The Options Clearing
Corporation, is entered into other than on or through the facilities of
a national securities exchange, and is entered into exclusively by
persons who are `eligible contract participants' as defined in the
Exchange Act.'' \26\ In addition, FINRA proposes to clarify that the
definitions of ``conventional option'' and ``conventional index
option'' would include ``OCC Cleared OTC Options'' in amended FINRA
Rule 2360(a)(8) and (a)(9), respectively. FINRA would further amend the
definitions of ``standardized equity option,'' ``standardized index
option'' and ``FLEX Equity Option'' in FINRA re-numbered Rule
2360(a)(32), (a)(33) and (a)(16), respectively, to specifically exclude
OCC Cleared OTC Options. Finally, FINRA proposes minor amendments to
the definition of ``expiration date'' in Rule 2360(a)(14) to reflect
that the expiration date of OCC Cleared OTC Options may be customized
by the parties to the trade in accordance with the rules of the OCC,
and not fixed by the OCC's rules.\27\
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\26\ The definition reflects the OCC proposed rule requirement
that counterparties to OCC Cleared OTC Options must be ``eligible
contract participants'' as defined in the Act. See note 3 and
proposed Section 6(f), Article XVII of the OCC By-Laws.
\27\ FINRA notes that the expiration date of FLEX Equity Options
also may be customized and accordingly the proposed rule change also
clarifies this definition for purposes of FLEX Equity Options.
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FINRA also proposes minor amendments to paragraphs (b)(11)(A)(i)
and (ii) and paragraph (b)(16) of FINRA Rule 2360 to provide, as noted
above, that the ODD and Special Written Statement are not required to
be delivered by members effecting a transaction in OCC Cleared OTC
Options. As noted above, the OCC Cleared OTC Options would otherwise be
subject to the same sales practice and other requirements that apply to
transactions in conventional options (including, among other
requirements, suitability, approval of account opening and
supervision). In addition, the proposed rule change would make
technical, non-substantive changes to FINRA Rule 2360(b)(11)(A) to
reflect FINRA Manual style convention.
Amendments to FINRA Rule 4210
For purposes of margin treatment, FINRA proposes to treat OCC
Cleared OTC Options as it treats other cleared and guaranteed options,
which to date have always been listed options,\28\ in light of the
clearing and guaranteeing functions performed by the OCC. FINRA Rule
4210(f)(2) and FINRA Rule 4210(g) sets forth the strategy-based margin
and portfolio margin requirements for transactions in options. In
general, the margin requirement for options listed on an exchange (and
cleared and guaranteed by the OCC) is lower than the margin requirement
for OTC options \29\ (not cleared or guaranteed by the OCC). The
reasons underlying the more favorable margin treatment for listed (and
OCC cleared and guaranteed) options apply with equal force to OCC
Cleared OTC Options. The clearing and guaranteeing functions performed
by the OCC reduce the counterparty credit risk of the otherwise OTC
nature of these options, likening them to the same level of risk as
listed options.
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\28\ See FINRA Rule 4210(f)(2)(A)(xxiv) and FINRA Rule
4210(g)(2)(A) for the definition of ``listed'' and ``listed
option,'' respectively.
\29\ See FINRA Rule 4210(f)(2)(A)(xxvii) for the definition of
``OTC'' and FINRA Rule 4210(g)(2)(H) for ``unlisted derivative.''
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The proposed beneficial margin treatment for OCC cleared OTC option
may only be applied by a member after the OTC option has been accepted
for clearing and guaranteed by the OCC. FINRA understands that the
OCC's proposal provides that the trade data for an OTC option trade
would be submitted to an approved OCC vendor that would process the
trade and submit it as a confirmed trade to OCC for clearing. The OCC
would then confirm if the OTC option trade meets OCC's validation
requirements and will notify the vendor, which will notify the
submitting parties.\30\ The OCC proposal also provides that parties may
submit trades for clearance that were entered into bilaterally at any
time in the past, provided that the eligibility for clearance will be
determined as of the date the trade is submitted to OCC for
clearance.\31\ Upon confirmation from
[[Page 41153]]
the OCC vendor that the OTC option has been accepted for clearance and
guaranteed by the OCC, the member may apply the applicable listed
option margin requirements.
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\30\ FINRA further understands that, if the option trade is
rejected for clearing, the option would remain subject to any
applicable agreement between the original parties to the
transaction, which may provide that (1) such rejected transaction
shall remain a bilateral transaction between the parties subject to
such agreement or other documentation as the parties have entered
into for that purpose or (2) may be terminated. See note 3 and
proposed interpretation .02 of Section 6, Article VII of the OCC By-
Laws. If the OTC option was rejected for clearing, but the option
contract was not terminated by the parties and remained an OTC
option contract, the member would be required to apply the
applicable OTC option margin requirements, not the listed option
margin requirements.
\31\ See note 3. OCC's license agreement with S&P imposes
certain minimum requirements relating to time remaining to
expiration of the OTC option, as detailed in proposed Interpretation
and Policy .01 of Section 6, Article XVII of the OCC By-Laws. See
also proposed Section 5, Article VI of the OCC By-Laws specifying
that the OCC will not accept certain trades for clearance that were
entered into bilaterally at any time in the past if such a trade is
received after 4:00 p.m. Central Time on the business day that is
four business days prior to the expiration date of such option.
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Accordingly, FINRA proposes to amend the definition of ``listed''
in FINRA Rule 4210(f)(2)(A)(xxiv) to provide that a listed option means
an option that is traded on a national securities exchange or issued
and guaranteed by a registered clearing agency and shall include an OCC
Cleared OTC Option as defined in FINRA Rule 2360. FINRA proposes to
amend the definition of ``OTC'' in FINRA Rule 4210(f)(2)(A)(xxvii) to
provide that OTC options shall not include an OCC Cleared OTC Option as
defined in FINRA Rule 2360. FINRA proposes conforming amendments to
FINRA Rule 4210(g)(2)(A) regarding portfolio margin requirements to
provide that a ``listed option'' means an option that is traded on a
national securities exchange or issued and guaranteed by a registered
clearing agency and shall include an OCC Cleared OTC Option as defined
in FINRA Rule 2360. Finally, FINRA Rule 4210(g)(2)(H) would be amended
to clarify that an ``unlisted derivative'' would include among other
things, an index-based option that is neither traded on a national
securities exchange nor issued or guaranteed by a registered clearing
agency and shall not include an OCC Cleared OTC Option as defined in
FINRA Rule 2360.
FINRA requests comment on the proposed rule change. Among other
matters that commenters may wish to address, FINRA is particularly
interested in the following question: Do commenters believe that
different or amended margin provisions, including higher requirements,
would be superior to those set forth in the proposed rule change?
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice, which will be no later than 90 days following
Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\32\ 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 the proposed rule change fosters
innovation in the market by accommodating a new product in OCC Cleared
OTC Options while balancing the need to protect investors and the
public interest by regulating such product in a rational regulatory
framework. FINRA believes that treating OCC Cleared OTC Options as
conventional options ensures that OCC Cleared OTC Options are subject
to position and exercise limits and reporting consistent with the
treatment of OTC options generally. FINRA believes requiring OCC
Cleared OTC Options to be subject to position limits is consistent with
Act and the purpose of position limits generally: To prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position; to minimize the potential for mini-
manipulation and for corners or squeezes of the underlying market; and
to reduce the possibility for disruption of the options market itself,
especially in illiquid options classes. FINRA believes that it is
consistent to treat transactions in OCC cleared OTC options as
conventional options and not require delivery of the ODD or the Special
Written Statement because the options are not addressed in the ODD, and
because counterparties to such OCC cleared OTC options are ``eligible
contract participants'' as defined in the Act and are more
sophisticated investors likely to be aware of the risks of options
trading. OCC Cleared OTC options will also be subject to the same
options sales practice and other requirements (such as account opening
procedures and standards for supervision and suitability) as are all
categories of options. For purposes of margin treatment, FINRA believes
that the clearing and guaranteeing functions performed by the OCC
support a determination to treat OCC cleared OTC options as the margin
rule treats other cleared and guaranteed options, which to date have
always been listed options. The clearing and guaranteeing functions
performed by the OCC greatly reduce the counterparty credit risk of the
otherwise OTC nature of these options, likening them to the same level
of risk as listed options.
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\32\ 15 U.S.C. 78o-3(b)(6).
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In addition, FINRA believes the proposed rule change facilitates
OCC's ability to clear OTC options subject to the same basic rules,
procedures and risk management practices that have been used by OCC in
clearing transactions in listed options. The clearance and settlement
of OTC options by the OCC is consistent with OCC's obligations with
respect to the prompt and accurate clearance and settlement of
securities transactions and the protection of securities investors and
the public interest.
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 does not anticipate that
the proposed rule change would impose any additional costs on members
that trade OCC Cleared OTC Options. FINRA believes that the proposed
rule change fosters innovation in the market by accommodating a new
product in OCC Cleared OTC Options while balancing the need to protect
investors and the public interest by regulating such product in a
rational regulatory framework. FINRA believes that treating OCC Cleared
OTC Options as conventional options ensures clarity and consistency in
that OCC Cleared OTC Options are subject to position and exercise
limits and reporting as well as other sales practice and other
requirements on par with the treatment of OTC options generally. FINRA
believes that the clearing and guaranteeing function provided by OCC
benefits members by reducing the counterparty credit risk of the
otherwise OTC nature of these options and the proposed rule change
reflects such reduction in risk by permitting members to margin these
options consistent with the margin requirements for listed options.
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:
[[Page 41154]]
(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
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2013-027 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2013-027. 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 Web site (https://www.sec.gov/rules/sro.shtml
). 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 Web site 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 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2013-027, and should be submitted
on or before July 30, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-16379 Filed 7-8-13; 8:45 am]
BILLING CODE 8011-01-P
