Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Provide Relief Relating to Specified Option Transactions Under FINRA Rule 4210 (Margin Requirements), 46204-46206 [2023-15266]

Download as PDF 46204 Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices execute the corresponding contract at the corresponding exchange. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange’s proposed re-categorization of certain exchange groupings is intended to enable the Exchange to recover the costs it incurs to route orders to away markets, particularly Nasdaq MRX. The Exchange does not believe that this proposal imposes any unnecessary burden on competition because it seeks to recoup costs incurred by the Exchange when routing orders to away markets on behalf of Members and notes that at least one other options exchange has a similar routing fee structure.14 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 The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act,15 and Rule 19b–4(f)(2) 16 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. ddrumheller on DSK120RN23PROD with NOTICES1 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: • Send an email to rule-comments@ sec.gov. Please include file number SR– EMERALD–2023–15 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments [Release No. 34–97898; File No. SR–FINRA– 2023–010] • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–EMERALD–2023–15. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (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 website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–EMERALD–2023–15 and should be submitted on or before August 9, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2023–15269 Filed 7–18–23; 8:45 am] BILLING CODE 8011–01–P Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or supra note 4. U.S.C. 78s(b)(3)(A)(ii). 16 17 CFR 240.19b–4(f)(2). Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Provide Relief Relating to Specified Option Transactions Under FINRA Rule 4210 (Margin Requirements) July 13, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 30, 2023, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 4210 (Margin Requirements) to provide margin relief for specified index option transactions, known as ‘‘protected options,’’ and to make other minor conforming revisions with regard to the margin relief. The text of the proposed rule change is available on FINRA’s website at 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. 14 See 1 15 15 15 VerDate Sep<11>2014 00:36 Jul 19, 2023 17 17 Jkt 259001 PO 00000 CFR 200.30–3(a)(12). Frm 00078 Fmt 4703 Sfmt 4703 2 17 E:\FR\FM\19JYN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 19JYN1 Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Cboe Exchange, Inc. (‘‘Cboe’’ or the ‘‘Exchange’’) filed with the SEC a proposed rule change to amend Cboe Rule 10.3 regarding margin requirements related to cash-settled index options written against exchangetraded funds (‘‘ETF(s)’’) that track the same index underlying the option.3 The SEC has approved Cboe’s proposed rule change.4 Cboe Rule 10.3 sets forth margin requirements, and certain exceptions to those requirements, that apply to the customers of Trading Permit Holders (‘‘TPHs’’).5 Cboe stated that, under paragraph (c)(5) of Rule 10.3, TPHs generally are required to obtain from a customer, and maintain, a margin deposit for short cash-settled index options in an amount equal to 100% of the current market value of the option plus 15% (if overlying a broad-based index) or 20% (if overlying a narrowbased index) of the amount equal to the index value multiplied by the index multiplier minus the amount, if any, by which the option is out-of-the-money.6 Cboe stated the minimum margin required for such an option is 100% of the option current market value plus 10% of the index value multiplied by the index multiplier for a call or 10% of the exercise price multiplied by the index multiplier for a put. The Cboe rule change establishes a new exception to these requirements that Cboe stated is tailored to a ‘‘protected option’’ strategy, as set forth in new paragraph (c)(5)(C)(iv)(e) under Cboe Rule 10.3.7 Subject to specified conditions, the exception is applicable to short option positions or warrants on indexes that are offset by positions in an underlying stock basket, non-leveraged index mutual fund, or non-leveraged ETF that is based on the same index option.8 Cboe stated it believes that the rule change will help reduce operational costs for customers that use the protected option strategy, while at the same time providing an effective safeguard against the risk of a short option position.9 Similarly, in approving Cboe’s rule change, the SEC stated it believes the rule change will facilitate the use of protected options and reduce associated costs and burdens.10 In the interest of regulatory harmony and ensuring that the potential benefits of protected option treatment are available to FINRA members and their customers, FINRA is proposing to conform FINRA’s margin rule to the new provisions adopted by Cboe and to make other minor conforming revisions. Specifically, FINRA proposes to establish under Rule 4210 new paragraph (f)(2)(H)(v)f. (‘‘Protected Options’’).11 The new paragraph would provide that when an index call (put) option or warrant is carried ‘‘short’’ (the ‘‘protected option or warrant position’’) and there is carried in the same account a long (short) position in an underlying stock basket, non-leveraged index mutual fund or non-leveraged ETF (each, referred to as the ‘‘protection’’) that is based on the same index underlying the index option or warrant, the protected option or warrant position is not subject to the requirements set forth in paragraphs (f)(2)(E)(i) and (f)(2)(E)(iii) of Rule 4210 12 if the 3 See Securities Exchange Act Release No. 96395 (November 28, 2022), 87 FR 74199 (December 2, 2022) (Notice of Filing of a Proposed Rule Change to Amend Rule 10.3 Regarding Margin Requirements; File No. SR–CBOE–2022–058) (‘‘Cboe Proposal’’). 4 See Securities Exchange Act Release No. 97019 (March 2, 2023), 88 FR 14416 (March 8, 2023) (Order Approving a Proposed Rule Change to Amend Rule 10.3 Regarding Margin Requirements; File No. SR–CBOE–2022–058) (‘‘Cboe Approval Order’’). 5 Under Cboe rules, a TPH is a holder of a license to access the facilities of the Exchange for the purpose of effecting transactions in securities traded on the Exchange without the services of another person acting as broker. 6 Cboe noted that the out-of-the-money amount for a call is any excess of the aggregate exercise price of the option or warrant over the product of the current (spot or cash) index value and the applicable multiplier. The out-of-the-money amount for a put is any excess of the product of the current (spot or cash) index value and the applicable multiplier over the aggregate exercise price of the option or warrant. See Cboe Proposal, 87 FR 74199, 74201 n.8. 7 See Cboe Proposal, 87 FR 74199, 74200. 8 Cboe distinguishes the ‘‘protected option’’ strategy from a ‘‘covered call,’’ which is a strategy of writing an option against a position in an underlying security and is addressed by separate margin requirements under Cboe rules. See Cboe Proposal, 87 FR 74199, 74201. 9 See Cboe Proposal, 87 FR 74199, 74203. 10 See Cboe Approval Order, 88 FR 14416, 14418. 11 See Exhibit 5. 12 The exception from the margin requirements under Cboe’s new rule is as to the margin requirements set forth in Cboe Rule 10.3(c)(5)(A), which sets forth margin requirements for listed options. Paragraph (f)(2)(E)(i) under FINRA Rule 4210 correspondingly addresses listed options and is virtually identical to the Cboe provisions. Paragraph (f)(2)(E)(iii) under Rule 4210 addresses margin requirements for over-the-counter (‘‘OTC’’) products. As such, FINRA is proposing to include both listed and OTC products within the scope of the exception. Both types of products would be subject to the conditions specified under the rule which, again, are virtually identical to Cboe’s provisions. FINRA believes this harmonized approach to both listed and OTC options is appropriate for purposes of the rule change so as to broaden availability of the benefits of the protected option strategy to, for example, non-Cboe VerDate Sep<11>2014 00:36 Jul 19, 2023 Jkt 259001 PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 46205 following conditions, which conform to the Cboe rule, are met: 1. When the protected option or warrant position is created, the absolute value of the protection is not less than 100 percent of the aggregate current underlying index value associated with the protected option or warrant position determined at either: A. The time the order that created the protected option or warrant position was entered or executed; or B. The close of business on the trading day the protected option or warrant position was created; 2. The absolute value of the protection is at no time less than 95 percent of the aggregate current underlying index value associated with the protected option or warrant position; and 3. Margin is maintained in an amount equal to the greater of: A. The amount, if any, by which the aggregate current underlying index value is above (below) the aggregate exercise price of the protected call (put) option or warrant position; or B. The amount, if any, by which the absolute value of the protection is below 100 percent of the aggregate current underlying index value associated with the protected option or warrant. In proposing the margin exception for protected options, Cboe noted that the exception is not intended to and does not apply to leveraged instruments.13 In addition, FINRA is proposing minor revisions to paragraphs (f)(2)(H)(v)a. through d. under Rule 4210 to conform with the usage of the term ‘‘in the same account’’ as used in proposed paragraph (f)(2)(H)(v)f. Specifically: • In paragraph (f)(2)(H)(v)a., the phrase ‘‘in an account in which there is also carried . . .’’ would be changed to read ‘‘in the same account as . . .’’ • In paragraphs (f)(2)(H)(v)b. through d., the phrase ‘‘is also carried with . . .’’ would be changed to read ‘‘there is carried in the same account . . .’’ FINRA believes these changes are appropriate because they clarify the rule text and conform with the new proposed protected option provisions. If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice. The effective date will be no later than 30 days following publication of the Regulatory Notice announcing FINRA members. This would thereby prevent a potential gap between listed and OTC options. 13 See Cboe Proposal, 87 FR 74199, 74201; see also Cboe Approval Order, 88 FR 14416, 14417. E:\FR\FM\19JYN1.SGM 19JYN1 46206 Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices Commission approval of the proposed rule change.14 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,15 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that, by conforming FINRA Rule 4210 with Cboe’s new provisions relating to protected options, the proposed rule change would promote regulatory clarity and harmonization with respect to use by customers of the protected option strategy. This would help facilitate the use of protected options and reduce associated costs and burdens while providing effective safeguards, thereby conducing to the protection of investors and the public interest. Further, for the reasons set forth in the Cboe Approval Order, the Commission found that the Cboe rule change is consistent with the provisions of Section 6(b)(5) 16 and Section 6(c)(3) 17 of the Act. Because the proposed rule change conforms with Cboe’s protected options amendments, FINRA believes the proposed rule change is consistent with the corresponding provisions under Section 15A(b)(6) 18 and Section 15A(g)(3) 19 of the Act. ddrumheller on DSK120RN23PROD with NOTICES1 B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. FINRA believes that conforming FINRA Rule 4210 with Cboe’s protected option provisions would benefit FINRA members and their customers. The 14 FINRA notes that the proposed rule change would not impact funding portal members and would not impact members that have elected to be treated as capital acquisition brokers (‘‘CABs’’). These members are not subject to Rule 4210. 15 15 U.S.C. 78o–3(b)(6). 16 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the rules of an exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general to protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers or dealers. 17 15 U.S.C. 78f(c)(3). Section 6(c)(3) authorizes, among other things, a national securities exchange to prescribe standards of financial responsibility or operational capability. 18 15 U.S.C. 78o–3(b)(6). 19 15 U.S.C. 78o–3(g)(3). VerDate Sep<11>2014 00:36 Jul 19, 2023 Jkt 259001 proposed rule change provides an additional options strategy to investors, allowing them to adopt certain options positions at potentially lower cost than is possible under the current margin requirement. The required protection that is the alternative to the margin requirement incorporates reasonable safeguards against the risks of short open positions, as proposed by Cboe and approved by the Commission. The proposed rule change would also promote competition between FINRA members and any members of Cboe (or any other exchange that adopts the Cboe rule) that are not FINRA members, by allowing FINRA members to use the protected option strategy instead of posting margin. The proposed rule change would also expand the protected options treatment to unlisted, OTC options, so they are subject to the same conditions as for listed options. FINRA believes that harmonizing the FINRA margin requirements for OTC options with the amended Cboe rule would reduce potential regulatory arbitrage that would favor listing options on Cboe. While FINRA does not have sufficient information on how many investors or members would choose to make use of the protected options treatment for either listed or unlisted options, it believes the number is small and would be limited to institutional investors. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. PO 00000 Frm 00080 Fmt 4703 Sfmt 9990 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–2023–010 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2023–010. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (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 website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to File Number SR–FINRA–2023–010 and should be submitted on or before August 9, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2023–15266 Filed 7–18–23; 8:45 am] BILLING CODE 8011–01–P 20 17 E:\FR\FM\19JYN1.SGM CFR 200.30–3(a)(12). 19JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 137 (Wednesday, July 19, 2023)]
[Notices]
[Pages 46204-46206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15266]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97898; File No. SR-FINRA-2023-010]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Provide 
Relief Relating to Specified Option Transactions Under FINRA Rule 4210 
(Margin Requirements)

July 13, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 2023, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 4210 (Margin Requirements) 
to provide margin relief for specified index option transactions, known 
as ``protected options,'' and to make other minor conforming revisions 
with regard to the margin relief.
    The text of the proposed rule change is available on FINRA's 
website at 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 46205]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Cboe Exchange, Inc. (``Cboe'' or the ``Exchange'') filed with the 
SEC a proposed rule change to amend Cboe Rule 10.3 regarding margin 
requirements related to cash-settled index options written against 
exchange-traded funds (``ETF(s)'') that track the same index underlying 
the option.\3\ The SEC has approved Cboe's proposed rule change.\4\ 
Cboe Rule 10.3 sets forth margin requirements, and certain exceptions 
to those requirements, that apply to the customers of Trading Permit 
Holders (``TPHs'').\5\ Cboe stated that, under paragraph (c)(5) of Rule 
10.3, TPHs generally are required to obtain from a customer, and 
maintain, a margin deposit for short cash-settled index options in an 
amount equal to 100% of the current market value of the option plus 15% 
(if overlying a broad-based index) or 20% (if overlying a narrow-based 
index) of the amount equal to the index value multiplied by the index 
multiplier minus the amount, if any, by which the option is out-of-the-
money.\6\ Cboe stated the minimum margin required for such an option is 
100% of the option current market value plus 10% of the index value 
multiplied by the index multiplier for a call or 10% of the exercise 
price multiplied by the index multiplier for a put.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 96395 (November 28, 
2022), 87 FR 74199 (December 2, 2022) (Notice of Filing of a 
Proposed Rule Change to Amend Rule 10.3 Regarding Margin 
Requirements; File No. SR-CBOE-2022-058) (``Cboe Proposal'').
    \4\ See Securities Exchange Act Release No. 97019 (March 2, 
2023), 88 FR 14416 (March 8, 2023) (Order Approving a Proposed Rule 
Change to Amend Rule 10.3 Regarding Margin Requirements; File No. 
SR-CBOE-2022-058) (``Cboe Approval Order'').
    \5\ Under Cboe rules, a TPH is a holder of a license to access 
the facilities of the Exchange for the purpose of effecting 
transactions in securities traded on the Exchange without the 
services of another person acting as broker.
    \6\ Cboe noted that the out-of-the-money amount for a call is 
any excess of the aggregate exercise price of the option or warrant 
over the product of the current (spot or cash) index value and the 
applicable multiplier. The out-of-the-money amount for a put is any 
excess of the product of the current (spot or cash) index value and 
the applicable multiplier over the aggregate exercise price of the 
option or warrant. See Cboe Proposal, 87 FR 74199, 74201 n.8.
---------------------------------------------------------------------------

    The Cboe rule change establishes a new exception to these 
requirements that Cboe stated is tailored to a ``protected option'' 
strategy, as set forth in new paragraph (c)(5)(C)(iv)(e) under Cboe 
Rule 10.3.\7\ Subject to specified conditions, the exception is 
applicable to short option positions or warrants on indexes that are 
offset by positions in an underlying stock basket, non-leveraged index 
mutual fund, or non-leveraged ETF that is based on the same index 
option.\8\ Cboe stated it believes that the rule change will help 
reduce operational costs for customers that use the protected option 
strategy, while at the same time providing an effective safeguard 
against the risk of a short option position.\9\ Similarly, in approving 
Cboe's rule change, the SEC stated it believes the rule change will 
facilitate the use of protected options and reduce associated costs and 
burdens.\10\ In the interest of regulatory harmony and ensuring that 
the potential benefits of protected option treatment are available to 
FINRA members and their customers, FINRA is proposing to conform 
FINRA's margin rule to the new provisions adopted by Cboe and to make 
other minor conforming revisions.
---------------------------------------------------------------------------

    \7\ See Cboe Proposal, 87 FR 74199, 74200.
    \8\ Cboe distinguishes the ``protected option'' strategy from a 
``covered call,'' which is a strategy of writing an option against a 
position in an underlying security and is addressed by separate 
margin requirements under Cboe rules. See Cboe Proposal, 87 FR 
74199, 74201.
    \9\ See Cboe Proposal, 87 FR 74199, 74203.
    \10\ See Cboe Approval Order, 88 FR 14416, 14418.
---------------------------------------------------------------------------

    Specifically, FINRA proposes to establish under Rule 4210 new 
paragraph (f)(2)(H)(v)f. (``Protected Options'').\11\ The new paragraph 
would provide that
---------------------------------------------------------------------------

    \11\ See Exhibit 5.
---------------------------------------------------------------------------

    when an index call (put) option or warrant is carried ``short'' 
(the ``protected option or warrant position'') and there is carried in 
the same account a long (short) position in an underlying stock basket, 
non-leveraged index mutual fund or non-leveraged ETF (each, referred to 
as the ``protection'') that is based on the same index underlying the 
index option or warrant, the protected option or warrant position is 
not subject to the requirements set forth in paragraphs (f)(2)(E)(i) 
and (f)(2)(E)(iii) of Rule 4210 \12\ if the following conditions, which 
conform to the Cboe rule, are met:
---------------------------------------------------------------------------

    \12\ The exception from the margin requirements under Cboe's new 
rule is as to the margin requirements set forth in Cboe Rule 
10.3(c)(5)(A), which sets forth margin requirements for listed 
options. Paragraph (f)(2)(E)(i) under FINRA Rule 4210 
correspondingly addresses listed options and is virtually identical 
to the Cboe provisions. Paragraph (f)(2)(E)(iii) under Rule 4210 
addresses margin requirements for over-the-counter (``OTC'') 
products. As such, FINRA is proposing to include both listed and OTC 
products within the scope of the exception. Both types of products 
would be subject to the conditions specified under the rule which, 
again, are virtually identical to Cboe's provisions. FINRA believes 
this harmonized approach to both listed and OTC options is 
appropriate for purposes of the rule change so as to broaden 
availability of the benefits of the protected option strategy to, 
for example, non-Cboe FINRA members. This would thereby prevent a 
potential gap between listed and OTC options.
---------------------------------------------------------------------------

    1. When the protected option or warrant position is created, the 
absolute value of the protection is not less than 100 percent of the 
aggregate current underlying index value associated with the protected 
option or warrant position determined at either:
    A. The time the order that created the protected option or warrant 
position was entered or executed; or
    B. The close of business on the trading day the protected option or 
warrant position was created;
    2. The absolute value of the protection is at no time less than 95 
percent of the aggregate current underlying index value associated with 
the protected option or warrant position; and
    3. Margin is maintained in an amount equal to the greater of:
    A. The amount, if any, by which the aggregate current underlying 
index value is above (below) the aggregate exercise price of the 
protected call (put) option or warrant position; or
    B. The amount, if any, by which the absolute value of the 
protection is below 100 percent of the aggregate current underlying 
index value associated with the protected option or warrant.
    In proposing the margin exception for protected options, Cboe noted 
that the exception is not intended to and does not apply to leveraged 
instruments.\13\
---------------------------------------------------------------------------

    \13\ See Cboe Proposal, 87 FR 74199, 74201; see also Cboe 
Approval Order, 88 FR 14416, 14417.
---------------------------------------------------------------------------

    In addition, FINRA is proposing minor revisions to paragraphs 
(f)(2)(H)(v)a. through d. under Rule 4210 to conform with the usage of 
the term ``in the same account'' as used in proposed paragraph 
(f)(2)(H)(v)f. Specifically:
     In paragraph (f)(2)(H)(v)a., the phrase ``in an account in 
which there is also carried . . .'' would be changed to read ``in the 
same account as . . .''
     In paragraphs (f)(2)(H)(v)b. through d., the phrase ``is 
also carried with . . .'' would be changed to read ``there is carried 
in the same account . . .''
    FINRA believes these changes are appropriate because they clarify 
the rule text and conform with the new proposed protected option 
provisions.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. The effective date will be no later than 30 days following 
publication of the Regulatory Notice announcing

[[Page 46206]]

Commission approval of the proposed rule change.\14\
---------------------------------------------------------------------------

    \14\ FINRA notes that the proposed rule change would not impact 
funding portal members and would not impact members that have 
elected to be treated as capital acquisition brokers (``CABs''). 
These members are not subject to Rule 4210.
---------------------------------------------------------------------------

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that, by conforming FINRA Rule 4210 
with Cboe's new provisions relating to protected options, the proposed 
rule change would promote regulatory clarity and harmonization with 
respect to use by customers of the protected option strategy. This 
would help facilitate the use of protected options and reduce 
associated costs and burdens while providing effective safeguards, 
thereby conducing to the protection of investors and the public 
interest. Further, for the reasons set forth in the Cboe Approval 
Order, the Commission found that the Cboe rule change is consistent 
with the provisions of Section 6(b)(5) \16\ and Section 6(c)(3) \17\ of 
the Act. Because the proposed rule change conforms with Cboe's 
protected options amendments, FINRA believes the proposed rule change 
is consistent with the corresponding provisions under Section 15A(b)(6) 
\18\ and Section 15A(g)(3) \19\ of the Act.
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    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the 
rules of an exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general to protect investors and the public interest, and 
not be designed to permit unfair discrimination between customers, 
issuers, brokers or dealers.
    \17\ 15 U.S.C. 78f(c)(3). Section 6(c)(3) authorizes, among 
other things, a national securities exchange to prescribe standards 
of financial responsibility or operational capability.
    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ 15 U.S.C. 78o-3(g)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    FINRA believes that conforming FINRA Rule 4210 with Cboe's 
protected option provisions would benefit FINRA members and their 
customers. The proposed rule change provides an additional options 
strategy to investors, allowing them to adopt certain options positions 
at potentially lower cost than is possible under the current margin 
requirement. The required protection that is the alternative to the 
margin requirement incorporates reasonable safeguards against the risks 
of short open positions, as proposed by Cboe and approved by the 
Commission. The proposed rule change would also promote competition 
between FINRA members and any members of Cboe (or any other exchange 
that adopts the Cboe rule) that are not FINRA members, by allowing 
FINRA members to use the protected option strategy instead of posting 
margin.
    The proposed rule change would also expand the protected options 
treatment to unlisted, OTC options, so they are subject to the same 
conditions as for listed options. FINRA believes that harmonizing the 
FINRA margin requirements for OTC options with the amended Cboe rule 
would reduce potential regulatory arbitrage that would favor listing 
options on Cboe. While FINRA does not have sufficient information on 
how many investors or members would choose to make use of the protected 
options treatment for either listed or unlisted options, it believes 
the number is small and would be limited to institutional investors.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2023-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2023-010. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection. All submissions should 
refer to File Number SR-FINRA-2023-010 and should be submitted on or 
before August 9, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15266 Filed 7-18-23; 8:45 am]
BILLING CODE 8011-01-P

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