[Federal Register Volume 89, Number 51 (Thursday, March 14, 2024)]
[Notices]
[Pages 18691-18694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05363]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99696; File No. SR-FINRA-2023-010]


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

March 8, 2024.

I. Introduction

    On June 30, 2023, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities and 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 4210 (Margin 
Requirements) to provide margin relief for specified index option 
transactions, known as ``protected options,'' and to make other minor 
conforming revisions with regard to the margin relief. The proposed 
rule change was published for comment in the Federal Register on July 
19, 2023.\3\ On August 31, 2023, FINRA extended the time period in 
which the Commission must approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
to approve or disapprove the proposed rule change to October 17, 
2023.\4\ On September 28, 2023, the Commission published an order 
instituting proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ On January 9, 2024, the Commission 
designated a longer period for Commission action on the proposed rule 
change.\6\ The Commission received comment letters on the proposed rule 
change.\7\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 97898 (July 13, 2023), 88 FR 
46204 (``Notice'').
    \4\ See Letter from Adam Arkel, Associate General Counsel, 
FINRA, to Sheila Swartz, Division of Trading and Markets, Commission 
(Aug. 31, 2023).
    \5\ See Exchange Act Release No. 98628 (Sept. 28, 2023), 88 FR 
68855 (Oct. 4, 2023).
    \6\ See Exchange Act Release No. 99304, 89 FR 2659 (Jan. 16, 
2024). The Commission designated March 15, 2024, as the date by 
which the Commission shall approve or disapprove the proposed rule 
change.
    \7\ All comments received on the proposed rule change are 
available at https://www.sec.gov/comments/sr-finra-2023-010/srfinra2023010.htm.

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[[Page 18692]]

II. Description of the Proposed Rule Change

    In its filing with the Commission, FINRA stated that Cboe Exchange, 
Inc. (``Cboe'' or the ``Exchange'') filed with the Commission a 
proposed rule change to amend Cboe Rule 10.3 regarding margin 
requirements related to cash-settled index options written against 
exchange-traded funds (``ETF(s)'') that track the same index underlying 
the option,\8\ which the Commission approved on March 2, 2023.\9\
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    \8\ See Exchange Act Release No. 96395 (Nov. 28, 2022), 87 FR 
74199 (Dec. 2, 2022) (Notice of Filing of a Proposed Rule Change to 
Amend Rule 10.3 Regarding Margin Requirements; File No. SR-CBOE-
2022-058) (``Cboe Proposal''). See also Notice at 46205, n.3.
    \9\ See Exchange Act Release No. 97019 (Mar. 2, 2023), 88 FR 
14416 (Mar. 8, 2023) (Order Approving a Proposed Rule Change to 
Amend Rule 10.3 Regarding Margin Requirements; File No. SR-CBOE-
2022-058) (``Cboe Approval Order'').
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    FINRA stated that the Cboe rule change established a new exception 
to those margin requirements with respect to a ``protected option'' 
strategy, as set forth in new paragraph (c)(5)(C)(iv)(e) under Cboe 
Rule 10.3.\10\ 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.\11\ In approving Cboe's rule change, FINRA observed that the 
Commission stated it believes the rule change will facilitate the use 
of protected options and reduce associated costs and burdens.\12\ FINRA 
stated that, in the interest of regulatory harmony and ensuring that 
the potential benefits of protected option treatment are available to 
FINRA members and their customers, FINRA proposed to conform its margin 
rule to the provisions Cboe adopted and to make other minor conforming 
revisions.\13\
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    \10\ See Notice at 46205.
    \11\ Cboe distinguishes the ``protected option'' strategy from a 
``covered call,'' which is a strategy of writing an option against a 
position in an underlying security and is addressed by separate 
margin requirements under Cboe rules. See Cboe Proposal at 74201. 
See also Notice at 46205, n.8.
    \12\ See Cboe Approval Order at 14418.
    \13\ See Notice at 46205.
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    Specifically, FINRA proposed to establish under FINRA Rule 4210 new 
paragraph (f)(2)(H)(v)f. (``Protected Options'').\14\ 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 \15\ if the 
following conditions, which conform to the Cboe rule, are met:\16\
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    \14\ See Exhibit 5 to the proposed rule change, available at 
https://www.sec.gov/files/rules/sro/finra/2023/34-97898-ex5.pdf.
    \15\ FINRA stated that 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. According to FINRA, paragraph 
(f)(2)(E)(i) under FINRA Rule 4210 correspondingly addresses listed 
options and is virtually identical to the Cboe provisions. Paragraph 
(f)(2)(E)(iii) under FINRA Rule 4210 addresses margin requirements 
for over-the-counter (``OTC'') products. As such, FINRA proposed to 
include both listed and OTC products within the scope of the 
exception. FINRA stated that both types of products would be subject 
to the conditions specified under the rule which, according to 
FINRA, are virtually identical to Cboe's provisions. FINRA stated 
that it believes this harmonized approach to both listed and OTC 
options is appropriate for purposes of the rule change to broaden 
availability of the benefits of the protected option strategy to, 
for example, non-Cboe FINRA members, and would thereby prevent a 
potential gap between listed and OTC options. See also Notice at 
46205, n.12.
    \16\ See id. at 46205.
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    1. when the protected option or warrant position is created, the 
absolute value of the protection is not less than 100 percent of the 
aggregate current underlying index value associated with the protected 
option or warrant position determined at either:
    A. the time the order that created the protected option or warrant 
position was entered or executed; or
    B. the close of business on the trading day the protected option or 
warrant position was created;
    2. the absolute value of the protection is at no time less than 95 
percent of the aggregate current underlying index value associated with 
the protected option or warrant position; and
    3. margin is maintained in an amount equal to the greater of:
    A. the amount, if any, by which the aggregate current underlying 
index value is above (below) the aggregate exercise price of the 
protected call (put) option or warrant position; or
    B. the amount, if any, by which the absolute value of the 
protection is below 100 percent of the aggregate current underlying 
index value associated with the protected option or warrant.\17\
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    \17\ See id.
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    FINRA stated that in proposing the margin exception for protected 
options, Cboe emphasized that the exception is not intended to and does 
not apply to leveraged instruments.\18\
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    \18\ See Cboe Proposal at 74201; see also Cboe Approval Order at 
14417 and Notice at 46205.
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    In addition, FINRA proposed minor revisions to paragraphs 
(f)(2)(H)(v)a. through d. under FINRA Rule 4210 to conform with the 
usage of the term ``in the same account'' as used in proposed paragraph 
(f)(2)(H)(v)f.\19\ Specifically:
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    \19\ See Notice at 46205.
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     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 . . .'' \20\
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    \20\ See id.
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    FINRA stated that it believes these changes are appropriate because 
they clarify the rule text and conform with the new proposed protected 
option provisions.\21\
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    \21\ See id.
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    Lastly, FINRA stated that if the Commission approves the proposed 
rule change, FINRA will announce the effective date of the proposed 
rule change in a Regulatory Notice.\22\ The effective date will be no 
later than 30 days following publication of the Regulatory Notice 
announcing Commission approval of the proposed rule change.\23\
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    \22\ See id.
    \23\ See id. at 46205-46206. FINRA stated that the proposed rule 
change would not impact funding portal members and would not impact 
members that have elected to be treated as capital acquisition 
brokers (``CABs''). According to FINRA, these members are not 
subject to Rule 4210. See id. at 46205, n.14.
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III. Commission Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to a national securities 
association.\24\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\25\ which requires, among other things, that the association's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of

[[Page 18693]]

trade, to facilitate transactions in securities, to remove impediments 
to and perfect the mechanism of a free and open market and, in general, 
to protect investors and the public interest.
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    \24\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). See e.g., discussions 
below regarding how customers of broker-dealers will benefit from a 
reduction in transaction costs and improved operational 
efficiencies, as well as how the proposed rule change will reduce 
burdens for customers of broker-dealers by providing them a margin 
exception for protected options.
    \25\ 15 U.S.C. 78o-3(b)(6).
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    The Commission received comment letters in response to the 
proposal.\26\ Cboe urged the Commission to promptly approve the 
proposed rule change.\27\ Cboe stated that the Commission has already 
considered the policy issues the proposed rule change presents under 
the Cboe Proposal, which the Commission previously determined to be 
consistent with the Exchange Act and beneficial to investors.\28\ 
Further, Cboe stated in its comment letter that prompt Commission 
approval of the proposed rule change will provide FINRA members with 
the same ability to offer margin relief for protected options that is 
now available under Cboe Options Rules.\29\ Cboe stated, as a result, a 
significant number of industry members that accommodate protected 
option strategies can realize the potential operational efficiencies 
offered by the margin rule described in the proposed rule change (and 
the Cboe Proposal) and will promote regulatory harmonization regarding 
margin requirements.\30\
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    \26\ See supra note 7. A few commenters addressed short options 
or short options strategies more generally, and therefore, those 
comments are outside the scope of this proposal. See Letter from 
Nick Steinmetz, Individual Investor (July 19, 2023); Letter from 
Anonymous (July 20, 2023); Letter from Anonymous (Nov. 22, 2023). 
Some commenters addressed option strategies involving options 
hedging other options or cases where the writer of a short option 
would need to deliver shares (rather than cash) if the option is 
exercised. See Letter from Brian Herrmann, Individual Investor (Oct. 
5, 2023); Letter from Joshua Dobos, Individual Investor (Oct. 6, 
2023); Letter from Sean Shanks, Individual Investor (Oct. 6, 2023) 
(``Shanks Letter''). Another commenter stated that traders should 
not have the opportunity to offset short option positions with ETFs 
and stock baskets, but should be hedged with the underlying asset. 
See Letter from Anonymous (Oct. 6, 2023). This proposed rule change 
generally applies to cash-settled (i.e., not settled in the 
underlying asset) short option positions or warrants on broad-based 
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.
    \27\ See Letter from Laura G. Dickman, Vice President and 
Associate General Counsel, Cboe Global Markets, Inc., to Vanessa 
Countryman, Secretary, Commission (Aug. 4, 2023) (``Cboe Letter'').
    \28\ See id.
    \29\ See id.
    \30\ See id.
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    Further, one commenter expressed concern that the proposed rule 
change generally would relax margin requirements.\31\ Another commenter 
stated that entities should be responsible for their own risk, and that 
FINRA should not change margin requirements for entities that can 
effectively hedge any reasonable risk within the current market 
structure.\32\
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    \31\ See Letter from Anonymous, Individual Investor (Oct. 9, 
2023).
    \32\ See Shanks Letter.
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    The Commission agrees that by conforming FINRA Rule 4210 with 
Cboe's new margin rules relating to protected options, the proposed 
rule change will promote regulatory harmonization with respect to use 
by customers of the protected option strategy. The proposed rule change 
also will help facilitate the use of protected options and reduce 
associated costs and burdens, while providing effective safeguards for 
the protection of investors and the public interest through the 
proposed conditions required as part of the protected options margin 
treatment. The proposed rule will permit customers of FINRA member 
broker-dealers (subject to the requirement that the deficiency not be 
greater than 5 percent) to post margin in the form of available equity 
in the margin account or cash or other marginable securities to remedy 
a deficiency. As a result, customers of broker-dealers will benefit 
from a reduction in transaction costs and improved operational 
efficiencies, in contrast to being required to purchase and deposit 
additional shares related to the underlying index, such as additional 
shares of an ETF, where the protection value is not at least equal to 
the aggregate underlying index. In addition, to the extent that equity 
in the margin account is utilized, customers will also benefit from a 
straightforward process from an operational standpoint with respect to 
posting required margin.\33\ Specifically, the proposed rule change 
will allow a customer to use collateral currently held in the 
customer's margin account to meet the conditions of the protected 
options margin, and therefore, the customer would not be required to 
post additional collateral (such as additional shares of an ETF) into 
the account to remedy a deficiency (provided there is sufficient equity 
in the account). The proposed rule change will, therefore, provide 
customers the flexibility to post other types of collateral (subject to 
the requirement that the deficiency not be greater than 5 percent) in 
the form of cash or other marginable securities, while continuing to 
require them to maintain sufficient levels of required margin for 
protected options, subject to the conditions in the proposed rule 
change.
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    \33\ See Cboe Approval Order at 14418-14419.
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    Further, the securities (in addition to shares of ETFs) that 
customers will be permitted to post under the proposed rule change 
(subject to the requirement that the deficiency not be greater than 5 
percent) must be margin eligible. This means that a broker-dealer can 
finance the customer's purchase of that security, and the customer can 
use the purchased margin security as collateral for the same 
purchase.\34\ In addition, the proposed rule change prescribes margin 
requirements only for index options, i.e., protected options margin. 
Margin eligible securities (including ETFs) that customers hold in the 
same account as the index options and may post to meet the protected 
option margin requirements will continue to need to be fully paid for 
or be separately margined pursuant to the requirements of the Federal 
Reserve Board's Regulation T and FINRA Rule 4210 for those 
securities.\35\
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    \34\ For example, margin securities under the Board of Governors 
of the Federal Reserve System's Regulation T include, among others, 
any security registered or having unlisted trading privileges on a 
national securities exchange, any non-equity security, or any 
security issued by either an open-end investment company or unit 
investment trust which is registered under section 8 of the 
Investment Company Act of 1940. See 12 CFR 220.2. If a security is 
not a margin security, a customer cannot purchase it on margin, 
which means the customer must deposit 100 percent of the purchase 
price in their margin account. The classification of a margin 
security generally reflects the existence of an extensive public 
market for the security or recognition of requisite liquidity in the 
market for the security. See Charles F. Rechlin et al, Securities 
Credit Regulation Sec.  3:7 (2d ed.).
    \35\ For example, Regulation T prescribes a 50 percent initial 
margin requirement for listed equity securities (meaning the 
customer must pay at least 50 percent of the market value of a 
listed equity security when purchasing it in a transaction financed 
by the broker-dealer and can use the purchased equity security as 
collateral for the same purchase). See 12 CFR 220.12(a). Regulation 
T only sets the initial margin requirements on equity securities, 
but Rule 4210 adds initial margin requirements on securities where 
Regulation T does not set specific requirements, such as for debt 
securities. Additionally, Rule 4210 specifies maintenance 
requirements that set a limit to the value that a customer's margin 
account can lose, such as 25 percent for listed equity securities. 
See Rule 4210(c).
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    Further, the requirement to post margin on protected options or 
warrant positions that equals the greater of the in-the-money amount of 
the option or warrant, or the amount by which the aggregate current 
underlying index value exceeds the absolute value of the protection, 
while also requiring that the protection be at all times at least 95 
percent of the aggregate current underlying index value addresses the 
risks associated with protected options or warrant positions (e.g., the 
risk of exercise of a short position when the option or warrant is in-
the-money and tracking error). Therefore, this condition benefits both 
broker-dealers and customers by providing appropriate safeguards that 
address the risks

[[Page 18694]]

associated with protected options, while offering a tailored margin 
approach with respect to the margin treatment for protected options.
    Further, as discussed in section II. above, the proposed rule 
change also will expand the protected options margin requirements to 
unlisted, OTC options, so that these options are permitted the same 
margin treatment as listed options.\36\ Amending Rule 4210 to permit 
the protected options treatment to apply to both listed and unlisted 
OTC options will benefit market participants by allowing for consistent 
treatment between these option types (which will be subject to the same 
conditions), and thereby, facilitate trading in protected options.\37\
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    \36\ As discussed in section II. above, the protected option 
margin requirements only apply to listed options under Cboe's margin 
rules.
    \37\ FINRA stated it believes a small number of investors or 
members would choose to make use of the protected options treatment 
for either listed or unlisted options, and they would be limited to 
institutional investors. See Notice at 46206.
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    Finally, FINRA stated that if the Commission approves the proposed 
rule change, FINRA will announce the effective date of the proposed 
rule change in a Regulatory Notice,\38\ and that the effective date 
will be no later than 30 days following publication of the Regulatory 
Notice announcing Commission approval of the proposed rule change.\39\ 
FINRA's proposed implementation schedule is appropriate, as market 
participants are aware of the Cboe Approval Order and the proposed rule 
change will reduce burdens for customers of broker-dealers by providing 
them a margin exception for protected options.
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    \38\ See id. at 46205.
    \39\ See id. at 46205-46206.
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    Accordingly, for the foregoing reasons, the Commission finds that 
this proposed rule change is consistent with the Exchange Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\40\ that the proposed rule change (SR-FINRA-2023-010) is 
approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-05363 Filed 3-13-24; 8:45 am]
BILLING CODE 8011-01-P