Document ID: SEC-2023-1169-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2023-10-04T04:00Z

[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68855-68857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21956]

[[Page 68855]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98628; File No. SR-FINRA-2023-010]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Provide Relief Relating 
to Specified Option Transactions Under FINRA Rule 4210 (Margin 
Requirements)

September 28, 2023.

I. Introduction

    On June 30, 2023, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities and 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 4210 (Margin 
Requirements) to provide margin relief for specified index option 
transactions, known as ``protected options,'' and to make other minor 
conforming revisions with regard to the margin relief. The proposed 
rule change was published for comment in the Federal Register on July 
19, 2023.\3\ The Commission received two comment letters on the 
proposal.\4\ On August 31, 2023, FINRA extended the time period in 
which the Commission must approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
to approve or disapprove the proposed rule change to October 17, 
2023.\5\ The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \6\ to solicit comments on the proposed 
rule change and to institute proceedings to determine whether to 
approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 97898 (Jul. 13, 2023), 88 FR 
46204 (``Notice'').
    \4\ Comments received on the proposed rule change are available 
at https://www.sec.gov/comments/sr-finra-2023-010/srfinra2023010.htm.
    \5\ See Letter from Adam Arkel, Associate General Counsel, 
FINRA, to Sheila Swartz, Division of Trading and Markets, Commission 
(Aug. 31, 2023).
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    In its filing with the Commission, FINRA stated that Cboe Exchange, 
Inc. (``Cboe'' or the ``Exchange'') filed with the Commission a 
proposed rule change to amend Cboe Rule 10.3 regarding margin 
requirements related to cash-settled index options written against 
exchange-traded funds (``ETF(s)'') that track the same index underlying 
the option,\7\ which the Commission approved on March 2, 2023.\8\
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    \7\ See Exchange Act Release No. 96395 (Nov. 28, 2022), 87 FR 
74199 (Dec. 2, 2022) (Notice of Filing of a Proposed Rule Change to 
Amend Rule 10.3 Regarding Margin Requirements; File No. SR-CBOE-
2022-058) (``Cboe Proposal''). See also Notice at 46205, n.3.
    \8\ See Exchange Act Release No. 97019 (Mar. 2, 2023), 88 FR 
14416 (Mar. 8, 2023) (Order Approving a Proposed Rule Change to 
Amend Rule 10.3 Regarding Margin Requirements; File No. SR-CBOE-
2022-058) (``Cboe Approval Order'').
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    FINRA stated that the Cboe rule change established a new exception 
to those margin requirements with respect to a ``protected option'' 
strategy, as set forth in new paragraph (c)(5)(C)(iv)(e) of Cboe Rule 
10.3.\9\ Subject to specified conditions, the exception is applicable 
to short option positions or warrants on indexes that are offset by 
positions in an underlying stock basket, non-leveraged index mutual 
fund, or non-leveraged ETF that is based on the same index option.\10\ 
In approving Cboe's rule change, FINRA observed that the Commission 
stated it believes the rule change will facilitate the use of protected 
options and reduce associated costs and burdens.\11\ FINRA stated that, 
in the interest of regulatory harmony and ensuring that the potential 
benefits of protected option treatment are available to FINRA members 
and their customers, FINRA proposed to conform its margin rule to the 
provisions Cboe adopted and to make other minor conforming 
revisions.\12\
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    \9\ See Notice at 46205.
    \10\ Cboe distinguishes the ``protected option'' strategy from a 
``covered call,'' which is a strategy of writing an option against a 
position in an underlying security and is addressed by separate 
margin requirements under Cboe rules. See Cboe Proposal at 74201. 
See also Notice at 46205, n.8.
    \11\ See Cboe Approval Order at 14418.
    \12\ See Notice at 46205.
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    Specifically, FINRA proposes to add new paragraph (f)(2)(H)(v)f. 
(``Protected Options'') to FINRA Rule 4210.\13\ The new paragraph would 
provide that when an index call (put) option or warrant is carried 
``short'' (the ``protected option or warrant position'') and there is 
carried in the same account a ``long'' (short) position in an 
underlying stock basket, non-leveraged index mutual fund, or non-
leveraged ETF (each referred to as the ``protection'') that is based on 
the same index underlying the index option or warrant, the protected 
option or warrant position is not subject to the requirements set forth 
in paragraphs (f)(2)(E)(i) and (f)(2)(E)(iii) of Rule 4210 \14\ if the 
following conditions, which conform to the Cboe rule, are met: \15\
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    \13\ See Exhibit 5 to the proposed rule change, available at 
https://www.sec.gov/files/rules/sro/finra/2023/34-97898-ex5.pdf.
    \14\ FINRA stated that the exception from the margin 
requirements under Cboe's new rule is virtually identical to the 
margin requirements set forth in Cboe Rule 10.3(c)(5)(A), which sets 
forth margin requirements for listed options. According to FINRA, 
paragraph (f)(2)(E)(i) under FINRA Rule 4210 correspondingly 
addresses listed options and is virtually identical to the Cboe 
provisions. Paragraph (f)(2)(E)(iii) of FINRA Rule 4210 addresses 
margin requirements for over-the-counter (``OTC'') products. As 
such, FINRA proposed to include both listed and OTC products within 
the scope of the exception. FINRA stated that both types of products 
would be subject to the conditions specified under the rule which, 
according to FINRA, are virtually identical to Cboe's provisions. 
FINRA stated that it believes this harmonized approach to both 
listed and OTC options is appropriate for purposes of the rule 
change to broaden availability of the benefits of the protected 
option strategy to, for example, non-Cboe FINRA members, and would 
thereby prevent a potential gap between listed and OTC options. See 
also Notice at 46205, n.12.
    \15\ See id. at 46205.
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    1. when the protected option or warrant position is created, the 
absolute value of the protection is not less than 100 percent of the 
aggregate current underlying index value associated with the protected 
option or warrant position determined at either:
    A. the time the order that created the protected option or warrant 
position was entered or executed; or
    B. the close of business on the trading day the protected option or 
warrant position was created;
    2. the absolute value of the protection is at no time less than 95 
percent of the aggregate current underlying index value associated with 
the protected option or warrant position; and
    3. margin is maintained in an amount equal to the greater of:
    A. the amount, if any, by which the aggregate current underlying 
index value is above (below) the aggregate exercise price of the 
protected call (put) option or warrant position; or
    B. the amount, if any, by which the absolute value of the 
protection is below 100 percent of the aggregate current underlying 
index value associated with the protected option or warrant.\16\
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    \16\ See id.
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    FINRA also proposes to expand the protected options treatment to 
OTC options, so they are subject to the same conditions as listed 
options. FINRA stated that it believes that harmonizing the FINRA 
margin requirements for OTC options with the amended Cboe rule would 
reduce potential regulatory arbitrage that would favor listing options 
on Cboe. FINRA stated that while it does not have sufficient 
information on how many investors or

[[Page 68856]]

members would choose to make use of the protected options treatment for 
either listed or OTC options, it believes the number is small and would 
be limited to institutional investors.\17\
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    \17\ See id. at 46206. See also supra note 14.
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    FINRA stated that in proposing the margin exception for protected 
options, Cboe emphasized that the exception is not intended to and does 
not apply to leveraged instruments.\18\
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    \18\ See Cboe Proposal at 74201; see also Cboe Approval Order at 
14417 and Notice at 46205.
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    In addition, FINRA proposes minor revisions to paragraphs 
(f)(2)(H)(v)a. through d. of FINRA Rule 4210 to conform with the usage 
of the term ``in the same account'' as used in proposed paragraph 
(f)(2)(H)(v)f.\19\ Specifically:
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    \19\ See Notice at 46205.
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     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. Proceedings to Determine Whether To Approve or Disapprove SR-
FINRA-2023-010 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule 
change should be approved or disapproved.\24\ Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to the proposed rule change.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\25\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis and input concerning whether the proposed rule 
change is consistent with the Exchange Act and the rules thereunder.
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    \25\ Id.
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    In particular, the Commission seeks comment on the following 
questions and asks commenters to submit data where appropriate to 
support their views:
     What are commenters' views on FINRA's proposal to expand 
the protected options treatment to OTC options so they are subject to 
the same conditions as listed options? Would the expansion of the 
protected options treatment to OTC options help to reduce potential 
regulatory arbitrage that may favor listing options on certain 
exchanges?
     What are commenters' views on the types of market 
participants that would utilize the protected options treatment for 
either listed or OTC options? For example, would use of the protected 
options treatment for either listed or OTC options be generally limited 
to institutional investors? Please explain why or why not.

IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposed 
rule change is consistent with the Exchange Act and the rules 
thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4 under the Exchange Act,\26\ any request for an opportunity 
to make an oral presentation.\27\
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    \26\ 17 CFR 240.19b-4.
    \27\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by October 25, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 8, 2023.
    Comments may be submitted by any of the following methods:

Electronic Comments

     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 October 25, 2023. Rebuttal comments

[[Page 68857]]

should be submitted by November 8, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21956 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P