Document ID: SEC-2013-1245-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-07-09T04:00Z

[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]

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 http://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.
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    \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.
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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.
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    \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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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.
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    \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.
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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\
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    \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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    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.
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    \10\ However, the position limits for standardized and 
conventional options overlying specified exchange-traded funds are 
established in FINRA Rule 2360, Supplemental Material .03.
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    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).
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    \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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    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\
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    \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.
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    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 (http://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 (http://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