Daily Rules, Proposed Rules, and Notices of the Federal Government
FINRA has proposed to amend FINRA Rule 4210 (Margin Requirements) to: (1) Revise the definitions and margin treatment of option spread strategies; (2) clarify the maintenance margin requirement for non-margin eligible equity securities; (3) clarify the maintenance margin requirements for non-equity securities; (4) eliminate the current exemption from the free-riding prohibition for designated accounts; (5) conform the definition of "exempt account"; and (6) eliminate the requirement to stress test portfolio margin accounts in the aggregate. In addition, the proposed rule change would amend FINRA Rule 4210 to make non-substantive technical and stylistic changes.
Basic option spreads can be paired in such ways that they offset each other in terms of risk. The total risk of the combined spreads is less than the sum of the risk of both spread positions if viewed as stand-alone strategies. FINRA Rule 4210(f)(2) currently recognizes several specific option spread strategies.
While the strategies recognized under FINRA Rule 4210 are the most common types of option spread strategies used by investors, there are other combinations of calls and/or puts that are similar in terms of their risk profile. Accordingly, FINRA proposed a broader definition of a spread in FINRA Rule 4210(f)(2)(A)(xxxii) to mean a "long" and "short" position in different call option series, different put option series, or a combination of call and put option series, that collectively have a limited risk/reward profile, and meet the following conditions: (1) All options must have the same underlying security or instrument; (2) all "long" and "short" option contracts must be either all American-style or all European-style;
The proposed revised margin requirements set forth in FINRA Rule 4210(f)(2)(H) would require that the "long" option contracts within such spreads must be paid for in full. The margin required for the "short" option contracts within such spreads would be the lesser of: (1) The margin required pursuant to FINRA Rule 4210(f)(2)(E); or (2) the maximum potential loss. The maximum potential loss would be determined by computing the intrinsic value of the options at price points for the underlying security or instrument that are set to correspond to every exercise price present in the spread. The intrinsic values are netted at each price point, and the maximum potential loss is the greatest loss, if any. The proceeds of the "short" options may be applied towards the cost of the "long" options and/or any margin requirement. FINRA Rule 4210(f)(2)(H)(iv) would also make clear that OTC option contracts that comprise a spread must be issued and
FINRA proposed to eliminate the definitions for the option spread strategies currently recognized within the rule, along with the specific margin requirements associated with each spread, with the exception of a "long" box spread consisting of European-style options.
FINRA proposed to clarify the maintenance margin requirement for non-margin eligible equity securities. FINRA Rule 4210(c)(1) prescribes a maintenance margin requirement of 25% of the current market value of all securities (except for security futures contracts) held "long" in an account. FINRA believes that non-margin eligible equity securities should be subject to more stringent margin requirements in light of the nature of such securities. Accordingly, FINRA proposed to amend FINRA Rule 4210(c)(1) regarding securities held "long" to clarify that the maintenance margin requirement of 25% of the current market value would apply only to margin securities as defined in Regulation T.
Similar to the treatment above, FINRA also proposed to amend Rule 4210(f)(8)(B)(iii) to clarify that the special maintenance margin requirement for day traders, based on the cost of all day trades made during the day, would be 25% for margin eligible equity securities, and 100% for non-margin eligible equity securities.
In addition, FINRA proposed to adopt new paragraph (g)(7)(E) of FINRA Rule 4210 regarding the margin requirements for non-margin eligible equity securities held in a portfolio margin account. Consistent with the margin treatment above, the provision would clarify that non-margin eligible equity securities held "long" in a portfolio margin account would have a maintenance margin requirement equal to 100% of the current market value at all times.
FINRA also proposed to amend paragraph (g)(7)(D) of FINRA Rule 4210 to clarify that although non-margin eligible equity securities are not eligible for portfolio margin treatment, they may be carried in a portfolio margin account, provided that the member uses strategy-based margin requirements unless such securities are subject to other provisions of paragraph (g). For example, non-margin eligible equity securities may be carried in a portfolio margin account, but the amendment would clarify that they would be subject to the margin treatment set forth in FINRA Rule 4210(g)(7)(E), rather than FINRA Rule 4210(c).
In the Notice, FINRA proposed to further amend FINRA Rule 4210 to clarify the appropriate maintenance margin requirement for non-equity securities in a margin account. Paragraph (c)(4) stipulates a maintenance margin requirement for each bond held "short" in a margin account. Paragraph (e)(2)(C) stipulates the maintenance margin requirements on any positions in specified non-equity
"Free-riding" is the purchase of a security and the selling of the same security in the cash account, using the proceeds of the sale to satisfy the purchase. Such activity is prohibited under section 220.8(a)(1)(ii) of Regulation T. FINRA Rule 4210(f)(9) addresses free-riding in the cash account and currently exempts broker-dealers and "designated accounts."
Certain non-equity securities such as exempted securities, mortgage related securities, highly rated foreign sovereign debt securities, and investment grade debt securities may be subject to reduced maintenance margin requirements (or require no margin be deposited) for an "exempt account," as defined in FINRA Rule 4210(a)(13).
FINRA proposed to eliminate the monitoring requirement contained in FINRA Rule 4210(g)(1)(D) that stress testing of accounts must be done in the aggregate for portfolio margin accounts. The rule would continue to require firms to stress test portfolio margin accounts on an individual account basis. FINRA has been reviewing the portfolio margin program and believes that the stress testing on an individual account basis is sufficient from a risk perspective.
Finally, the proposed rule change would amend FINRA Rule 4210 to make non-substantive technical and stylistic changes to encourage consistency throughout the rule and enhance readability.
FINRA stated that it would announce the effective date of the proposed rule change in a
As stated above, the Commission received one comment letter in response to the proposed rule change generally supporting the proposal, particularly the modernization of the treatment of option spread strategies.
The commenter also recommended technical changes to the proposal, including: (1) That the 100% maintenance margin requirement on non-margin eligible equity securities be
In response to the comment regarding the 100% maintenance margin requirement for non-margin eligible, non-equity securities, FINRA proposes to further analyze the impact of this proposed change on member firms and the market. Accordingly, Amendment No. 1 would eliminate the requirements applicable to non-margin eligible, non-equity securities from the proposed rule. To effectuate this change, FINRA proposes to delete the exclusion of non-equity securities from FINRA Rule 4210(c)(1) as originally proposed in the Notice. In addition, FINRA proposes to delete in FINRA Rule 4210(c)(4) the reference to non-margin eligible, non-equity securities as originally proposed in the Notice. The margin requirement for non-equities held "long" in an account would be margined as provided in FINRA Rule 4210(c)(1) unless they otherwise meet an exception for the type of non-equity security provided in FINRA Rule 4210(e).
In response to the technical comments in the Aman Letter, FINRA agrees that amending the proposed rule further to clarify the 100% maintenance margin requirement for non-margin eligible equity securities held "long" would be beneficial. In Amendment No. 1, FINRA proposes to add a new subparagraph (6) to FINRA Rule 4210(c) to effectuate this clarification. Also in response to technical comments, with regard to the margin requirements for non-equity securities and the exceptions provided in FINRA Rule 4210(e), FINRA proposes in Amendment No. 1 to modify Rule 4210(c) by prefacing that the margin provisions are as stated except as set forth in Rule 4210(e) as well as Rule 4210(f) (the margin requirements for options and warrants) and Rule 4210(g) (portfolio margin requirements).
In response to the comment that FINRA define "non-margin eligible, non-equity securities," Amendment No. 1 would delete that term in FINRA Rule 4210(c)(4) in light of the elimination of the proposal to amend the margin requirements for such securities. Finally, and unrelated to any specific comment, Amendment No. 1 would make certain clarifying changes to Rule 4210(c) to eliminate the reference to "plus" as the maintenance margin provisions are not additive.
After careful review of the proposed rule change, the comment received, and Amendment No. 1, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.
The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.