FINRA Adopts Amendments Relating to Protected Option and Warrant Positions Under FINRA Rule 4210

Notice Type
X Rule Amendment
Suggested Routing
X Compliance
X Legal
X Margin Department
X Operations
X Regulatory Reporting
X Risk Management
X Senior Management
Key Topics
X Margin
X Options
Referenced Rules & Notices
X FINRA Rule 4210
Margin Requirements
FINRA Adopts Amendments Relating to Protected Option and Warrant Positions Under FINRA Rule 4210 Summary FINRA has amended FINRA Rule 4210 (Margin Requirements) to establish a specified exception under the margin rules with respect to certain short option or warrant positions on indexes that are written against products that track the same underlying index. Referred to as “protected” option or warrant positions, the new exception conforms with similar provisions Cboe recently adopted. The amendments are effective as of the date of issuance of this Notice. This Notice provides an overview of the amendments. The text of the amendments is included as Attachment A. In this Notice, all references to provisions of the amendments are to the rule text as shown in Attachment A. Questions regarding this Notice may be directed to:
X James Barry, Director, Credit Regulation, Office of Financial and Operational Risk Policy (OFORP), at (646) 315-8347 or james.barry@finra.org; X Joseph David, Senior Principal Specialist, Credit Regulation, at (646) 315-8444 or joseph.david@finra.org; or X Adam Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961 or adam.arkel@finra.org. Background & Discussion The SEC has approved1 FINRA’s proposed rule change to establish an exception from the margin requirements under Rule 4210 with respect to certain short option or warrant positions on indexes that are written against products that track the same underlying index. The amendments conform, with minor revisions, with corresponding provisions Cboe recently adopted.2 Specifically, the new exception applies, as further set 1 Regulatory Notice 24-08 March 19, 2024

forth under the amendments, 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 exchange-traded fund (ETF) that is based on the same index option. New paragraph (f)(2)(H)(v)f. provides that, when an index call (put) option or warrant is carried “short” (referred to as 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)3 of Rule 4210 if the following conditions 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. The exception is not intended to and does not apply to leveraged instruments. The amendments are effective as of the date of issuance of this Notice. 2 Regulatory Notice 24-08 March 19, 2024

Regulatory Notice 3
March 19, 2024 24-08
©2024. FINRA. All rights reserved. Regulatory Notices attempt to present information to readers in a format that is easily understandable. However, please be aware that, in case of any misunderstanding, the rule language prevails. 1 See Securities Exchange Act Release No. 99696 (March 8, 2024), 89 FR 18691 (March 14, 2024) (Order Approving a Proposed Rule Change to Provide Relief Relating to Specified Option Transactions under FINRA Rule 4210 (Margin Requirements); File No. SR-FINRA-2023-010). 2 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). 3 Paragraphs (f)(2)(E)(i) and (f)(2)(E)(iii) of Rule 4210 address margin requirements for listed and over-the-counter (OTC) products, respectively, as further specified in those provisions. Endnotes

---

Attachment A
Following shows the amendments adopted pursuant to SR-FINRA-2023-010. New language is underlined; deletions are in brackets.

---

4210. Margin Requirements
      (a) through (e) No Change.
      (f) Other Provisions
      (1) No Change.
      (2) Puts, Calls and Other Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants (A) through (G) No Change. (H)(i) through (iv) No Change. (v) The following requirements set forth the minimum amount of margin that must be maintained in margin accounts of customers having positions in components underlying options, and stock index warrants, when such components are held in conjunction with certain positions in the overlying option or warrant. The option or warrant must be listed or OTC (as defined in this Rule). In the case of a call or warrant carried in a short position, a related long position in the underlying component shall be valued at no more than the call/warrant exercise price for margin equity purposes.

a. "Long" Option or Warrant Offset. When a component underlying an option or warrant is carried "long" ("short") in [an] the same account [in which there is also carried] as a "long" put (call) or warrant specifying equivalent units of the underlying component, the minimum amount of margin that must be maintained on the underlying component is 10 percent of the aggregate option/warrant exercise price plus the "out-of-the-money" amount, not to exceed the minimum maintenance required pursuant to paragraph (c) of this Rule. b. Conversions. When a call or warrant carried in a "short" position is covered by a "long" position in equivalent units of the underlying component and there is [also] carried in the same account [with] a "long" put or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short call or warrant, the minimum amount of margin that must be maintained for the underlying component shall be 10 percent of the aggregate exercise price.
c. Reverse Conversions. When a put or warrant
carried in a "short" position is covered by a "short" position in equivalent units of the underlying component and there

is [also] carried in the same account [with] a "long" call or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the "short" put or warrant, the minimum amount of margin that must be maintained for the underlying component shall be 10 percent of the aggregate exercise price plus the amount by which the exercise price of the put exceeds the current market value of the underlying, if any. d. Collars. When a call or warrant carried in a "short" position is covered by a "long" position in equivalent units of the underlying component and there is [also] carried in the same account [with] a "long" put or warrant specifying equivalent units of the same underlying component and having a lower exercise price and the same expiration date as the "short" call/warrant, the minimum amount of margin that must be maintained for the underlying component shall be the lesser of 10 percent of the aggregate exercise price of the put plus the put "out-of￾the-money" amount or 25 percent of the call aggregate exercise price. e. No Change.

f. Protected Options. 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 exchange-traded fund (each, 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 this Rule if the following conditions 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. (I) through (N) No Change. (3) through (10) No Change. (g) through (h) No Change.

• • • Supplementary Material: --------------
  .01 through .06 No Change.

---