SR-FINRA-2023-010

The Financial Industry Regulatory Authority, FINRA, has published on its website a proposed rule change in connection with margin requirements regarding certain options or warrants on indices. Specifically, FINRA seeks to exempt from margin requirements short positions in index call or put options or warrants – the so-called protected option – when there is a corresponding long or short position in an underlying stock basket, non-leveraged index mutual fund, or non-leveraged ETF that is based on the same index as the option or warrant (offsetting arrangement). The exemption would only apply, if certain conditions are met which include the following:
1. The value of the protection at the time of creating the protected option or warrant position must be equal to or greater than 100 percent of the current aggregate underlying index value associated with that position.
2. The value of the protection should never fall below 95 percent of the current aggregate underlying index value associated with the protected option or warrant position.
3. Margin must be maintained at an amount equal to the greater of either the difference between the aggregate current underlying index value and the aggregate exercise price of the protected call or put option or the amount by which the value of the protection falls below 100 percent of the aggregate current underlying index value.
It is important to note that the proposed margin exception for protected options would NOT apply to leveraged instruments. Additionally, FINRA proposes minor revisions to align certain paragraphs of Rule 4210 with new terminology introduced in the context of the rule change.