Position Limits for Options on Exchange-Traded Funds and Registration Qualifications with Respect to Options Discretionary Accounts

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May 25, 2009 12:26pm ETF BASIC NEWS

etf-news6FINRA is the largest independent regulator for all securities firms doing business in the United States. We oversee nearly 5,000 brokerage firms, 173,000 branch offices and 653,000 registered securities representatives. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets.     

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),1 and Rule 19b-4 thereunder,2 notice is hereby given that on May 11, 2009, Financial Industry Regulatory Authority, Inc. (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. (“NASD”)) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by FINRA. FINRA has designated the proposed rule change as constituting a “non-controversial” rule change under paragraph (f)(6) of Rule 19b-4 under the Act,3 which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.


I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change
 FINRA is proposing to amend FINRA Rule 2360 (Options) to (1) establish higher position limits for options on selected exchange-traded funds, (2) clarify the application of position limits to conventional options on exchange-traded funds, and (3) clarify the appropriate registration qualifications for accepting and reviewing the acceptance of options discretionary accounts.

 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 parts of such statements.

 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
 
 1. Purpose

 The proposed rule change would add Supplementary Material to FINRA Rule 2360 (Options) to (1) establish higher position limits for options on selected exchange-traded funds (“ETFs”) and (2) clarify the application of position limits to conventional options on ETFs. In addition, the proposed rule change would amend FINRA Rule 2360(b)(18) to clarify the appropriate registration qualifications for accepting and reviewing the acceptance of options discretionary accounts.

Options on ETFs

 FINRA Rule 2360(b)(3) subjects standardized and conventional options4 to one of five different position limits with the maximum limit of 250,000 contracts. FINRA’s position limits are consistent with those of the Options Exchanges.5 The Options Exchanges, however, have Supplementary Material that designates higher position limits for options on selected ETFs. The position limit for options on The DIAMONDS Trust (DIA) and the Standard and Poor’s Depositary Receipts Trust (SPY) is 300,000 contracts. The position limit for options on The iShares Russell 2000 Index Fund (IWM) is 500,000 contracts, and the position limit for options on The PowerShares QQQ Trust (QQQQ) is 900,000 contracts. FINRA proposes, in accordance with Rule 2360(b)(3)(A)(vi), to establish the same position limits on such options to ensure consistency with rules of the Options Exchanges.

 In addition, FINRA proposes to clarify that the position limits for conventional options on ETFs should be the same as position limits for other equity securities. Thus, if an ETF underlying a conventional option also underlies a standardized option, then the position limit on the conventional ETF option shall be the same as the position limit for the standardized ETF option.6 However, if an ETF underlying a conventional option does not also underlie a standardized option, then the position limit for the conventional ETF option shall be the basic limit of 25,000 contracts.7 In order for such a conventional ETF option to qualify for a position limit greater than 25,000 contracts, a member must apply for an increased position limit in accordance with FINRA Rule 2360(b)(3)(A)(viii)b. by first demonstrating to FINRA’s Market Regulation Department that the underlying ETF security meets the standards for such higher options position limit and the initial listing standards for standardized options trading.

Full Story: http://www.sec.gov/rules/sro/finra/2009/34-59946.pdf


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