FINRA Updates Five Broker Rules for Company KPI Options

FINRA amended five rules on Oct. 22, clarifying how broker-dealer options requirements apply to binary contracts tied to company metrics and options cleared by agencies other than the Options Clearing Corporation (OCC). The changes define how existing options standards apply as exchanges pursue products linked to public-company figures.

The amendments took effect immediately when filed. They revise Rules 2220, 2351, 2357, 2360 and 4210, covering customer communications, approval to trade, supervision, position reporting and margin. FINRA also addressed margin treatment for spreads and straddles.

A company KPI option pays based on whether a specified financial or operating metric meets a condition set in the contract. That differs from an option tied directly to a company’s share price. Several national securities exchanges have filed proposals for binary options tied to figures reported by public companies.

Cboe’s proposed contracts offer one example of the products in development. The SEC approved Cboe Exchange’s listing rules on Oct. 13. The contracts are European-style and cash-settled, with a fixed $1 settlement amount determined by whether the reported metric meets the contract condition. Cboe’s proposal uses values disclosed in issuer earnings-related filings submitted to the SEC.

On Oct. 22, the SEC granted Cboe Clear U.S. temporary registration as a clearing agency for 18 months. The registration covers clearing cash-settled binary securities options, including contracts tied to company KPIs. The listing approval and the clearing registration are separate regulatory steps for Cboe’s proposed products.

Cboe’s Sept. 30 announcement set an October launch target for an initial group of 23 U.S.-listed companies and named Robinhood as the planned first retail broker. The launch plan was outlined earlier.