Options Allocation of Exercise Assignment Notices

FINRA Rule 2360(b)(23)(C) requires member firms conducting transactions in exchange-listed options to establish fixed procedures for allocating options exercise assignment notices to short options positions in their customer accounts. Firms may elect to allocate exercise assignment notices on: (1) a “first in-first out” basis (FIFO); (2) a random selection basis; or (3) another equally random selection basis determined by the firm. However, firms must receive prior FINRA approval for the method selected. Any changes to a firm’s allocation method must be reported to and approved by FINRA.

As detailed in Regulatory Notice 11-35, firms initiating an options business, changing their clearing firm, or changing their allocation method, must submit the form to [email protected] for approval. Also in Regulatory Notice 11-35, FINRA clarified its designated procedures for firms employing a random method of allocating options exercise assignment notices. Firms using the random method must ensure that they follow these updated procedures or seek approval from FINRA for an alternative allocation method.

Firms must inform customers in writing of the method used to allocate options exercise assignment notices, including explanations of how the system operates and the consequences of that system. Firms also must preserve sufficient work papers and other documentary materials relating to the allocation of options exercise assignment notices to establish the manner in which allocation of the exercise assignment notices is in fact being accomplished.

Firms that receive specific requests on behalf of a group of accounts under common ownership for an exception from their approved method of allocating options exercise notices to permit reallocation of exercise assignment notices for such accounts, must submit those reallocation instructions to [email protected] for approval as part of their overall allocation method. This exception can only be applied after the firm’s approved method has completed and has no impact on the number of contracts allocated to other accounts. A firm must detail (i) its original methodology for the accounts in question, (ii) the new methodology proposed for those accounts and reason for the change, and (iii) the customer and specific accounts affected by the requested change in methodology. If the information provided is acceptable, FINRA will issue an approval letter with respect to the reallocation method requested for specified accounts.  

For questions regarding the allocation form, or the allocation process, please contact:

• Max Tourtelot (212) 457-5366
• James Turnbull (212) 457-5367