U.S. Options Market Regulations

Technological and financial innovations have led to the introduction of complex financial instruments and trading strategies with global influence. Due to some of these developments, transparency, procedures, and controls can be easily compromised. Preventing illegal activities is increasingly becoming a challenge for regulatory agencies, and options as a complex tool add more levels to the required supervision, with different brokerage fees, complex structures and allowable levels of leverage, and high risk exposures.In this article, we will discuss the basic regulations, regulatory agencies and activities of the US options market

The main goal of regulated financial markets is to protect the rights and interests of ordinary investors by implementing the required set of agreements. The U.S. options regulator formulates, registers, standardizes, revises or revises (when necessary) U.S. options trading rules, including:

  • An option chain with a given strike price and expiry date
  • Trading unit
  • batch
  • Position limit
  • Limit exemption for hedging positions
  • Exercise mechanism
  • Order report and exception handling rules
  • OTC options trading rules
  • Set leverage and margin limits
  • Short selling rules

In addition, regulatory agencies have put forward requirements for transaction reports, dispute resolution mechanisms, and disciplinary actions for non-compliant individuals and companies. Most of these rules and regulations are implemented through brokerage companies.

Option contracts can be traded on stocks/indexes or foreign exchange/commodities/futures as the underlying. Different U.S. organizations manage these categories. All option contracts traded on stocks/indices are under the supervision of the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Agency (FINRA); while options contracts for foreign exchange/commodities/futures are subject to the Commodity Futures Trading Commission (CFTC) and the United States Regulation by the National Futures Association (NFA).

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U.S. Securities and Exchange Commission

This Securities and Exchange CommissionFounded in 1934, its mission statement is to “protect investors, maintain a fair, orderly and efficient market, and promote capital formation.” It has established regulations to ensure that fair practices are followed in the market with complete transparency.Provide a complete list of SEC options trading rules here.

Financial Industry Regulatory Authority

Founded in 2007, Financial Industry Regulatory Authority It is a non-governmental organization dedicated to ensuring investor safety and market reliability through supervision. Its main focus is that securities companies and brokers comply with a set of rules and ensure market transparency. FINRA operation can be divided into four parts:

  • Educate the public on investment, fund handling, fraud and risk management through the training modules provided on its website.
  • Mandatory broker-dealer registration: All companies engaged in securities trading in the United States are obliged to register with the U.S. Financial Industry Regulatory Agency and become licensed broker-dealers. If they fail to do so, they may be punished, legally prosecuted, or even shut down.
  • Securities license and examination.
  • Disciplinary action records are kept.
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FINRA’s option-specific regulations can be found in its detailed Options Regulatory GuideThe member exchange’s proposal has been carefully verified for impact assessment, and if deemed appropriate, it will be changed in accordance with the SEC’s implementation rules.

Commodity Futures Trading Commission

Was established in 1974, Commodity Futures Trading Commission It is a government agency that assists future trade in different sectors, such as agriculture, global markets, energy and environmental markets. Its regulation aims to fulfill its mission, “protecting market participants and the public from fraud, manipulation, abuse and systemic risks related to derivatives.” CFTC also provides mechanisms for individual traders File a complaint, And ASA Whistleblower planThe following is a list of exchanges monitored by the CFTC:

  1. Chicago Board Options Exchange
  2. Chicago Board of Trade
  3. Chicago Mercantile Exchange
  4. Hedge street
  5. American Futures Exchange
  6. Kansas City Trade Commission
  7. Minneapolis Corn Exchange
  8. New York Mercantile Exchange
  9. New York Trade Commission
  10. A chicago

National Futures Association (NFA)

National Futures Association (NFA) Is “the main independent supplier of an efficient and innovative regulatory plan to protect the integrity of the derivatives market” (including options).One Detailed regulatory guidelines (including options) It can be found on the NFA official website. All NFA members have the following obligations:

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  • Become a listed/registered member of NFA.
  • Comply with basic capital requirements.
  • Record keeping and reporting should cover all transactions and related business activities in detail.

Key U.S. Options Regulations

The following are some of the main regulations in the United States:

  • U.S. option traders must trade within the regulatory limits set by their respective regulatory agencies.
  • Since short trading options usually result in losses exceeding the transaction amount, leverage restrictions, margin requirements, and short positions have the most regulations to protect investors and traders from unknown risks.
  • According to regulations, option traders must maintain the minimum margin amount set by the broker.
  • For foreign exchange short options, the notional transaction value plus the premium received should be retained as margin.
  • For long options, the full option premium is required as a deposit.
  • The first-in-first-out (FIFO) rule prevents holding similar option positions.

Bottom line

How regulatory agencies ensure smooth operation through established regulations, rules and dispute resolution mechanisms has exposed the true efficiency of specific markets. Although it is always exciting to trade complex financial assets (such as options and other derivatives) for better profits, care should be taken to ensure that the market, participants, and promotion companies are well regulated.


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