A broker has paid FINRA fees for failing to report OTC options positions to the Large Options Position Reporting System (“LOPR”).
In an acceptance, waiver and consent letter, FINRA found that the broker:
- mistakenly classified the counterparty to certain transactions as a broker-dealer instead of a bank, which incorrectly exempted the transactions from LOPR reporting;
- failed to report transactions where the broker-dealer acted as an intermediary between US-based clients and foreign broker-dealer affiliates; and
- failed to identify discrepancies in the LOPR system “country” field and counterparty “home country” designation, which resulted in the counterparty being incorrectly labeled as a foreign entity, and thereby exempting transactions from LOPR requirements.
FINRA has determined that due to classification errors and reporting failures, certain positions exceeded the applicable OTC position limit. FINRA said that in the majority of these cases, the broker-dealer exceeded the limit on one side of the market while the client exceeded the limit on the other.
FINRA also found that – from January 2014 to October 2020 – the lack of adequate supervisory policies designed to control position limits for conventional stock options contributed to broker reporting failures. The broker’s monitoring system (i) was unable to distinguish reportable from unreportable trades, (ii) was unable to determine whether trades had been reported or not, and (iii) n was not designed to identify instances where positions exceeded applicable limits.
Accordingly, FINRA concluded that the broker-dealer violated FINRA Rule 2010 (“Standards of Commercial Honor and Principles of Trade”), Rule 2360(b)(3) and (b)(5) (” Options”), and rule 3110 (“Monitoring”).
To settle the charges, the broker agreed to (i) a censure, (ii) a civil monetary penalty of $5,000,000, and (iii) undertakings to improve its oversight policies regarding LOPR reports.
One question that this enforcement action raises is whether position limits are set much too low. According to the action, in some cases the company and its client significantly exceeded the limit, but no damage appears to have resulted. Wouldn’t that indicate that the limits should be raised?