FINRA is modifying the way firms designate their method of allocating options exercise assignment notices.  Beginning 8/8/11, firms initiating an options business, or changing their allocation method, must use the application form in Attachment A of this Notice.  FINRA also updated the designated random selection allocation procedures, as described in Attachment B.

FINRA Rule 2360(b)(23)(C) requires member firms conducting transactions in exchange-listed options to establish fixed procedures for allocating options exercise notices to short options positions in its customer accounts.  Firms may allocate exercise assignment notices one of three ways:  (i) on a “first in-first out” (FIFO) basis;  (ii) on a random selection basis;  or, (iii) on another equally random selection basis determined by the firm. 

Prior FINRA approval is required for any method selected, as well as for any changes to a firm’s allocation method. 

FINRA also has updated its designated procedures for firms employing a random method of allocating options exercise assignment notices. These firms must ensure that they follow FINRA's updated procedures, or seek approval from FINRA for an alternative allocation method.  Again, the revised procedures are described in Attachment B. 

Finally, 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.

FINRA Contacts in Options Regulation.   Direct questions to:   Director Max Tourtelot, (917) 281-3133;  Assoc. Director Casey McMahon, (917) 281-3042.

For further details, go to:   [FINRA RegNote 11-35, July 2011, "Options"]