OCC and Investor Protection

The Options Clearing Corporation (OCC) issues substantially all CBOE options contracts. The OCC is recognized as the vital mechanism which provides market and systemic safety to the listed securities options markets in the U.S. As the issuer of exchange listed options, OCC in effect becomes the buyer to every clearing member representing a seller and the seller to every clearing member representing a buyer.

OCC's role is supported by a three-tiered safeguard system. OCC's qualifications for membership are stringent to protect OCC and its clearing members. Each clearing member applicant is subject to a thorough initial assessment of its operational capability, the experience and competence of its personnel, and its financial condition in relation to predefined standards. After tough membership standards, OCC's second line of defense against clearing member default is member margin deposits. OCC currently holds billions in aggregate clearing member margin deposits. The third line of defense is the clearing members' contributions to the clearing fund. A member's clearing fund deposit is based upon its options activity and is computed monthly. OCC's clearing fund totals hundreds of millions of dollars.

Customer Safeguards

In addition to the OCC safeguards, CBOE has adopted its own rules and regulations to better ensure that a fair and orderly marketplace exists. Both CBOE and the OCC operate under the jurisdiction of the SEC and are obligated to follow federal securities laws and regulations.

All brokerage firms conducting a public options business must furnish its options customers with the options disclosure document entitled Characteristics and Risks of Standardized Options. Firms are also obligated to establish suitability in approving a customer's account for options trading, and to ensure that all options recommendations made to customers are suitable in light of their investment objectives, financial situation and needs.

Registered representatives must pass a registration exam known as the Series 7 that tests their knowledge of the securities industry, options, federal law and regulations, and exchange rules. The securities industry and six self-regulatory organizations have moved forward with an educational initiative that would emphasize a continuing education program for brokers rather than testing.

Branch office managers require more training, experience and must pass a more advanced exam known as the Series 8 concerning the supervision of brokers. Options communications to customers must abide by certain rules and regulations before dissemination, and must be approved by the firm's Compliance Department and an exchange that trades options.

Position limits on options exist to prevent an individual or entity from controlling the market. Position limits for equity options are based on volume and number of shares outstanding of the underlying equity issue. Stock index options also have position limits in order to prevent control of the market. Hedge exemptions allow greater position limits for investors who are using options to hedge a stock position or a diversified portfolio of stocks.

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