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 theunderlying 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.