FINRA Fines Firm for LOPR Failure on OTC Options
Commentary by Steven Lofchie
A firm settled FINRA charges for failing to accurately perform large options position reporting ("LOPR") on trades where a U.S. broker-dealer intermediated an OTC option entered into with a non-U.S. entity.
According to the AWC, the violations stemmed from five separate issues, including: (i) a system migration that failed to update salesperson location data, leading the system to erroneously conclude no U.S. salesperson was involved; (ii) a trading system logic error that excluded salesperson information; (iii) the inadvertent exclusion of transactions involving non-U.S. funds; (iv) manual data entry errors where a salesperson selected an incorrect trader identifier; and (v) data formatting errors where location information was placed in the wrong field. FINRA stated that the firm remediated these system issues between 2020 and 2024.
FINRA also found that the firm failed to establish a supervisory system reasonably designed to ensure the accuracy and completeness of its LOPR reporting. FINRA highlighted that the firm's written procedures relied on reviewing randomly selected options transactions, which was insufficient to ensure that intermediated transactions were being captured and reported correctly. FINRA stated that these deficiencies allowed reporting failures to persist during the relevant period. FINRA noted that the firm has since strengthened its supervision by implementing new procedures that recalculate the LOPR eligibility of positions on a daily basis.
FINRA concluded that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 2360 ("Options"), and 3110 ("Supervision").
To settle the matter, the firm agreed to (i) a censure and (ii) a $125,000 fine.
Commentary
Not all OTC options entered into by a non-U.S. dealer are required to be LOPR reported. Firms must carefully evaluate the manner in which they conduct their sales activities with respect to such options so that such options are appropriately categorized as to whether they are subject to reporting.