Supervising Options Account Activities
Review is ongoing, not just at opening
Supervision of account activity means written procedures for the prompt review of options orders and the periodic review of account holdings and trading patterns. The ROP looks for suitability on each recommendation, accuracy of the order as entered (buy/sell, opening/closing, underlying, strike, expiration, limit price), consistency with the approved level for that account, and whether the customer holds the underlying or the necessary spread leg to support the stated strategy.
What examiners expect you to flag
- Excessive activity and churning - high turnover, heavy commission relative to account size, trading against the customer's stated objective.
- Unwarranted concentration - one position or one underlying dominating the account.
- Unauthorized or discretionary trading without written authorization.
- Third-party trading - orders from someone other than the named account holder without documentation.
- Position and exercise limit aggregation - limits apply across all accounts under common control or common direction, not account by account.
Use exception reports for large orders, uncovered short positions, expiring positions, and accounts with repeated limit breaches. Record what you reviewed and what you did.
Traps
A customer cannot escape position or exercise limits by spreading contracts among several accounts. A customer already over a limit is not frozen - transactions that reduce the position (closing trades) are permitted. Do not confuse the large-position reporting obligation with the limit itself.
Rule of thumb
If a review would have caught the problem, the firm is expected to have had a procedure that produced that review - document the review, the date, and the reviewer.