Chapter 22 - Opening and Maintaining Retail Option Accounts Flashcards
What is a managed account?
An account in which the investment
portfolio of a client of a member
firm is managed by the member,
usually for a management fee or other
consideration, through discretionary
authority granted by the client on a
continuing basis.
What is an option account application form?
A form required to open an options
account which provides the necessary
personal and financial information for
an IA to judge the suitability of options
for a client, facilitates adherence to
option regulations, helps make clients
aware of industry rules, and clarifies
their position with regards to option
trading.
What is an options trading agreement?
A form required to open an options
account which must be signed by
the client; outlines the rights and
obligations of the member firm and
the client with regards to options
transactions.
What is a risk disclosure statement?
A document, generally describing the
risks and attributes of options trading,
that is given to options clients when an
options account is opened.
What is a simple discretionary account?
Accounts opened as a matter of
convenience and managed by a
member on a temporary basis at the
written request of a client.
The forms necessary for opening regular option accounts and the key items on these forms
- Option Account Application Form: At some member firms this may have to be signed by the client, but it is not
required by the SROs. - Key items the form must include:
- The client’s personal and financial information
- Past investment experience
- Option accounts with other brokers
- Whether the client is an insider of a publicly traded company
- Anticipated types of transactions and account restrictions
- Options Trading Agreement: This must be signed by the client, who must be given a copy prior to any option
trade in the account. - Key items the form must include:
- The client’s promise to honour exchange rules
- The rights and obligations of the member firm and the client with regards to option transactions
- The client’s acknowledgement of receipt of the Risk Disclosure Statement
- Risk Disclosure Statement: This must be given to a client prior to any option trade in the account
- Issues and warnings outlined in the Risk Disclosure Statement must include the following statements:
- Options carry a high degree of risk.
- Investors should be familiar with the terms and conditions of the specific options they are trading.
- Investors should be aware of the danger of illiquid markets.
- Exchanges may suspend or impose trading restrictions.
- Investors should be familiar with the protection accorded to any money deposited.
- Investors should understand how commissions are charge.
- The foreign currency risk faced by Canadian purchasers of U.S.-listed (or any other foreign country–listed)
options. - Investors should be aware of the potential vulnerability of exchanges’ electronic trading facilities.
Procedures for opening option accounts
- When the IA and the potential client have completed the Option Account Application Form, the final approval is
the responsibility of a designated Supervisor. - If a potential client refuses to give complete answers to all questions on the Option Account Application Form,
the designated Supervisor can still authorize the account to be opened but should note the reasons for doing so
on the form.
Procedures that must be followed with respect to managed and simple discretionary accounts
Managed Accounts:
* Investment member firms of CIRO must be approved by CIRO to handle managed accounts.
* Only qualified portfolio managers may handle managed accounts.
* CIRO will permit sub-advisors to manage these accounts provided there is a written sub-advisor agreement
with the member in place and the individual or firm is registered as a portfolio manager.
* A designated Supervisor must approve all managed options accounts.
* A designated Supervisor must assume supervisory responsibility for each managed account, and must review
them on a quarterly basis.
Simple Discretionary Accounts:
* Only IAs who have actively dealt in, advised on or performed analysis of options for a minimum of two years are
eligible to exercise authority over discretionary accounts.
* A designated Supervisor must approve every discretionary account that will trade options.
* All orders for discretionary options accounts must be approved by a designated Supervisor and must be clearly
labelled as such.
* A designated Supervisor must review all discretionary accounts on a daily and monthly basis.
Procedures for transferring option accounts from one member firm to another
- When a client transfers from one firm to another, a new set of account forms must be completed and a current
copy of the Risk Disclosure Statement must be given to the client.
How commissions on options trades are charged
- Option commissions are charged to both the buyer and the seller of the option.
- Commissions are charged when an option is exercised (and assigned) according to the normal commission
schedules for the underlying interest.
a. List the form(s) a potential options client must sign when opening an account.
b. When must this (these) form(s) be signed?
c. List the form(s) a potential options client must receive when opening an account.
a. A new options client must sign the Options Trading Agreement.
b. This form must be signed before any option trades are executed for the account.
c. A new options client must receive a copy of the signed Options Trading Agreement and a copy of the Risk
Disclosure Statement.
What can an IA do if a potential options client refuses to answer a question on the Options Account
Application Form?
The IA should make the designated Supervisor aware that the client has not divulged some information
required on the Options Account Application Form. The onus then falls on the designated Supervisor to decide
whether to open the account as requested or to open the account with certain restrictions on it or to refuse to
open the account at all. If the designated Supervisor allows the account to be opened, the firm may request
the client to sign an acknowledgment that he/she declined to reveal some information and that this may
impair the member’s ability to service the account.
List six of the issues and warnings about options trading that appear in the Risk Disclosure Statement
- options carry a high degree of risk
- investors should be familiar with the terms and conditions of the specific options they are trading
- the danger of illiquid markets
- exchanges may suspend or impose trading restrictions
- investors should be familiar with the protection accorded any money deposited
- investors should understand how commissions are charged
- the foreign currency risk faced by Canadian purchasers of U.S.-listed (or any other foreign country listed)
options - the potential vulnerability of exchanges’ electronic trading facilities
List the two main differences between a managed account and a simple discretionary account.
- managed accounts may be solicited while discretionary accounts cannot
- managed accounts can be operated on a continuing basis while discretionary accounts are usually for a
limited period of time
