According to FINRA, Morgan Stanley & Co. LLC was censured and fined $225,000 for improperly deleting expiring over-the-counter options positions from its Large Options Positions Reporting (LOPR) system reports.
The firm implemented a new LOPR system that deleted expiring OTC option positions on their expiration dates, resulting in under-reporting of OTC option positions to the LOPR system. This reporting system is designed to provide regulators with visibility into large options positions that could pose systemic risks to the markets.
The supervisory failures were particularly concerning. The firm failed to establish and maintain a supervisory system and written procedures reasonably designed to comply with its LOPR reporting obligations. Most notably, the firm did not test the new system for the deletion of expiring OTC positions from its LOPR reports, despite having been previously disciplined for that exact issue. This represents a failure to learn from past violations and implement adequate controls.
Following the discovery of this violation, the firm updated its written procedures to include an OTC expiry review, which should have been in place before implementing the new system.
While LOPR reporting may seem like a technical regulatory requirement, it serves an important purpose in monitoring market risk. Large options positions can significantly impact market stability, and regulators rely on accurate reporting to identify potential risks. When major firms under-report their positions, it undermines the effectiveness of regulatory oversight.
Investors should understand that a firm's compliance with reporting requirements reflects its overall commitment to regulatory obligations. The failure to test a new system before implementation, especially after previous discipline for the same issue, suggests inadequate risk management and compliance culture. For investors, particularly those with large or complex portfolios, working with firms that demonstrate strong compliance practices is important for ensuring proper oversight of their investments.
