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Security Futures

The Commodity Futures Modernization Act of 2000 (CFMA) lifted the ban on trading security futures, specifically single-stock and narrow-based stock index futures. Security futures are regulated both as securities and as future contracts, and must be traded on trading facilities and through intermediaries registered with both the SEC and CFTC.

Security futures involve a high degree of risk and are not suitable for all investors. The possibility exists that your customers holding security futures could lose a substantial amount of money in a very short period of time because security futures are highly leveraged. The amount they could lose is potentially unlimited and can exceed the amount they originally deposited with your firm.

There are no trading strategies that can eliminate the risk in security futures. Strategies using combinations of positions, such as spreads, may be as risky as outright long or short futures positions. Trading in security futures requires knowledge of both the securities and futures markets.

Continuing Education (CE) Requirements

The CFMA requires FINRA and the National Futures Association (NFA) to develop proficiency requirements related to security futures products. FINRA requires registered persons who intend to engage in a security futures business to complete a Firm Element continuing education program covering security futures.

FINRA and the NFA, in partnership with the Institute for Financial Markets, have developed a Web-based, Firm Element continuing education program focusing on essential information that should be known by persons who offer and sell security futures and those who supervise such persons.  Interested members should review the training requirements and content outlines for more details.

In addition, firms should be aware that adding a security futures business may constitute a material change in business operations for purposes of NASD Rule 1017. This would require a firm to file a continuing membership application and obtain prior approval from FINRA before engaging in a security futures business. Firms should review the guidance provided by FINRA in Notice to Members 02-73 to assist in determining whether adding a security futures business constitutes a “material change in business operations.”

Security Futures Risk Disclosure Statement

FINRA and the NFA require members to deliver the Security Futures Risk Disclosure Statement (Disclosure Statement) to customers at or prior to the time a customer’s account is approved for trading security futures. Thereafter, the firm must distribute each new or revised Disclosure Statement to each customer having an account approved for such trading or, in the alternative, not later than the time a confirmation of a transaction is delivered to each customer that enters into a security futures transaction. Firms may separately distribute new supplements to such customers; firms are not required to redistribute the entire Disclosure Statement or the earlier supplement. This Disclosure Statement has been prepared by FINRA and NFA with significant assistance from other futures and securities self-regulatory organizations.

FINRA released supplements to this statement in 2010 and 2014, which have been appended to the current brochure. Members can download the supplements below.

Additional copies of this document may be obtained by contacting FINRA MediaSource at (240) 386-4200.

April 2014 Supplement to the Security Futures Risk Disclosure Statement
May 23, 2014
FINRA Amends the TAF Rate for Transactions in Covered Security Futures
September 26, 2012
August 2010 Supplement to the Security Futures Risk Disclosure Statement
September 7, 2010
SEC Approval and Effective Date for New Consolidated FINRA Rules
June 15, 2009
FINRA Requests Comment on Proposed Rule to Establish a Leverage Limitation for Retail Forex
January 21, 2009
FINRA Announces SEC Approval and Effective Date for New Consolidated FINRA Rules Relating to Warrants, Options and Security Futures
December 15, 2008
Amendments to Registration Rules Extending the Date by which Eligible Registrants must Complete Continuing Education Program before Engaging in Security Futures Activities
November 13, 2006
SEC Approves New Rule and Rule Amendments Concerning Audit Trail and Trading Halt Requirements for ATSs that Trade Security Futures
March 7, 2003
SEC Approves New Rules and Rule Amendments Concerning Security Futures
October 24, 2002
Investor Education
Security futures are among the potentially riskiest financial products available in the United States. This article describes what security futures are, how they differ from stock options, some of the risks they can pose, and how they are regulated.