Options Exercise and Assignment: OCC and Broker-Dealer Allocation Methods
When a buyer exercises an equity call option, how does the Options Clearing Corporation (OCC) assign the exercise notice to member broker-dealers, and what allocation methods is the member broker-dealer permitted to use to assign the notice to customer accounts?
OCC assigns to broker-dealers on a RANDOM basis only. Broker-dealers assign to clients using Random, FIFO, or another approved fair and equitable method.
Complete Analysis & Legal Rationale
When an option holder exercises a contract, the OCC assigns the exercise notice to a clearing member firm on a RANDOM basis only. Once the broker-dealer receives the assignment from the OCC, the firm allocates the assignment to its short customers using: (1) Random selection, (2) First-in, first-out (FIFO), or (3) Any other method that is fair and equitable and documented in the firm's procedures. Favoring larger clients or high-commission accounts is strictly prohibited.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Assignment by account balance violates fair allocation principles.
Matches the exact regulatory framework: OCC uses random; broker-dealer may use random, FIFO, or fair/equitable method.
The OCC does not use FIFO; it uses random selection. Broker-dealers cannot favor high-commission accounts.
Proportional fractional assignment is not the standard OCC allocation framework for single contract exercises.
Official Standard: Specifies random assignment by OCC and approved broker-dealer customer allocation methods.