United States: FINRA Releases Revised 4210 Margin Rule Proposal

Last Updated: October 21 2015
Article by Daniel N. Budofsky, Alla Digilova and Akshay N. Belani

The reproposed amendments to Rule 4210 attempt to address commenters' concerns that the original proposed rule would impact business activity in the TBA market.

On September 24, the Financial Industry Regulatory Authority (FINRA) proposed a revised rule (the "Reproposal") that would implement, among other things, margin collection requirements for (1) To Be Announced (TBA) transactions, including adjustable rate mortgage (ARM) transactions;1 (2) Specified Pool Transactions;2 and (3) transactions in Collateralized Mortgage Obligations (CMOs)3 with forward settlement dates that exceed three business days.4

Consistent with the original proposed rule issued in January 2014 (the "Original Proposal"),5 FINRA reiterated that the proposed amendments are based on best practices adopted by the Treasury Market Practices Group (TMPG) of the Federal Reserve Bank of New York (FRBNY) and are designed to reduce counterparty credit risk in the TBA market.6

The Reproposal incorporates a number of revisions to address market participants' concerns that the Original Proposal would impede business activity in the TBA market. In the preamble to the Reproposal, FINRA indicates that it has revised the proposal "to ameliorate its impact on business activity and to address the concerns of smaller customers that do not pose material risk to the market as a whole, in particular those engaging in non-margined, cash account business."7 Specifically, FINRA added a conditional exception to the proposed margin requirements for any counterparty with gross open positions amounting to $2.5 million or less, as well as specified exceptions to the maintenance margin requirements and modifications to the de minimis transfer provisions8

Background

According to FINRA, most trading in agency mortgage-backed securities (MBS) takes place in the TBA market, and agency MBS is one of the largest fixed income markets.9 FINRA explains, however, that the TBA market has historically been one of the few markets "where a significant portion of activity is unmargined, thereby creating a potential risk arising from counterparty exposure."10 The TMPG similarly commented that a default on forward-settling agency MBS transactions could subject other market participants in the TBA market to significant losses and risks.11 Accordingly, in October 2013, the TMPG recommended that TBA market participants should "substantially complete" the transition to a system of margining by December 31, 2013.12 As a result, many market participants transitioned to margining by negotiating and entering into Master Securities Forward Transaction Agreements (MSFTAs) or other arrangements that provide a basic contractual framework, including a framework (consistent with the TMPG's recommendations) for the bilateral exchange of margin for forward and other delayed delivery transactions involving mortgage-backed and asset-backed securities.

The Reproposal

FINRA's Reproposal retains the majority of substantive requirements that were set out in the Original Proposal. For example, FINRA members would still be required to collect variation margin for subject transactions when the current exposure exceeds $250,000.13 In response to comments, however, FINRA clarified that any deficiency or mark-to-market loss with a single counterparty shall not give rise to any margin requirement if the aggregate of such amounts with the counterparty does not exceed $250,000.14 Members also would be required to collect maintenance margin (i.e., initial margin) from non-exempt counterparties15 However, for exempt accounts which include, but are not limited to, broker-dealers, specified institutions, and high net worth persons ("exempt accounts"),16 no maintenance margin is required to be collected.

Key Differences Between Original Proposal and Reproposal


  • Covered Agency Transactions. FINRA retained the definition of Covered Agency Transactions largely as published in the Original Proposal. Such transactions include TBA transactions (including ARM transactions) and Specified Pool Transactions, where the difference between the trade date and the contractual settlement date is greater than one business day, as well as CMO transactions (issued in conformity with a program of an agency17), where the difference between the trade date and the contractual settlement date is greater than three business days.18
  • Election for Certain Counterparties. A FINRA member may elect not to apply margin requirements with respect to Covered Agency Transactions to any counterparty that is a "Federal banking agency" (as defined under the Federal Deposit Insurance Act) central bank; multinational central bank; foreign sovereign; multilateral development bank; or the Bank for International Settlements. A FINRA member may make this election provided that the member makes a written determination of such counterparty's risk limits (as described further below), which the member would be required to enforce.19
  • Risk Limits. A firm's credit risk officer or credit risk committee would be required to make a written determination of the risk limit applicable to each counterparty to a transaction in a Covered Agency Transaction that is in accordance with the member's written risk policies and procedures.20 In response to comments, the Reproposal establishes a new Supplementary Material .05 that provides, for purposes of risk determinations, that
    • members engaging in transactions with advisory clients of a registered investment adviser may elect to make the risk limit determination at the investment adviser level, except for any account or commonly controlled accounts that exceed greater than 10% of the regulatory assets under management reported on the adviser's most recent Form ADV;
    • members of limited size and resources may designate an appropriately registered principal to make the risk limit determinations;
    • members may base their determination of risk limits on consideration of all products involved in the member's business with the counterparty, provided that the member makes a daily record of the counterparty's risk; and
    • members must regularly evaluate the adequacy of margin required by the rule with respect to a particular counterparty account or all its counterparty accounts and adjust the margin requirements as necessary.21

In addition to applying to Covered Agency Transactions, FINRA revised the Supplementary Material .05 to apply to transactions with exempt accounts that involve certain "good faith" securities" (paragraph (e)(2)(F)) and transactions with exempt accounts that involve highly rated foreign sovereign debt securities and investment grade debt securities (paragraph (e)(2)(G)).22

  • Transactions with Exempt Accounts. As in the Original Proposal, maintenance margin would not be required for transactions with exempt accounts. Variation margin would still be mandated for such transactions, and firms would be required to deduct the amount of any uncollected mark-to-market loss when computing the firm's net capital pursuant to Rule 15c3-1 under the Securities Exchange Act of 1934.23
  • Transactions with Non-Exempt Accounts. As in the Original Proposal, for such transactions, member firms would be required to collect variation margin and maintenance margin equal to 2% of the value of the securities—regardless of the type, volatility, or tenor of the security.24 However, FINRA revised the Original Proposal to provide relief from the maintenance margin collection requirement when the original contractual settlement for the Covered Agency Transaction is in the month of the trade date for such transaction (or in the month succeeding the trade date for such transaction in cases where the customer regularly settles its Covered Agency Transactions on a Delivery Versus Payment (DVP) basis or for cash).25 The exception, however, does not apply to non-exempt accounts engaging in "dollar rolls," "round robin" trades, or other financing techniques for its Covered Agency Transactions.26
  • Concentrated Exposures. The Reproposal maintains the treatment of concentrated exposures described in the Original Proposal. Accordingly, member firms would be required to provide written notification to FINRA and would be prohibited from entering into any new transactions that could increase credit exposure if net capital deductions over a five business day period exceed, (1) for a single account or group of commonly controlled accounts, 5% of the member's tentative net capital; or (2) for all accounts combined, 25% of the member's tentative net capital.27 In addition, the Reproposal clarifies that the foregoing limits are intended to include Covered Agency Transactions, de minimis transfer amounts, and amounts otherwise excepted for gross open positions of $2.5 million or less in the aggregate (as discussed further below).
  • Exceptions from the Reproposed Margin Requirements. The Proposed Rule includes two exceptions from the margin requirements:
    1. Covered Agency Transactions cleared through a registered clearing agency.28
    2. Covered Agency Transactions with a counterparty that amount to gross open positions of $2.5 million or less in the aggregate—provided, among other things, that the original contractual settlement for all such transactions is in the month of the trade date for such transactions, or in the month succeeding the trade date for such transactions where the counterparty regularly settles its Covered Agency Transactions on a DVP basis or for cash.29

FINRA explained that it added the second exception to address commenters' concerns that the proposed margin requirements "would unnecessarily constrain non-risky business activity of market participants or otherwise unnecessarily alter market participants' trading decisions."30

At its July meeting, the FINRA Board of Governors authorized the filing of the proposed rule change with the SEC. If the SEC approves the proposed rule change, FINRA will announce its effective date in a Regulatory Notice to be published no later than 60 days following SEC approval. The effective date will be no later than 180 days following publication of the Regulatory Notice announcing Commission approval.

Conclusion

The recently reproposed amendments to FINRA Rule 4210 appear to address some of the commenters' concerns regarding the impact of the Original Proposal on business activity in the TBA market, particularly for smaller market participants that do not exceed the thresholds set forth in the Reproposal. However, given the costs of compliance—including the system and infrastructure costs associated with bilateral margining—these requirements are still likely to have a significant impact on the market and many of its participants.

Footnotes

1 "TBA transactions" are defined in FINRA Rule 6710(u).

2 "Specified Pool Transactions" are defined in FINRA Rule 6710(x).

3 "CMO transactions" are defined in FINRA Rule 6710(dd).

4 Proposed Rule Change to Amend FINRA Rule 4210 (Margin Requirements) to Establish Margin Requirements for the TBA Market (Sep. 24, 2015) (the "Reproposal").

5 FINRA Requests Comment on Proposed Amendments to FINRA Rule 4210 for Transactions in the TBA Market, Regulatory Notice 14-02 (Jan. 27, 2014) (the "Original Proposal").

6 Reproposal at 6-7.

7 Reproposal at 8-9.

8 Reproposal at 9.

9 Reproposal at 5-6.

10 Reproposal at 6.

11 Original Proposal at 1-2 (citation omitted).

12 TMPG, Frequently Asked Questions: Margining Agency MBS Transactions (Oct. 25, 2013).

13 Reproposal at 58.

14 Reproposal at 58-59.

15 Reproposal at 19-20.

16 "Exempt account" is defined under FINRA Rule 4210(a)(13).

17 FINRA Rule 6710(k) defines "agency" to mean a United States executive agency as defined in 5 U.S.C. 105 that is authorized to issue debt directly or through a related entity, such as a government corporation, or to guarantee the repayment of principal or interest of a debt security issued by another entity.

18 Reproposal at 9-10.

19 Reproposal at 13-14.

20 Reproposal at 14.

21 Reproposal at 15-16.

22 Reproposal at 60-61. The Reproposal borrows the concept of "good faith" securities from Section 220.6 of Regulation T, which authorizes broker-dealers to effect and finance transactions in securities entitled to "good faith" margin. Securities entitled to "good faith" margin include exempted securities, non-equity securities, money market mutual funds, and exempted securities mutual funds.

23 Reproposal at 18.

24 Reproposal at 19-20.

25 Reproposal at 21.

26 Id.

27 Reproposal at 136.

28 FINRA Rule 4210(f)(2)(A)(xxviii) defines "registered clearing agency" to mean a clearing agency as defined in Section 3(a)(23) of the Securities Exchange Act (SEA) that is registered with the SEC pursuant to SEA Section 17A(b)(2).

29 Reproposal at 88.

30 Reproposal at 89 .

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions