United States: FINRA Expands Margin Rules For Mortgage-Backed Securities Transactions

FINRA has introduced an expansion of Rule 4210 (the Rule), effective Dec. 15, 2017, importing margin concepts into the world of mortgage-backed transactions.

The expansion is centered on mortgage-backed securities forward transactions and, barring narrow exceptions, requires broker-dealers to collect mark-to-market (variation) margin from almost all counterparties as well as maintenance (initial) margin from a large number of counterparties. The Rule also provides dealers with increased liquidation rights following a failure to post margin by the counterparty. This article gives a high-level overview of the covered transactions and of the counterparties covered by the two margin requirements and implications of the new liquidation rights.

Covered Transactions

For the purposes of the Rule, a "covered agency transaction" is one of:

  • A TBA transaction, both "for good delivery" and "not for good delivery," (including ARM transactions) for which the difference between the trade and settlement date is greater than one business day.
  • Specified pool transactions for which the difference between the trade and settlement date is greater than one business day.
  • CMOs issued in conformity with a program of an agency or GSE (Fannie Mae, Freddie Mac, Ginnie Mae, etc.) for which the difference between the trade and settlement date is greater than three business days.

Mark-to-Market (Variation) Margin Requirements

Broker-dealers are required to mark any covered agency transactions to the market daily and collect any net mark-to-market loss from counterparties, subject to limited exemptions. To facilitate the new margin requirements, the Rule requires that the threshold in any agreement be set at zero and any minimum transfer amounts not exceed $250,000.

Exemptions

Broker-dealers do not have to collect mark-to-market margin from the following counterparties:

  • A federal banking agency, central bank, multinational central bank, foreign sovereign, multilateral development bank or the Bank for International Settlements.
  • A counterparty that has less than $10 million in gross open positions where the settlement date is in the same month as, or the month succeeding, the trade date and the counterparty regularly settles its covered agency transactions on a DVP basis or for cash (with certain exceptions for dollar rolls, "round robin" trades or trades for which other financing techniques are used).

In addition, the following transactions are excluded from the scope of the margin requirements:

  • Transactions cleared through a registered clearing agency and attracting any margin requirements of such agency.
  • Transactions where the underlying security is in multifamily housing or project loan program securities issued in conformity with an agency or GSE (i.e., Freddie Mac K Certificates, Fannie Mae Delegated Underwriting and Servicing Bonds, or Ginnie Mae Construction or Project Loan Certificates).

The Rule has introduced increased rights for dealers in the event their counterparties fail to post margin as required for a period of time. Under the new regime, if the counterparty does not post mark-to-market margin entirely covering the net forward exposure, once five business days have elapsed from the date on which the net forward exposure occurred, the dealer may liquidate one or more outstanding transactions in its sole discretion to eliminate such forward exposure.

In practical terms, this right is likely to result in the dealer terminating transactions that are in-the-money to the counterparty, thereby netting amounts due to the counterparty with any margin posting requirements. We would expect that dealers would be incentivized to leave transactions out-of-the-money to the counterparty outstanding, and therefore, counterparties should expect the revised liquidation rights, to the extent they are utilized by a dealer, to result in an overall shift of the trading book with such dealer against the counterparty.

Maintenance (Initial) Margin Requirements

Broker-dealers are required to collect maintenance margin from any party that does not qualify as an "exempt account" for the purposes of the Rule. The Rule requires that a broker-dealer collect the margin in an amount that is the greater of:

  • 2% of the net long/short position of the counterparty.
  • An amount specified in an agreement between the counterparties.

Despite the very narrow exemptions from mark-to-market margin requirements, the Rule does provide broader relief from maintenance margin. Where the counterparty falls within exemptions, known as "exempt accounts," a broker-dealer is not required to collect maintenance margin.

To qualify as an "exempt account," an entity must be:

  • A broker-dealer registered as such under the Exchange Act.
  • An entity:
    • With net worth of at least $45 million in financial assets.
    • Meeting one of the following requirements:
      • Has securities registered pursuant to Section 12 of the Securities Act and has been subject to and in compliance with the reporting requirements of Section 13 of the Securities Act for at least 90 days.
      • Has securities registered pursuant to the Securities Act and has been subject to and in compliance with the reporting requirements of Section 15(d) of the Securities Act for at least 90 days.
      • If not subject to Section 13 or 15(d) of the Securities Act, all information pursuant to Securities Exchange Act Rule 15c12-11 is publicly available.
      • The entity furnishes to the SEC all information required by Securities Exchange Act Rule 12g3-2(b).
      • The entity makes available to the counterparty all current information regarding ownership, business, operation and financial condition (including audited financial information) in order for the counterparty to perform a risk analysis with respect to that entity.

For the purposes of covered agency transactions, "mortgage bankers" (i.e., entities engaging in providing real estate financing collateralized by liens on real estate) can also be treated as an "exempt account" to the extent such covered agency transactions are used to hedge a pipeline of mortgage commitments.

Compliance Considerations

Given the limited nature of the exemption and exceptions listed above, we would expect the vast majority of transactions to attract regulatory margining. This will most likely result in "thresholds" being set at zero and "minimum transfer amount" figures being set at $250,000 or lower in MSFTAs moving forward. SIFMA has released an amendment to the MSFTA making such changes, as well as changes surrounding maintenance margin and liquidation rights. While the SIFMA form generally tracks the Rule, it is to some extent dealer friendly, and therefore, non-dealer counterparties may wish to amend their MSFTAs to provide greater flexibility and protection in the event their margining obligations were to change.

Compliance Date

The Rule will become effective as of Dec. 15, 2017, and FINRA has not moved to exclude existing transactions from the Rule. As a result, we would expect that all transactions, new and existing, will have to be compliant with the Rule as of Dec. 15, 2017, and that all documentation will also have to be amended to facilitate compliance by that date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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