FINRA proposed amendments to Rule 4210 ("Margin Requirements") for Covered Agency Transactions ("CATs").
The proposal would amend requirements approved but not yet implemented under SR-FINRA-2015-036 ("Amendments to FINRA Margin Requirements for the TBA Market"). That proposal was first scheduled to become effective in December 2017, and is currently scheduled to become effective on October 26, 2021.
Among other things, the proposal would:
- Eliminate the two percent maintenance margin requirement that would otherwise apply to non-exempt accounts; i.e., the only margin requirements that broker-dealers would have to collect are mark to market (or "variation") margin.
- Permit firms to take capital charges in lieu of collecting margin for CATs, subject to conditions including a cap for all CAT transactions of $25 million. FINRA said that the conditions were intended to protect the financial stability of firms taking capital charges while "restricting the ability of larger members to use their capital in lieu of collecting margin to compete unfairly with smaller members."
- Make a series of changes intended to "streamline, consolidate and clarify" the CAT rule provisions, including:
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- explaining that capital charges are not required to be taken in connection with activity below the $250,000 de minimis transfer exception;
- clarifying the "small cash counterparty" exception for counterparties with below $10 million in gross open positions with the particular broker-dealer;
- modifying the definition of "counterparty" and adding supplemental material to provide that "counterparty" includes circumstances in which a broker-dealer guarantees a transaction (with FINRA noting in particular, in footnote 24, that this might be relevant in introducing/clearing relationships); and
- eliminating the five business-day time period under which liquidation would be required and instead relying on the general provisions in Rule 4210(f)(6) (". . . promptly as possible and in any event within 15 business days from the date such deficiency occurred. . . .").
Comments on the proposal must be submitted within 21 days of its publication in the Federal Register.
Commentary
FINRA initially proposed adopting these rules in a regulatory notice published in January 2014. The rules were adopted and scheduled to become effective three and a half years ago. Now, it appears a further delay is in order, given that FINRA indicated there will be a build time of roughly six months after this proposal is finalized by the SEC.
The latest proposal moves significantly in the direction of addressing some of the primary concerns raised by market participants with the rules as adopted - in particular, with regard to the initial margin requirement, the non-standard liquidation period and the ability to take capital charges rather than collect margin. But the proposal will likely require further tinkering. FINRA indicated that it has attempted to balance competitive impact. By its nature, any such balancing is likely to result in some firms being affected more than others.
Primary Sources
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