The SEC issued an order approving FINRA amendments to Rule 4210 ("Margin Requirements") for Covered Agency Transactions ("CATs"), as modified by Amendment No. 1.

The FINRA amendments will revise requirements approved, but not yet implemented under SR-FINRA-2015-036 ("Proposed Rule Change to Amend FINRA Rule 4210 (Margin Requirements) to Establish Margin Requirements for the TBA Market"). Those requirements were first scheduled to become effective in December 2017, and are currently scheduled to become effective on April 26, 2022 (see  related news). The FINRA amendments approved by this SEC order will:

  • eliminate the two percent maintenance margin requirement that would otherwise apply to non-exempt accounts; 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 and a requirement to liquidate certain transactions where relevant firm-wide thresholds are exceeded; and
  • make a series of changes intended to "streamline, consolidate and clarify" the CAT rule provisions.

As previously covered, some of these changes to streamline and clarify the CAT provisions include:

  • 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; and
  • modifying the definition of "counterparty" and adding supplemental material to provide that "counterparty" includes circumstances in which a broker-dealer guarantees a transaction.

In Amendment No. 1, FINRA modified two definitions:

  • non-margin counterparty  was revised to "exclude small cash counterparties and other exempted counterparties"; and
  • specified net capital deductionswere defined as the net capital deductions required under Rule 4210, paragraph (e)(2)(H)(ii)d.1, concerning "all unmargined excess net mark to market losses of its counterparties, except to the extent that the member, in good faith, expects such excess net mark to market losses to be margined by the close of business on the fifth business day after they arose."

FINRA stated that it will announce the effective date in a Regulatory Notice no later than 60 days following SEC approval, and that the rule will go into effect between nine and ten months after that order.

Commentary

The rules as approved are substantially similar to what was proposed in May of 2021. Given the timeline indicated by FINRA, the margin rules for CATs are scheduled to become effective in October or November of 2022.

Primary Sources

  1. SEC Order Granting Approval of a Proposed FINRA Rule Change, as Modified by Amendment No. 1, to Amend the Requirements for Covered Agency Transactions under FINRA Rule 4210 (Margin Requirements)

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