FINRA Proposes Amended Margin Requirements for TBAs: FINRA Regulatory Notice 14-02
FINRA published a proposal to amend its Rule 4210 to reconsider the margin requirements applicable to TBA and other agency transactions. The proposal is intended to build on the set of best practices adopted by the Treasury Market Practices Group ("TMPG") of the New York Fed, which became effective December 31, 2013. The scope of the FINRA-proposed rules is coterminous with the TMPG recommendations (i.e., it would cover TBAs (including ARMs), specified pool transactions and forward-settling CMOs, collectively referred to in the proposal as "Covered Agency Securities"). Comments to FINRA on the proposal are due by February 26, 2014.
Among other things, the proposal would:
- require members to collect variation margin on transactions in Covered Agency Securities and to collect a 2% maintenance margin on such transactions with non-"exempt accounts" (as defined in Rule 4210);
- require members to establish written risk limits for each counterparty with regard to Covered Agency Securities transactions;
- require members to take a net capital charge on uncollected margin by the close of business on the business day after the margin deficiency is created, and take liquidating action five business days from the date the margin deficiency is created;
- establish a $250,000 de minimis transfer amount, provided that a member would still be required to take a capital charge for any amount not collected by the close of business on the business day after the margin deficiency is created;
- establish additional capital deductions where trading exceeds specified concentration limits;
- allow members to use all margin eligible securities as collateral;
- carve out cleared transactions from the rule's scope; and
- "clarify" that exempt account status must be based on the beneficial owner of an account, and that sub-accounts of an investment manager must be margined individually.
See: FINRA Regulatory Notice 14-02; Text of Proposed Rule Amendment; FINRA Instructions to Submit Comments. Related news: FINRA Regulatory Notice 13-39: SEC Approved Amendments to FINRA Rule 2360 and Rule 4210 Regarding OTC Options Cleared by OCC (November 7, 2013); SEC Approves FINRA Rule Changes Related to OCC Cleared OTC Options (with Lofchie Comment) (October 8, 2013).
Commentary
In general, the FINRA proposal does not impose requirements that are far beyond current requirements under Rule 4210 or market practices coming into place as a result of the TMPG recommendations. For example, no maintenance margin requirements would be imposed on trades with exempt accounts.
Firms participating in transactions in Covered Agency Securities should closely review the proposal and consider the ways in which its adoption could have a material impact on its business. Firms should consider, among other things, (i) whether the time period for taking capital charges is consistent with its practices for collecting margin (if margin is not collected within one business day, a broker-dealer must take a capital charge); (ii) whether the de minimis threshold proposed in the rule is in line with current arrangements and practices; (iii) whether it is practical for broker-dealers to adopt written risk limits for all of their counterparties to Covered Agency Securities transactions; (iv) whether the proposal could lead to broker-dealer clients moving their trading to banks or offshore dealers and other market participants that are not FINRA-regulated broker-dealers; and (v) what the operational and compliance costs of implementing the proposal will be.
Broker-dealers should also be aware of a footnote to the proposal in which FINRA anticipates that the SEC will issue guidance providing that, if certain conditions are met, variation margin posted with a counterparty in transactions in Covered Agency Securities may be treated as an allowable asset in computing net capital.