FINRA Makes (Almost No) Revisions to Proposal for TBA Requirements

Commentary by Nihal Patel

FINRA proposed a second partial amendment to its rule proposal to adopt margin requirements for "to-be-announced" transactions and other forward-settling agency securities transactions (collectively, "TBAs").

The amendment makes changes only to the proposal's requirements that apply to multifamily and project loan securities (which FINRA chose to exclude from the proposal in the first partial amendment). FINRA stated that the revised rule text is designed so that products are interpreted "in the totality of their characteristics," and that FINRA did not propose a requirement that its members apply the proposed margin requirements to such securities. The remainder of the filing responds to the most recent round of comments but makes no further changes to the rule proposal.


This filing demonstrates that FINRA continues to believe their proposal gets it right on policy. In response to 54 comment letters the SEC received on the proposal in the last six months,* FINRA has made only two changes: (i) to exclude multifamily and project loan securities from the scope of the proposal and (ii) to extend the compliance date from six months to 18 months following SEC approval. FINRA's steadfastness continues to confound on many fronts:

  • As a general matter, there seems to be a disconnect between FINRA and market participants as to the cost of implementing the proposal. FINRA believes commenters are off as to their estimates, saying that they "fall toward the higher end of the cost range. . . ." Instead, FINRA seems to rely on an anecdotal survey of its own citing cost estimates from "one service provider," "one firm that does a significant business in the TBA market," "sources at one firm," and "another firm." Referring to multiple individual firms in the course of a survey is reasonable; except here, FINRA cites each of these single firms for the cost of particular aspects of implementation. (Imagine Zagat's but with only the blurbs and no ratings.) Whatever one thinks of the merits of cost-benefit analysis (and reasonable minds can disagree), such reliance is inadequate.
  • In response to comments from SIFMA that the rule change effectively mandates a new account type, FINRA states that it is aware that the rule involves costs and that firms have competing demands for resources, but that "regulation, like industry, continually evolves with new and ongoing initiatives."  What this fails to address is the fact that FINRA has consciously chosen to adopt a new system when there are multiple alternative systems to choose from (including the current fixed income margin scheme administered by FINRA).
  • In multiple places (including as to the definition of "exempt account") FINRA declines to make changes to Rule 4210 because it believes these issues are better addressed in a separate rulemaking or guidance.  That same logic is absent when FINRA chooses not to apply the margin transfer and liquidation timing requirements that apply to fixed income transactions under Rule 4210 generally and instead seeks a specific requirement to apply to TBAs.  If FINRA believes that these new requirements are appropriate, why not have that discussion in the context of a conversation more generally about these deadlines rather than make specific requirements for this particular product set?  This would not prevent FINRA from implementing the margin requirements for these TBAs, and would allow FINRA to seriously consider concerns raised by commenters as to timing, such as how to interpret a T+1 requirement when you're running a business with customers in different time zones.
  • In response to many other concerns raised by commenters, FINRA says that it will consider issuing guidance in the future. This kind of "punt" is great for lawyers (who will dig through all of the interpretations if and when FINRA updates the Rule 4210 interpretations - current copyright: 2010) but it is an unsatisfying response to those trying to run a business or determine whether to stay in a particular line of business.

* Full disclosure: Cadwalader represented SIFMA in its comment letters on the proposal.

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