FINRA proposed amendments to clarify the application of FINRA rules to security-based swaps ("SBS"). The proposal would take effect once SEC rules concerning SBS dealers ("SBSDs") and major SBS participants ("MSBSPs") become effective.
Specifically, FINRA stated that it is proposing to amend FINRA Rules 0180 ("Application of Rules to Security-Based Swaps"), 4120 ("Regulatory Notification and Business Curtailment"), 4210 ("Margin Requirements"), 4220 ("Daily Record of Required Margin"), 4240 ("Margin Requirements for Credit Default Swaps") and 9610 ("Application") in order to account for its members' SBS activities as SBS entities start to register with the SEC on October 6, 2021 (i.e., the compliance date for the SEC SBS rulemaking).
Among other things, the proposed amendments would:
amend FINRA Rule 0180 to provide a general presumption that FINRA rules apply to SBS (as they are also "securities"), subject to exceptions, including:
general exceptions from the FINRA Rule 6000 series (quotation, order, and transaction reporting facilities), Rule 7000 series (clearing, transaction and order data requirements, and facility charges) and Rule 11000 series (uniform practice code);
exceptions from certain FINRA conduct rules applicable only to FINRA members also registered as SBSDs or MSBSPs and such firms' associated persons ("APs") (including Rules 2030, 2090, 2110, 2210(d), 2232, 3110, 3120, 3130 and 4512), with carve-outs for Rules 2111, 2210(d) and 2232 where a broker-dealer ("BD") is "arranging, negotiating or executing" SBS on behalf of a non-U.S. affiliate pursuant to SEA Rule 3a71-3(d)(1); and
an exception from status as a BD AP if a person's functions are solely and exclusively related to SBS;
conform FINRA's operational and financial responsibility rules to the SEC's amended capital, margin and segregation SBSD and BD requirements as to SBS activities; and
amend FINRA margin requirements, by:
replacing current Rule 4240 ("Margin Requirements for Credit Default Swaps") with a new rule that would prescribe margin requirements for SBS intended to be consistent with Exchange Act Rule 18a-3, but not applicable to firms registered as SBSDs (including daily two-way variation margin and initial margin collection); and
generally excluding SBS from Rule 4210, subject to changes permitted under existing portfolio margin rules.
The amendments have a proposed effective date of October 6, 2021, and comments must be submitted within 21 days of the proposal's publication in the Federal Register.
FINRA requested feedback on a concept proposal setting forth how the FINRA rules might apply to security-based swaps.
The SEC final rules governing security-based swap activity in a cross-border context and the associated deadlines were published in the Federal Register. The compliance date for registration of SBSDs will be October 6, 2021.
The SEC finalized rules governing security-based swap activity in a cross-border context.
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