TBA/CAT-related Changes to FINRA Margin Rule Go into Effect
Commentary by Steven Lofchie
FINRA's final amendments to FINRA Rule 4210 ("Margin Requirements") on "to-be-announced" and other "Covered Agency Transactions" ("CAT") went into effect on May 22, 2024.
As previously covered, the amendments:
- eliminate the two percent maintenance margin requirement that would otherwise apply to non-exempt accounts; i.e., the only margin requirements that broker-dealers are required 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.
Commentary
These margin rule amendments were a dozen years in the making. A significant part of the reason that they took so long to implement is that both regulators and the industry underestimated the operational complexity of making material changes to the SEC custody rules.
This is a lesson that the SEC and industry may learn again with the recently adopted SEC rules on the mandated clearing of many transactions in U.S. Government Securities, which likewise require significant changes to custodial operations.
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