FINRA Sets Effective Date for TBA/CAT-related Changes to FINRA Margin Rule
Commentary by Steven Lofchie
FINRA set an effective date of May 22, 2024 for final amendments to FINRA Rule 4210 ("Margin Requirements") on "to-be-announced" and other "Covered Agency Transactions."
As previously covered, the amendments will:
- 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
The TBA Rules were extraordinarily long in the making. Following the financial crisis, the Treasury Markets Practice Group began a strong push for TBA margining by 2012. The first FINRA rule proposal on the topic dates to 2014.
A good part of the reason for that was the complexity of their interaction with other rules, particularly the margin rules for other products, the capital rules and the custody rules. The relevant complications are far from resolved: there is a good amount of both documentation and operational work to be done.
On the business side, introducing and clearing firms are going to have to agree as to how trades with introduced customers are to be handled.
These complications mean that it remains unclear what the impact of the rule change will be on the market. On the one hand, the requirement to transfer variation margin should reduce credit exposures between market participants, which seems to the good. On the other hand, the very significant operational and documentation challenges of compliance with the rule may reduce the ability of smaller firms to participate in the market.