FINRA Proposes Rule Change to Establish Margin Requirements for TBAs and Other Agency Transactions
FINRA filed a proposed rule change to amend FINRA Rule 4210 to establish margin requirements for "To-Be-Announced" transactions ("TBAs") and other forward-settling transactions in agency securities. The proposal follows on recommendations for margining in these transactions made by the New York Federal Reserve Bank's Treasury Market Practice Group ("TMPG").
The new requirements would apply to: (i) TBA transactions, inclusive of adjustable rate mortgage transactions; (ii) Specified Pool Transactions; and (iii) certain transactions in Collateralized Mortgage Obligations (collectively "Covered Agency Transactions"). FINRA indicated that the scope is intended to be congruent with the TMPG's best practices.
Generally speaking, the rule would require broker-dealers to collect variation margin from all customers (subject to limited exceptions) and maintenance margin of 2% on transactions with counterparties that are not "exempt accounts" or "mortgage bankers."
Commentary
The proposal is substantially similar to the version FINRA posted for comment in early 2014 (and which inspired a great deal of industry comment). One notable change is the addition of an exception to the requirements for smaller counterparties – generally, those whose positions amount to $2.5 million or less in the aggregate and whose transactions settle in the same month or the next month.
The proposal largely declines to make changes to Rule 4210 that go beyond the scope of the current proposal; for example, FINRA responded to commenters asking for changes to the definition of "exempt account" by saying that "that issue is better addressed as part of a future, separate rulemaking effort."