SEC No-Action Letter to FINRA Concerning the Definition of "Ready Market" as to Foreign Equity Securities (with Lofchie Comment)

The SEC Division of Trading and Markets released the attached no-action letter in response to FINRA's request to treat certain foreign equity securities as having a "ready market" under Rule 15c3-1(c)(ll)(i). According to FINRA, this would expand the number of foreign securities eligible as foreign margin stock under Regulation T.

The Division has stated that it will not recommend enforcement if the following conditions are met:

1. "The security is listed for trading on a foreign securities exchange located within a country that is recognized on the FTSE World Index, where the security has been trading on that exchange for at least the previous 90 days;
2. Daily quotations for both bid and ask or last sale prices for the security provided by the foreign securities exchange on which the security is traded are continuously available to broker-dealers in the United States, through an electronic quotation system;
3. The median daily trading volume (calculated over the preceding 20 business day period) of the foreign equity security on the foreign securities exchange on which the security is traded is either at least 100,000 shares or $500,000; and
4. The aggregate unrestricted market capitalization in shares of such security exceeds $500 million over each of the preceding 10 business days."

FINRA expects that broker-dealers relying on this letter will maintain appropriate risk management systems to monitor for concentrations, volatility and liquidity when extending credit.

Lofchie Comment: This interpretation has immediate significance in that it will allow U.S. broker-dealers to provide financing on competitive terms as to many non-U.S. securities. In the longer term, it also has significance for the security-based swaps rules, as the SEC's proposed capital rules would require firms to take a 100% capital charge on any swap on an illiquid security. Without some expansion of the non-U.S. securities that were deemed liquid, U.S. broker-dealers would have been entirely shut out of the market for swaps on non-U.S. securities. One aspect of the rule I think is too restrictive is the 90-trading-day requirement. This requirement will have the effect of preventing U.S. broker-dealers from financing positions in even very large IPOs of non-U.S. securities.

Click here to view letter in full (links externally to SEC website).For a general discussion of the margin regulations, see Lofchie's Guide to Broker-Dealer Regulation, Margin Chapter.