SEC Re-Approves TBA/CAT-related Changes to FINRA Margin Rule
The SEC re-approved amendments to FINRA Rule 4210 ("Margin Requirements") on "to-be-announced" ("TBA") and other "Covered Agency Transactions."
The approval came in response to a petition for review of a previous approval by SEC staff (acting through delegated authority) of the FINRA proposal. The amendments being reviewed were proposed in SR-FINRA-2021-010. That proposal made amendments to a separate FINRA rule filing to amend Rule 4210 relating to Covered Agency Transactions - SR-FINRA-2015-036. The amendments made under SR-FINRA-2015-036 were approved by the SEC in 2016.
In its response, the SEC said that it conducted a de novo review of the previous staff approval and found that FINRA met its burden of showing that the 2021 amendments are consistent with the requirements of the Exchange Act and the rulemaking process provided sufficient opportunity for interested parties to comment.
As previously covered, the 2021 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 would have 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 practical effect of this action is that the clock (probably) begins again for when the CAT rules will go into effect. FINRA previously indicated it would provide nine to ten months following SEC approval before the rule becomes effective. "Probably" because there are two important caveats:
- First, the rules adopted in 2016 are currently scheduled to go into effect in October. However, given that these rules have been delayed for seven years, it would be very surprising if FINRA would let that version of the rules go into effect now that the later amendments have been approved.
- Second, reading the tea leaves in the petition for review, there would seem to be a reasonable likelihood for a court challenge to the rulemaking, which has the potential to further kick this can down the extended highway it seems to be on.
The SEC review itself is lengthy but light on surprises. In large part (particularly given the de novo nature of the review), the nearly 100 pages consist of a rehashing of the 2021 rulemaking process, including the arguments made by commenters and responses from FINRA. (Disclosure: Fried Frank has acted as counsel to SIFMA in its comments on the rulemaking.)
The response also highlights a procedural oddity of the review. While the petition, in good part, is aimed at margin requirements for CATs generally, it is technically a procedural challenge to the 2021 amendments. As such, the SEC review largely avoids reconsideration of the need for these margin requirements in the first place, and instead works on an assumption that the margin requirements were appropriate as previously adopted and focuses on the more recent amendments. This is like responding to someone's argument about their distaste for all movies about artificial intelligence with an argument about the merits of the changes made in the many re-releases of the film Blade Runner. (Or to use a more modern example, to respond to someone who is not fond of pop music with a detailed discussion of the merits of "Taylor's versions" versus the original releases.) Of course, the SEC seems to be right on this procedural point and it is understandable that they chose not to re-litigate the past here.