FINRA Executives Describe Covered Agency Margin Rules
On an episode of FINRA Unscripted, David Aman, senior advisor, and James Barry, director of Credit Regulation, both with FINRA's Office of Financial and Operational Risk Policy, and Michael MacPherson, a senior advisor with Member Supervision's Risk Monitoring team, described the intent behind recent amendments to FINRA's margin rule, Rule 4210 ("Margin Requirements").
The amendments, which went into effect in May (see related coverage,) impose margin requirements on "Covered Agency Transactions" to address systemic risks and risks to FINRA member firms.
Mr. Barry said the new rule was created because member firms were neither collecting margin nor taking required capital charges for the potential loss. He said the amendments would "eliminate as much as possible" counterparty failure as part of the member firms' capital implications. He stated that FINRA "really wanted to make sure that firms [could] survive large swings in interest rates" and "have a cushion, the margin they've collected from their counterparties to absorb any losses that may occur."
Mr. Barry explained that in situations "where margin counterparties are unable to post margin within five-day period," a firm can request additional time of "up to 14 days." Mr. MacPherson said that because "the requirement to notify is new," certain firms "may or may not have access to our Firm Gateway." He recommended firms make sure that persons responsible for filing these notifications can access Gateway.
On introducing relationships, Mr. Aman said that firms need to "determine what the obligations are" in an introducing clearing arrangement. He highlighted that firms need to pay attention to "what the actual terms of that arrangement are and determine whether the client is a counterparty to the introducing broker, is a counterparty to the clearing broker, or potentially both."
The regulators promoted FINRA's extensive resources, including FAQs and webinars, to help firms understand and comply with the new rules.