FINRA Revises Margin Rule Interpretations

FINRA issued an extensive set of new and revised interpretations, as well as cancelled or replaced interpretations, to its rule on margin requirements ("Rule 4210").

The FINRA revisions consolidated interpretations that had been set out in Regulatory Notices or FAQs, or that had been the subject of oral advice. FINRA also canceled or replaced interpretations that had been superseded by new law; (e.g., interpretations as to extensions of credit on GNMAs that were now subject to the covered agency rules and the definition of "bank" that has been expanded by the SEC to include savings and loan associations.) Further, FINRA made a variety of clean-up changes, (e.g., incorporating definitions such as "Good Faith" from the Federal Reserve Board's Regulation T ("Credit by Brokers and Dealers")).

The changes include the following:

FINRA added new interpretations that are incorporations of guidance previously provided in a FINRA Regulatory Notice or a FINRA FAQ (primarily on portfolio margin). These include interpretations to the following effect or on the following topics:

• firms should impose higher house margin requirements on concentrated positions as measured either by exposure in the account or relative to the trading volume of the issuer;
• margin requirement on exchange traded warrants carried in a portfolio margin account;
• margin treatment of convertible debt in a portfolio margin account;
• margin treatment of baskets of securities in a portfolio margin account;
• requirement to take a capital charge on a deficiency in a portfolio margin account, if the deficit is not eliminated by close of business the day after it arises;
• margin treatment of money market mutual funds and exempt securities mutual funds and ETFs;
• minimum margin requirement on exchange-traded notes on which the payment is linked to a reference asset;
• minimum margin requirement on leveraged ETFs and on options on leveraged ETFs;
• permissibility of using either non-margin eligible equity security or offshore mutual fund shares as collateral for non-purpose credit and the margin requirement with respect to such security; and
• required procedures for credit oversight of accounts in which there are "trades executed away" (primarily prime brokerage accounts).

FINRA added new interpretations, to the following effect or on the following topics:

• on booking of short option positions that are partially covered by the underlying security;
• on margin treatment of short options where there is a related fully-paid long option position that expires on or after the maturity of the short option;
• on margin requirement as to short puts;
• on meeting a margin call that resulted from the exercise against the seller of a short option position that was part of a spread position;
• on the permissibility of meeting a margin call by the liquidation of positions (3x in a 12-month period);
• on the permissibility of allowing liquidation of error trades by investment advisers;
• on the definition of a "Regulation T margin call" as applied to margin calls for initial margin on "good faith" securities (firms extending credit on debt securities);
• on the extent to which trades by a market maker are exempt from day-trading requirements;
• on an omnibus account opened for a registered broker-dealer which is not subject to the day-trading regime;
• on the application of the "time and tick" requirement for day trading accounts;
• on the treatment of related option trades as "day trades;"
• on the treatment of a "house margin deficiency' in a portfolio margin account and the treatment of a margin call related to positions held in a portfolio margin account that are not portfolio margin eligible products;
• on that debt securities eligible for resale under Rule 144A ("Private resales of securities to institutions") may be treated as "saleable;"
• on reverse repos on equity securities which now should be booked into the margin account, not the good faith account;
• that, for purposes of determining exempt account status, "comparable financial reports" of a borrower may be unaudited in "appropriate circumstances"; and
• on procedures for requesting FINRA grant extensions of time to resolve margin deficiency.

FINRA replaced a number of pre-existing interpretations, in some cases where the prior interpretation was outdated due to a change in law. These include interpretations to the following effect or on the following topics:

• treatment of US branches of foreign banks as "designated accounts" and as "banks"';
• treatment of US savings institutions as "banks";
• statement that equity securities issued by GSEs are treated as margin equities, not as "exempted securities" for purposes of Rule 4210;
• statement that ""mortgage related securities" may be traded as "exempted securities" under Rule 4210(e)(2)(A) or (B);
• application of the minimum equity requirement to good faith accounts, prime brokerage accounts, broker-dealer credit accounts and portfolio margin accounts;
• value of foreign currency for margin purposes;
• required capital deductions on loans to broker-dealers; and
• required procedures when extending credit on restricted and control securities (additionally FINRA rescinded a number of other interpretations related to restricted and control securities).