The short answer is it is not clear, but we do not expect the new margin rules to apply to trades any earlier than June 2016 or later than January 2018, assuming that the proposed rules are approved by the SEC.  Although, we recommend that market participants consider dealing with any open negotiations of Master Securities Forward Transaction Agreements (MSFTAs) and re-papering of existing MSFTAs well in advance of the actual implementation date.

The remainder of this posting will deal with the mechanics and procedures behind the determination of these dates and provide our readers with additional information in respect of our recommendation to “dust off” their MSFTA files sooner rather than later.

On October 6, 2015, Financial Industry Regulatory Authority (FINRA) submitted a final TBA margining proposal for consideration by the Securities and Exchange Commission (the “SEC”).  Technically, the proposal consisted of changes to FINRA Rule 4210 to require margining of certain delayed delivery transactions that involve mortgage-backed securities (such as To Be Announced (TBA) trades and dollar rolls).

On October 20, 2015 (the “Publication Date”), the SEC published a release (available here) seeking comments in respect of FINRA’s proposal.  Comments are due on or before November 10, 2015.

The SEC has at least 45 days, and up to 90 days, after the Publication Date (i.e., from December 4, 2015 to January 18, 2016) to approve or disapprove the proposed rule changes.  Within 60 days of SEC approval, FINRA will announce the effective date of the new rules.  FINRA has indicated that it supports a deferred implementation period and suggested that the rules not be implemented for at least 6 months, and up to 24 months, following approval by the SEC.  Or, to put it another way:

• Assuming a December 4, 2015 SEC approval date, the rules could be effective by as early as June 4, 2016, as late as December 4, 2017; and
• Assuming a January 18, 2016 SEC approval date, the rules could be effective as early as July 18, 2016 or as late as January 18, 2018.

Despite this deferred implementation date, there are several reasons why we recommend that market participants resume stalled MSFTA negotiations and begin to re-paper existing MSFTA trading relationships sooner rather than later.  First, new margin requirements may mean new operational processes for many market participants.  For non-custodial investment advisers, this also means coordinating margin movements in respect of the TBA/dollar roll/delayed delivery MBS asset class with a third party (such as the bank at which a client custodies its assets ).  Second, some market participants (like registered investment companies) may need extra negotiation time to put ancillary documentation (like tri-party account control agreements) into place.  In our experience, this ancillary negotiation may take even more time than it has with respect to other documentation arrangements (i.e., ISDAs, prime brokerage, etc.) since some large custody banks have recently revised their standard account control agreements that are causing extended delays in the finalizing of MSFTA negotiations.  Finally, by definition, many of the changes that will need to be negotiated by the parties involve credit-related provisions in the MSFTA.  And, in our experience, approvals of credit-related changes are not always fast.

Good day.  Good information…or so we hope! DR2