On January 29th, FINRA released the following statement:

Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to extend, to March 25, 2020, the implementation date of the amendments to FINRA Rule 4210 (Margin Requirements) pursuant to SR-FINRA-2015-036, other than the amendments pursuant to SR-FINRA-2015-036 that were implemented on December 15, 2016. 

FINRA has indicated that it will file the proposed rule change with the Securities and Exchange Commission (“SEC”) with a request for “immediate effectiveness,” which means that FINRA is recommending to the SEC that the deferred implementation date will become effective  immediately upon filing of the rule change by FINRA with the SEC.  

As background, FINRA Rule 4210 contains, in pertinent part, proposed margin requirements that apply to certain delayed delivery transactions that involve specified agency mortgage-backed securities, including To Be Announced (“TBA”) transactions.  In the language of FINRA Rule 4210, transactions subject to these margin requirements are referred to as “Covered Agency Transactions,” although many market participants use the “short hand” term of “TBA Margin Requirements” or “TBA Margining” to describe the scope of transactions subject to the requirements.  (Technically, in addition to TBAs, the margin requirements under FINRA Rule 4210 apply to Specified Pool Transactions and transactions in Collateralized Mortgaged Obligations (“CMOs”), in each case issued in conformity with a program of a U.S. agency or Government-Sponsored Enterprise and with a forward settlement date specified in the rule – 1 day for TBAs and Specified Pool Transactions and 3 days for CMOs.)

The FINRA Rule 4210 margin requirements have been subject to several amendments and deferrals since their original proposal by FINRA in October 2015.  Most recently, in September 2018, FINRA’s Board of Governors had approved additional changes to FINRA Rule 4210, including an elimination of the 2% maintenance margin requirement.  A memo from FINRA’s president announcing these changes is available here.

The purpose of the January 29th deferral to the implementation date is to give FINRA time to work with industry participants and other regulators to consider additional changes to these margin requirements, presumably including those changes approved by FINRA’s Board of Governors in September 2018.  To our knowledge, FINRA has not released the actual text of any of these proposed changes, although we expect such a release to occur in relatively short order.  Given the magnitude of the proposed changes to FINRA Rule 4210, we further expect that any of the new (i.e., not-yet-released) proposed changes would be subject to public comment; although, we note that FINRA has not made an official statement to that effect.

FINRA has indicated that it will file the proposed rule change with the SEC with a request for “immediate effectiveness,” which means that FINRA desires for the deferred implementation date to become effective immediately upon filing of the rule change by FINRA with the SEC.  We expect that FINRA’s request will be honored by the SEC.  However, this decision ultimately rests with the SEC and, as of the time of the publication of this post, the SEC has not yet issued a release in respect of the FINRA proposed rule change.  If the SEC did not honor FINRA’s request for immediate effectiveness, then the proposed rule change would not become operative for 30 days after the date of its filing by FINRA with the SEC.

Finally, and by way of background, since December 2016, broker-dealers have had to make certain risk limit determinations under FINRA Rule 4210 in respect of a customer’s trading of Covered Agency Transactions.  This aspect of Rule 4210 will continue to operate in the manner provided for by the rule since December 2016, and is not affected by the proposal to defer the implementation date of the margin requirements in respect of Covered Agency Transactions to March 25, 2020.

The text of the proposed rule change is available here.

Good day.  Good delay? DR2