FINRA has recently submitted a filing with the Securities and Exchange Commission (“SEC”) to propose another delay to the implementation of TBA margin requirements under Rule 4210. The new implementation date would be March 25, 2021.
FINRA has requested that the deferred implementation date becomes effective immediately upon filing of the rule change by FINRA with the SEC.
The Reason for the Delay
In its filing, FINRA indicated that the purpose of this delay is to consider additional amendments to Rule 4210 that would help to avoid unnecessary disruption to the market for To-Be-Announced securities (or TBAs). This is not the first time that FINRA has indicated that it is considering amendments to 4210. To date, FINRA has not proposed any such amendments.
What Are Buy-Side Firms Doing Now?
Notwithstanding this delay, many buy-side market participants are finalizing their negotiation of Master Securities Forward Transaction Agreements (MSFTAs) with broker-dealers. These agreements often include provisions that defer the exchange of margin until such time as FINRA finalizes its rules. This approach mitigates counterparty risk in so far as it provides the buy-side firm with the benefits of events of default and established close-out and netting procedures if a broker-dealer becomes insolvent or defaults under the MSFTA for other reasons. (At the risk of stating the obvious, asset managers that take such an approach can only do so if their client agreements do not require the margining of TBAs.)
Margin would certainly provide for additional counterparty risk mitigation, although it comes with additional operational complexities that many buy-side firms prefer to deal with after FINRA finalizes this rule. And, as noted by FINRA in its filing with the SEC, industry participants have raised concerns that the proposed TBA margin rule could disrupt the functioning of these well-established markets.
For additional background on FINRA Rule 4210, please see our post from earlier this year (relating to the prior round of 4210 deferral by FINRA).
Good day. Good delay(s)? DR2