Search Results for "4210"

FINRA Requests Comment on Rule 4210 – Follows BDA Member Recommendations

Today, following extensive work with the BDA and its members, FINRA announced that they seek to comment on proposed amendments to Rule 4210 (Margin Requirements) that would clarify and incorporate into the rule current interpretations regarding when issued and other extended settlement transactions, and provide relief to facilitate the application of the rule to these transactions.
The BDA will host a call in the coming weeks to work on draft comments with membership. Comments are due May 14, 2021

The notice can be viewed here.

All BDA advocacy on Rule 4210 can be viewed here.
On extended settlement trades, FINRA intends to adopt these provisions:

Extended settlement transaction will be defined as any time a trade is not funded by a customer within the standard T+2 settlement cycle. The rule will make clear that extended settlement is an extension of credit.
The rule will permit a capital charge in lieu of customer-posted margin for trades with extended settlement cycles of up to 35 days with “DVP customers,” a term which will be defined in the rule, for trades with settlements.

On when-issued transactions, FINRA intends to adopt these provisions:

When-issued trades will be subject to the margin rule.
The rule will permit capital charges in lieu of customer margin for all when-issued trades with “exempt accounts.” That will be in addition to interdealer and designated trades which are exempted in the current rule.
Exempt accounts will be defined as minimums of $45 million in financial assets, $40 million in net assets, and providing sufficient financial information to conduct a credit review.
There will be an exception to margin requirements for trades in new-issue Treasury securities that settle within T+14 and new-issue municipal securities that settle within T+42.
The rule will permit a capital charge in lieu of margin for DVP customers on when-issued new issues in general if the trades are settled soon after securities are issued

FINRA Files for 4210 Effective Date Extension to March 2021

FINRA has filed with the SEC a proposed rule change to extend (to March 25, 2021) the implementation date of the amendments to FINRA Rule 4210 (margin requirements).

This delay, as well as certain changes to the amendments, are in line with BDA’s advocacy efforts and we appreciate all BDA members who helped drive those efforts.

The full notice and text are available here.

UPDATE: FINRA Board Approves Revisions to 4210 Amendments

During FINRA’s September Board Meeting, the FINRA Board of Governors approved revisions to the Covered Agency Transaction margin requirements that would:

(1) Eliminate the 2-percent maintenance margin requirement;

(2) Allow firms to take a capital charge in lieu of collecting margin for mark to market losses, subject to specified limitations and conditions; and

(3) Streamline the rule language

As noted in this memo from FINRA President and CEO Robert Cook, these revisions are due to competitive impact concerns raised by BDA member firms.

BDA is appreciative of the feedback and analytical data many of our member firms provided to FINRA in regard to these amendments. Additionally, BDA is appreciative of the outreach from our allies in Congress, who contacted FINRA, the Federal Reserve and the SEC on behalf of BDA’s membership.

BDA expects the SEC to review FINRA’s recommendations shortly. BDA will provide more information as it becomes available.

BDA RECAP: Members Participate in Capitol Hill Fly-in on FINRA Rule 4210 & Host Congressional Fundraiser

On Thursday, July 12, BDA members participated in a Capitol Hill fly-in, and hosted a fundraiser for Representative Bill Huizenga (R-MI), Chairman of the House Financial Services Committee’s Subcommittee on Capital Markets, Securities and Investment. The primary focus of the meetings was amendments to FINRA Rule 4210.

BDA members in attendance:

Brian Brennan, KeyBanc Capital Markets

Lana Calton, Hilltop Securities

David Medanich, Hilltop Securities

Demetri Patikas, Vining Sparks

Guy Yandel, George K. Baum & Co.

Don Winton, Crews & Associates

Ron Bernardi, Bernardi Securities

BDA members met with the following congressional offices:

Rep. French Hill – Arkansas

Rep. Steve Stivers – Ohio

Rep. David Kustoff – Tennessee

Rep. Jeb Hensarling – Texas (Chairman, House Committee on Financial Services)

Sen. Tom Cotton – Arkansas

Sen. Rob Portman – Ohio

Sen. John Cornyn – Texas

Policy discussion:

In April, FINRA asked the SEC to delay Rule 4210 amendments to March 2019, indicating that many market participants have requested that FINRA reconsider the potential impact of amended Rule 4210 on smaller and medium-sized broker-dealers. BDA and its members are supportive of this delay and would like FINRA and the SEC to reconsider these amendments.

BDA believes that the 4210 amendments represent a regulatory overreach by FINRA:

FINRA is using a broad statutory authority of the Securities and Exchange Act in an attempt to adopt a systemic risk rule, potentially violating congressional intent.

BDA believes that the 4210 amendments are anti-competitive to BDA members:

The margin requirements will push small- to medium-sized dealers out of the trading of these securities with larger buy-side institutions. BDA expects large buy-side institutions to halt trading these securities with BDA members due to practical demands.

The amendments could actually create systemic risk as they may consolidate the trading of these securities into a fewer number of counterparties instead of the broad number and kind of counterparties who currently trade these securities.

BDA expects large buy-side institutions to manage their exposure with smaller dealers by reducing trading and outstanding volumes to below the Rule’s gross open position limit of $10 million, making the required movement of margin unlikely.

BDA has also asked FINRA to consider allowing dealers to take a capital charge instead of requiring them to enter into margining agreements with customers:

A capital charge would allow dealers to remain competitive with money manager accounts and still manage any systemic risk.

Next steps:

BDA staff will continue to engage Capitol Hill on Rule 4210, and are working to gather further congressional support for a letter to regulators expressing the concerns of small and mid-sized broker-dealers with Rule 4210.

Specifically, BDA is working towards a rescission of the 4210 amendments, but is also engaging regulators on a capital charge, which would make the rule and amendments more tenable for BDA members

4210 Update: Rep Hultgren Sends Letter to SEC Chair Raising Anti-Competitive and FINRA Statutory Authority Concerns

House Municipal Finance Caucus Chairman Randy Hultgren (R-IL) last week wrote a letter to the SEC and FINRA, in favor of the BDA “Capital Charge” proposal and warns of regulatory overreach by FINRA.

The letter highlights the potential effects of implementation of the rule on small and medium sized dealers in Illinois. The Congressman is strongly in support of the Capital Charge proposal stating, ” These margin requirements will push small-to-medium sized dealers nationwide out of the trading of these securities with large buy-side-institutions.” Further he added concern about competition, “A capital charge would allow these dealers to remain competitive and still manage any systematic risk.”

In addition to strong support of the BDA proposal, the Congressman raised concerns of FINRA overreach stating, ” FINRA may be overstepping Congressional intent by attempting to regulate credit markets, this authority has been traditionally reserved for the Federal Reserve Board.” He concluded by saying, “I again urge the Commission to carefully reconsider the potential impacts and statutory limitations of this proposal. “

BDA Leading Advocacy

The BDA continues to work with partners on the House Financial Services Committee and Senate Banking Committee to pressure the SEC and FINRA to rethink the rule. This includes both advocating for the “Capital Charge” proposal as well for outright termination of the amendment due to its anti-competitive nature before implementation on March 25, 2019.

The strategy also includes direct engagement with the regulators. Last week, the BDA submitted a letter of support of the “Capital Charge” proposal to FINRA. The letter featured two smaller firms, Duncan-Williams and NatAlliance, and how the proposal would better the rule without creating a “race to the bottom.”

The BDA will continue to provide updates as they become available.

Rule 4210 Update: BDA Submits Capital Charge Letter to FINRA

On June 7, 2018, the BDA continued leading the advocacy push opposing FINRA Rule 4210 by submitting a letter in support of a “Capital Charge” provision in lieu of the proposed margin requirements. The letter, which comes on the heels of a 9 month delay of implementation of the rule by the SEC last month, showcases BDA firms and how the requested change would positively impact these firms.

Highlighted points include:

These firms do not believe that the Capital Charge Proposal will have any anti-competitive impact on their businesses.
These firms expect that the existing covered agency transaction rules will cause some erosion in their businesses.
These firms strongly support the Capital Charge Proposal.

BDA Continues Advocacy on Capitol Hill

The BDA continues to work with partners on the House Financial Services Committee and Senate Banking Committee to pressure the SEC and FINRA to rethink the rule. This includes both advocating for the “Capital Charge” proposal as well for outright termination of the amendment due to its anti-competative nature before implementation on March 25, 2019.

In the coming weeks, it is expected that multiple Members of Congress will reach out to both FINRA and the SEC. We will provide an update once this occurs

SEC Approves Delay of Rule 4210

On May 7, 2018, official notice was sent stating that the SEC approved FINRA’s request to extend the effective date of implementation of Rule 4210 until March 25th, 2019. As a result of exhaustive advocacy efforts from BDA membership with the SEC, FINRA and Capitol Hill, the delay was granted, in large part, to further study of BDA’s “capital charge” proposal.

The FINRA notice can be viewed – Here

Background

In December 2017, BDA member firms met with FINRA CEO Robert Cook and urged FINRA consider a new solution to the margin requirements under Rule 4210. This BDA-member proposal would allow dealers to either charge margin to counterparties or to take a regulatory capital charge to cover any mark-to-market deficiency in excess of the de minimis threshold. This would allow dealers to remain competitive and still manage any systemic risk in the marketplace.

Additionally, BDA members discussed Rule 4210 Amendments in-person with SEC Chairman Clayton and SEC commissioners in January 2018. In February 2018, BDA received confirmation that FINRA is considering a change to Rule 4210 based on the capital charge idea BDA members brought up during the December 2017 meeting.

Next Steps

The BDA is pleased with this development, and will continue to work with FINRA on of the capital charge proposal in lieu of margin. In the coming weeks, the BDA will conduct outreach to members to further gather empirical data to provide with regulators in advocacy for the capital charge proposal.

Overview of FINRA Rule 4210

Background

In October 2015, FINRA filed proposed amendments with the SEC to Rule 4210. The Amendments were approved by the SEC in August 2016, and will require U.S. registered broker-dealers to collect daily variation margin and, in some cases, initial margin, from their customers on specified transactions.

These margin requirements will apply to “Covered Agency Transactions,” which include “to-be-announced” (or “TBA”) transactions on mortgage-backed securities (“MBS”) and specified pool transactions for which the settlement date is more than one business day after the trade date; and U.S. agency collateralized mortgage obligations for which the settlement date is more than three business days after the trade date.

Overview

BDA feels that the 4210 Amendments are anti-competitive to BDA members.

Margin requirements will push small- to medium-sized dealers out of the trading of these securities with large buy-side institutions. While the Amendments do not require dealers to have MSFTAs in place with customers, dealers do not believe they can implement effective compliance procedures unless those agreements are in place in case margin thresholds are triggered.

BDA expects large buy-side institutions to halt trading these securities with our members due to practical MSFTA demands.

The Amendments could actually create systemic risk in that they will have the effect of consolidating the trading of these securities into a fewer number of counterparties instead of the broad number and kind of counterparties who currently trade the securities.

BDA expects large buy-side institutions to manage their exposure with smaller dealers by reducing trading and outstanding volumes to below the Rule’s gross open position limit of $10 million, making the required movement of margin unlikely. Larger trades will be consolidated into a fewer number of dealers – increasing risk to the market.

Potential Solutions Put Forward by BDA

In June 2016, BDA was successful in getting FINRA and SEC to file an amendment to the Rule that significantly expanded the “gross open position” exception from $2.5 million to $10 million. BDA had advocated for a more expansive gross open position limit throughout the rulemaking and the $10 million level expands the universe of counterparties and trades where the transfer of margin will typically not apply.

BDA supports excluding transactions from the “Covered Agency Securities” definition that do not pose systemic risk:

Specified pools and CMOs do not pose systemic risk because they are merely bond trades comprising a small percentage of the market. They are of a different kind of transaction altogether from most TBAs that are frequently used as hedging instruments.

BDA supports excluding transactions from the “Covered Agency Securities” definition that settle on the next or first good settlement date:

CMOs that settle either T+2 or on their first settlement date along with Specified MBS pools and TBAs that settle on their next good settlement date are effectively bond trades and do not pose the systemic risk that the Amendments seek to manage.

BDA has asked FINRA to allow dealers to take the capital charge instead of requiring them to enter into margining agreements with customers.

BDA believes that FINRA should revise the Amendments to allow dealers to either charge margin to counterparties or to take a regulatory capital charge to cover any mark to market deficiency in excess of the de minimis threshold.
This would allow dealers to remain competitive with money manager accounts and still manage any systemic risk. Other margin requirements are handled through a capital charge rather than collecting customer margin – corporate bonds are one such example.

Amendments

BDA submitted comments on 4210 Amendments to the SEC in 2015 and 2016, and worked with Sen. Tom Cotton (R-Arkansas) on his comments as well.
In 2016, BDA also successfully advocated for the wider “gross open position.”
BDA met with the SEC again in January and May 2017 to discuss concerns and advocate for additional changes, which were outlined in a letter submitted to FINRA in August 2017. In August and September 2017, BDA facilitated conference calls between members to answer compliance and interpretive questions regarding 4210.
In September 2017, FINRA filed a proposed rule to delay the major effective date of the rule until June 25, 2018.
In December 2017, BDA member firms met with FINRA CEO Robert Cook and urged FINRA consider a new solution to the margin requirements under Rule 4210. This BDA-member proposal would allow dealers to either charge margin to counterparties or to take a regulatory capital charge to cover any mark-to-market deficiency in excess of the de minimis threshold. This would allow dealers to remain competitive and still manage any systemic risk in the marketplace.
BDA has continued to stay in touch with FINRA on this issue, and also discussed 4210 Amendments in-person with SEC Chairman Clayton and SEC commissioners in January 2018.
In February 2018, BDA received confirmation that FINRA is considering a change to Rule 4210 based on the capital charge idea BDA members brought up during the December 2017 meeting. FINRA has connected with a number of BDA member firms to gather more information regarding this idea.

Moving forward, BDA is gathering more evidence of anti-competitive impacts of 4210 Amendments that we can send to FINRA in support of BDA member firms.

BDA has also remained active with a number of other industry groups on this issue. BDA is exploring political avenues, including additional pressure on the SEC and key members of Congress.

Click HERE to print.

BDA FINRA Rule 4210 Letter: Competitive Concerns, Compliance Questions, and a Proposed Amendment for FINRA’s Consideration

August 8, 2017, BDA submitted a letter to FINRA to respond to its request for interpretive and compliance questions related to the FINRA 4210 margin regime for mortgage securities.

BDA FINRA 4210 Letter Summary

First Good Settlement Date: The letter re-submits BDA’s proposed amendment to the rule, which would re-define “Covered Agency Transaction” to exclude TBA, CMO, and Specified Pool transactions that settle on the first good settlement date.
Rule Harms Competition: The letter urges FINRA and the SEC to urgently reconsider the rule in light of the competitive concerns raised by regional dealers. The letter points out that BDA firms will be harmed by the rule and business will migrate to non-broker-dealer financial institutions and the GSEs.
Market Consolidation: The letter includes tables that highlight the already concentrated nature of the TBA market, in which 10 firms control over 80% of the market based on par value transactions.
List of Compliance Questions: The letter includes BDA’s list of compliance questions as discussed on the recent conference call.
Delay not Good Enough: Finally, the letter states that while a delay is necessary, an amendment is the only solution for the competitive issues raised by BDA firms.

BDA Submits Comment Letter to the SEC: FINRA Rule 4210 "TBA" Margin Amendments

On May 2nd, BDA submitted a comment letter to the SEC in response to FINRA’s filing of Amendment #2 on its Rule 4210 “TBA” margin amendments.

The SEC solicited public comment on Amendment #2 and designated a longer period for Commission action for assessing the proposed rule. The Commission has until June 16, 2016, the maximum allowable timeframe for the Commission to approve or disapprove the rule under the proceedings process.

BDA Comment Letter Summary

BDA’s letter urges the Commission to disapprove the rule and focuses on the following issues:

The legal and compliance cost burdens for middle-market dealers to implement and continue to maintain the requirements of this proposed rule
The fact that the proposed margin amendments will not have a fair and equitable impact on mortgage market participants and, therefore, the amendments violate Exchange Act Section 15A(b)(6)
BDA argues that FINRA does not have the statutory authority to adopt a margin rule for the exempt securities defined as ‘covered agency securities’ by FINRA in the proposed rule

Additional Information

In February, BDA submitted a comment letter in response to the SEC’s request for comment on FINRA’s Rule 4210 filing with the SEC. The SEC’s order instituting proceedings can be read here.

The original Rule 4210 margin amendments that FINRA filed with the SEC in October 2015 can be read here.

BDA submitted a comment letter to the SEC in November 2015.

BDA met with the SEC, FINRA, and key Congressional committees in January.