BDA Comments on FINRA Margin Proposal for Agency MBS

BDA today filed a comment letter with the SEC in regard to their consideration of a FINRA proposal to amend FINRA Rule 4210, Margin Requirements, as it applies to Covered Agency Transactions (CATs), or agency MBS trades that settle outside a T+2 window. In our letter, we told the SEC that we are “seriously concerned about the effect of the Proposal on the ability of mid-size and regional broker-dealers to compete in the market for agency mortgage-backed securities.” We told the SEC that the FINRA proposal “would consume so much of mid-size firms’ capital and cash that it would effectively impair dealers’ market function.” We urged the SEC “to reject the Proposal and direct FINRA to revise it substantially such that margin requirements do not apply to Covered Agency Transactions unless a settlement date extends beyond normal conventions.”

In our letter, we argued that excessive capital and margin charges “would stem from the inability of dealers to net certain offsetting positions against each other for purposes of the Rule.” We cited three hypothetical examples of trades involving new issues of agency MBS where total capital and margin charges to the dealer would increase by between 700 and 2000 percent under the proposal. In addition, we cited significant holes in FINRA’s economic analysis of the proposal. We also asked that firms have 18-months to comply with the Rule once finalized.

FINRA’s proposed changes to Rule 4210 originated with a 2010 recommendation from the Treasury Market Practices Group that regulators should find a way to apply margin requirements to “extended settlement” trades, or trades where the settlement period extended beyond T+2.

We will continue to press FINRA and the SEC on their 4210 initiative. Please call or write with any questions.

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