On June 15, the Securities and Exchange Commission approved on an accelerated basis proposed amendments to FINRA Rule 4210 to establish margin requirements for TBA transactions, Specified Pool Transactions and certain forward transactions involving collateralized mortgage obligations (collectively, Covered Agency Transactions).
Pursuant to the amended rule, FINRA members that engage in Covered Agency Transactions must establish risk limits for these transactions in accordance with the member’s written risk policies and procedures. In addition, for transactions with non-exempt accounts, members must collect maintenance margin from counterparties in an amount equal to 2 percent of the contract value of the counterparty’s net long or net short position plus any net mark to market loss. Any deficiency that is not satisfied by the close of business on the next business day must be deducted from the member’s net capital until the deficiency is satisfied. If the deficiency is not satisfied within five business days, the member must promptly liquidate positions to satisfy the deficiency unless FINRA has specifically granted the member additional time.
Maintenance margin will not be required for transactions where the original contractual settlement is in the same month as the trade date or in the following month if the customer regularly settles its Covered Agency Transactions on a delivery verses payment basis or for “cash”—provided, however, that such exception does not apply to customers that engage in dollar rolls, “round robin” trades, or that use other financing techniques for its Covered Agency Transactions.
No maintenance margin will be required to be collected for transactions with exempt accounts. However, those transactions must be marked to the market daily and the member must collect any net mark to market loss. If this loss is not satisfied by the close of business on the next business day, the member must take the same net capital deductions and liquidation actions noted above.
All requirements to collect any deficiency or mark to market loss from a single counterparty is subject to a $250,000 minimum transfer amount. The rule will exempt from the foregoing margin requirements: (1) transactions with central banks and multilateral development banks; (2) transactions that are cleared through a registered clearing agency, and (3) subject to certain other requirements, short-dated transactions between a member and a counterparty where the dollar amount of the counterparty’s gross open positions in Covered Agency Transactions with the member are equal to or less than $10 million.
It is worth noting that FINRA amended the proposed amendments three times prior to receiving SEC approval. Among other things, the last amendment clarified the written risk limit requirements that will become effective six months after SEC approval. The actual margin requirements imposed under Rule 4210 will become effective in December 2017.
The text of the adopting release is available here.