SEC Approves Proposed Amendments to FINRA’s Rule on Margin Requirements

SUMMARY

On October 5, 2012, the SEC approved a proposal by FINRA to amend Rule 4210, which establishes margin requirements. The amendments were approved substantially as proposed, and would

  • replace the current margin requirements for specific option spread strategies with broad requirements for all “spreads” utilizing similar methodologies;
  • eliminate the ability to count the current market value of non-margin eligible equity securities towards the maintenance margin requirements for all securities held “long” and clarify certain other requirements for non-margin eligible equity securities;
  • eliminate the current exemption from the free-riding prohibition for “designated accounts”;
  • eliminate the special definition of “exempt account” used in the context of maintenance margin requirements for OTC put and call options on U.S. Government and agency debt securities; and
  • eliminate the requirement to stress-test portfolio margin accounts in the aggregate.  

In response to a comment on the proposed rules, FINRA amended its proposal to eliminate the proposed margin requirements applicable for non-margin eligible, non-equity securities. The amendments related to option spread strategies became effective on October 26, 2012 and all other amendments will become effective on January 23, 2013.

AMENDMENTS TO FINRA’S PROPOSED RULES

FINRA filed its proposed rule amendments with the SEC on May 23, 2012 and an amended proposal on August 13.1 On August 29, the SEC approved the amended proposal and also solicited comments specifically on the August 13 amendment. 2 The amendments as approved are substantially the same as those initially proposed except for the August 13 amendment. In that amendment, in response to a comment, FINRA proposed to remove the exclusion of non-margin eligible, non-equity securities from Rule 4210(c)(1), preserving their previous margin treatment for such securities held “long”,3 unless the non-equity securities meet an exception provided under Rule 4210(e). FINRA has stated that it will further analyze the impact of increased margin requirements on non-margin eligible, non-equity securities.  

All other amendments to Rule 4210 were approved by the SEC as originally proposed by FINRA, and we refer you to our memorandum to clients dated June 25, 2012, entitled “Margin Regulation: FINRA Proposes Amendments to its Rule on Margin Requirements,” for further discussion of the amendments.4