FINRA – Requests Comment on Proposed Amendments to the Margin Rule Regarding When Issued and Other Extended Settlement Transactions

March 14, 2021 – Proposed margin rule amendments to FINRA Rule 4210, to clarify, incorporate current interpretations regarding when issued, other extended settlement transactions, provide relief to facilitate application of rule to transactions.

Text marked to show changes from current rule text, made available in Attachment A. Attachment B has examples illustrating the operation of the rule with the amendments. Attachment C is a flow chart analyzing the application of the proposed rule to transactions.

Proposal Background
Rule 4210 was created to protect member firms against customer credit risk by generally requiring firms to collect margin when they extend credit to customers. Extensions of credit included transactions in which member firms permit customers to make partial or delayed payments on securities purchased or delivery of securities sold. Exams by FINRA revealed uncertainty in firms’ understanding about what constitutes delayed payment or delivery for purposes of margin rules, in part due to FRB’s Regulation T. Regulation T allowed transactions to be booked into customer cash account based on an agreement to make full cash payment for securities purchased or deposit securities sold promptly. But it then allowed 2 business days to resolve customer payment issues before requiring the Broker-Dealer to cancel or liquidate the purchase of non-exempted securities or obtain a time extension.

The margin on Extended Settlement
Amendment issued for clear, uniform standards on when payment/delivery is delayed. Proposed to define extended settlement transaction as a contract for purchase or sale of a security that does not provide for payment of funds or delivery of securities by the customer by the second business day after the date of the contract, including any exempted security. Also, proposed adding a new paragraph requiring all extended settlement transactions to be margined as though they were in margin accounts, except if specifically excepted. Exceptions included covered agency transactions when-issued security transactions, certain refunding transactions, extended settlement due to bona fide Delivery Versus Payment (DVP) customer. Clarified the definition of customer and specified that extensions of credit included extended settlement transactions, repurchase, or non-purpose securities borrowing transactions. Added supplement stating Regulation T good faith accounts are treated as margin accounts.

When-Issued Provisions
Reorganized “when-issued” provisions to reduce confusion and clarify the scope of the exception, by allowing member firms to take capital charges in lieu of collecting margin on when-issued transactions in cash accounts of exempt account and bona fide DVP customers. Restated public offering exception so that it expressly limited exception to equity IPOs. Further, offered relief by creating new exceptions for US Treasury and municipal securities. Allowed firms to take capital charges in lieu of collecting margin from certain customers. Customers included exempt accounts, non-member BDs, and bona fide DVP customers. Excepted covered agency transactions and those in agency CMOs for T+3 settlement.

Comment on proposed margin rule amendments should be received by May 14, 2021.

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