FINRA Proposed Rule Change to Amend the Requirements for Covered Agency Transactions under FINRA Rule 4210 (Margin Requirements) as Approved Pursuant to SR-FINRA-2015-036

May 7, 2021

In October 2015, FINRA proposed to amend Rule 4210 to establish margin requirements for transactions in TBA, specified pool, and collateralized mortgage obligations. FINRA pointed out that rulemaking was necessary to address potential risks arising from unsecured credit exposures that exist in the covered agency transaction market. Industry participants requested FINRA reconsider the potential impact of requirements on smaller and medium-sized firms, and that FINRA extend the rule implementation date. Stated that requirements, as they were approved, favor larger firms over smaller firms because larger firms would have more market power to negotiate margin agreements. Noted non-FINRA member bank dealers, other entities participate in the covered agency transaction market without subject to Rule 4210, putting FINRA B/Ds at disadvantage. As such, FINRA extended rule implementation several times, recently to October 26, 2021. Now, FINRA is proposing revisions to the covered agency transaction requirements.

Eliminate maintenance margin requirement that applies to nonexempt accounts. This would eliminate the need for members to distinguish exempt account customers from other customers for purposes of covered agency transaction margin. Members would collect margin for each counterparty’s excess mark to market loss. Permitted members to take a capital charge in lieu of collecting margin for the excess net mark to market losses on covered agency transactions, subject to specified conditions. Revisions to streamline, consolidate, clarify rules to preserve key exceptions, including the $250,000 de minimis transfer exception, and the $10 million gross open position exception.

Comments on the proposal are due 21 days from pending Federal Register publication.

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