The reproposed amendments to Rule 4210 attempt to address commenters’ concerns that the original proposed rule would impact business activity in the TBA market.
On September 24, the Financial Industry Regulatory Authority (FINRA) proposed a revised rule (the “Reproposal”) that would implement, among other things, margin collection requirements for (1) To Be Announced (TBA) transactions, including adjustable rate mortgage (ARM) transactions; (2) Specified Pool Transactions; and (3) transactions in Collateralized Mortgage Obligations (CMOs) with forward settlement dates that exceed three business days.
Consistent with the original proposed rule issued in January 2014 (the “Original Proposal”), FINRA reiterated that the proposed amendments are based on best practices adopted by the Treasury Market Practices Group (TMPG) of the Federal Reserve Bank of New York (FRBNY) and are designed to reduce counterparty credit risk in the TBA market.
The Reproposal incorporates a number of revisions to address market participants’ concerns that the Original Proposal would impede business activity in the TBA market. In the preamble to the Reproposal, FINRA indicates that it has revised the proposal “to ameliorate its impact on business activity and to address the concerns of smaller customers that do not pose material risk to the market as a whole, in particular those engaging in non-margined, cash account business.” Specifically, FINRA added a conditional exception to the proposed margin requirements for any counterparty with gross open positions amounting to $2.5 million or less, as well as specified exceptions to the maintenance margin requirements and modifications to the de minimis transfer provisions.
According to FINRA, most trading in agency mortgage-backed securities (MBS) takes place in the TBA market, and agency MBS is one of the largest fixed income markets. FINRA explains, however, that the TBA market has historically been one of the few markets “where a significant portion of activity is unmargined, thereby creating a potential risk arising from counterparty exposure.” The TMPG similarly commented that a default on forward-settling agency MBS transactions could subject other market participants in the TBA market to significant losses and risks. Accordingly, in October 2013, the TMPG recommended that TBA market participants should “substantially complete” the transition to a system of margining by December 31, 2013. As a result, many market participants transitioned to margining by negotiating and entering into Master Securities Forward Transaction Agreements (MSFTAs) or other arrangements that provide a basic contractual framework, including a framework (consistent with the TMPG’s recommendations) for the bilateral exchange of margin for forward and other delayed delivery transactions involving mortgage-backed and asset-backed securities.
FINRA’s Reproposal retains the majority of substantive requirements that were set out in the Original Proposal. For example, FINRA members would still be required to collect variation margin for subject transactions when the current exposure exceeds $250,000. In response to comments, however, FINRA clarified that any deficiency or mark-to-market loss with a single counterparty shall not give rise to any margin requirement if the aggregate of such amounts with the counterparty does not exceed $250,000. Members also would be required to collect maintenance margin (i.e., initial margin) from non-exempt counterparties However, for exempt accounts which include, but are not limited to, broker-dealers, specified institutions, and high net worth persons (“exempt accounts”), no maintenance margin is required to be collected.
Key Differences Between Original Proposal and Reproposal
In addition to applying to Covered Agency Transactions, FINRA revised the Supplementary Material .05 to apply to transactions with exempt accounts that involve certain “good faith” securities” (paragraph (e)(2)(F)) and transactions with exempt accounts that involve highly rated foreign sovereign debt securities and investment grade debt securities (paragraph (e)(2)(G)).
FINRA explained that it added the second exception to address commenters’ concerns that the proposed margin requirements “would unnecessarily constrain non-risky business activity of market participants or otherwise unnecessarily alter market participants’ trading decisions.”
At its July meeting, the FINRA Board of Governors authorized the filing of the proposed rule change with the SEC. If the SEC approves the proposed rule change, FINRA will announce its effective date in a Regulatory Notice to be published no later than 60 days following SEC approval. The effective date will be no later than 180 days following publication of the Regulatory Notice announcing Commission approval.
The recently reproposed amendments to FINRA Rule 4210 appear to address some of the commenters’ concerns regarding the impact of the Original Proposal on business activity in the TBA market, particularly for smaller market participants that do not exceed the thresholds set forth in the Reproposal. However, given the costs of compliance—including the system and infrastructure costs associated with bilateral margining—these requirements are still likely to have a significant impact on the market and many of its participants.
 “TBA transactions” are defined in FINRA Rule 6710(u).
 “Specified Pool Transactions” are defined in FINRA Rule 6710(x).
 “CMO transactions” are defined in FINRA Rule 6710(dd).
 Proposed Rule Change to Amend FINRA Rule 4210 (Margin Requirements) to Establish Margin Requirements for the TBA Market (Sep. 24, 2015) (the “Reproposal”).
 FINRA Requests Comment on Proposed Amendments to FINRA Rule 4210 for Transactions in the TBA Market, Regulatory Notice 14-02 (Jan. 27, 2014) (the “Original Proposal”).
 Reproposal at 6-7.
 Reproposal at 8-9.
 Reproposal at 9.
 Reproposal at 5-6.
 Reproposal at 6.
 Original Proposal at 1-2 (citation omitted).
 TMPG, Frequently Asked Questions: Margining Agency MBS Transactions (Oct. 25, 2013).
 Reproposal at 58.
 Reproposal at 58-59.
 Reproposal at 19-20.
 “Exempt account” is defined under FINRA Rule 4210(a)(13).
 FINRA Rule 6710(k) defines “agency” to mean a United States executive agency as defined in 5 U.S.C. 105 that is authorized to issue debt directly or through a related entity, such as a government corporation, or to guarantee the repayment of principal or interest of a debt security issued by another entity.
 Reproposal at 9-10.
 Reproposal at 13-14.
 Reproposal at 14.
 Reproposal at 15-16.
 Reproposal at 60-61. The Reproposal borrows the concept of “good faith” securities from Section 220.6 of Regulation T, which authorizes broker-dealers to effect and finance transactions in securities entitled to “good faith” margin. Securities entitled to “good faith” margin include exempted securities, non-equity securities, money market mutual funds, and exempted securities mutual funds.
 Reproposal at 18.
 Reproposal at 19-20.
 Reproposal at 21.
 Reproposal at 136.
 FINRA Rule 4210(f)(2)(A)(xxviii) defines “registered clearing agency” to mean a clearing agency as defined in Section 3(a)(23) of the Securities Exchange Act (SEA) that is registered with the SEC pursuant to SEA Section 17A(b)(2).
 Reproposal at 88.
 Reproposal at 89.