United States: FINRA Proposes Further Extension of Effective Date For TBA Margin Requirements

FINRA proposed extending the effective date for certain amendments to FINRA Rule 4210 to March 25, 2019. The extension would affect rule changes scheduled to go into effect on June 25, 2018 that would establish margin requirements for "to-be-announced" or "TBA" transactions and other forward-settling agency securities transactions (collectively, "Covered Agency Transactions").

FINRA received comments from industry participants requesting an extension due to the potential impact of requirements on smaller and medium-sized firms, and to lessen "potential uncertainty" within the Covered Agency Transactions market. FINRA indicated that it intends to use the extension to consult with industry participants and other regulators. (Amendments to Rule 4210 relating to risk limits for Covered Agency Transactions that went into effect in December 2016 would remain effective.)

FINRA filed the proposed extension for immediate effectiveness.

Commentary / Steven Lofchie

FINRA's TBA Margin Requirements have been almost five years in the making, yet their implementation is still facing very material problems. The implementation of the requirements is turning out to be far more complicated than anyone expected, due to the interaction of the FINRA margin requirements with the SEC's custody and capital rules. While those problems were partially resolved, at least as far as implementation at the large firms is concerned, it is becoming clear that implementation at smaller firms and at introducing firms is more challenging, and, in fact, that there is no clear path for such implementation.

Perhaps these problems can be resolved within the new extension period. The Rule will need to be further amended and firms will need to further revise their technology. It is reasonable to expect that this will require significantly more than nine months.

It might actually make better sense for FINRA to put aside the TBA Margin Requirements for awhile, and instead engage in a more substantial rethinking of margin requirements generally. One of the problems with the TBA Margin Requirements is that they are in material respects inconsistent with existing FINRA margin rules (for example, the required payment periods are different; likewise, the rules as to the use of collateral, and the availability of minimum transfer amounts). A larger rethinking of the FINRA margin rules would enable FINRA to develop a rule set that would have some overall philosophical (and, even more importantly, operational) consistency, and would give FINRA time to coordinate its margin rules with the SEC's capital and custody rules.

(Note: Steven Lofchie and Nihal Patel have assisted SIFMA in commenting on the FINRA TBA Margin Requirements and in requesting an extension of the rule effectiveness date.)

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