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While TBA transaction benefits are recognized widely, they are exposed to counterparty default risk due to forward settlement dates that occur in the future (up to several months). If the SEC did not honor FINRA’s request for immediate effectiveness, then the proposed rule change would not become operative for 30 days after the date of its filing by FINRA with the SEC. Covered Agency Transactions include (1) To Be Announced (TBA) transactions, inclusive of adjustable rate Notwithstanding this delay, many buy-side market participants are finalizing their negotiation of Master Securities Forward Transaction Agreements (MSFTAs) with broker-dealers. To date, FINRA has not proposed any such amendments. A FINRA member is a US regulated broker/dealer. FINRA has requested that the deferred implementation date becomes effective immediately upon filing of the rule change by FINRA with the SEC. January 2019 – FINRA filed for effective date postponement, proposing March 2020 as go-live. The FINRA Rule 4210 margin requirements have been subject to several amendments and deferrals since their original proposal by FINRA in October 2015. FINRA has recently submitted a filing with the Securities and Exchange Commission (“SEC”) to propose another delay to the implementation of TBA margin requirements under Rule 4210. FINRA Rule 4210 is designed to enforce application of margin requirements to covered agency transactions (bilateral forward-settling transactions in agency MBS), issued in conformity with … This initiative contributes to overall market health and transparency. Finally, and by way of background, since December 2016, broker-dealers have had to make certain risk limit determinations under FINRA Rule 4210 in respect of a customer’s trading of Covered Agency Transactions. However, this decision ultimately rests with the SEC and, as of the time of the publication of this post, the SEC has not yet issued a release in respect of the FINRA proposed rule change. Our goal is to provide meaningful and timely information to buy-side market participants, including: mutual funds, hedge funds, exchange-traded funds (ETFs) and their investment advisers; corporate end users; nonswap dealer banks; and other end users of derivatives and repurchase agreements. And, as noted by FINRA in its filing with the SEC, industry participants have raised concerns that the proposed TBA margin rule could disrupt the functioning of these well-established markets. However, we think that regulators should address the evolving framework in an efficient manner that shields market players from additional costs due to late blueprint amendments. While TBA transaction benefits are recognized widely (i.e. A Buy-Side Guide to Regulatory and Transactional Issues Related To Derivatives and Repurchase Agreements. 1 The proposal, designed to reflect the growth of the TBA market and to replace current interpretive materials under Rule 4210 that have become outdated, is informed by the set of best practices adopted by the Treasury Market Practices Group (TMPG) of the Federal Reserve Bank … To our knowledge, FINRA has not released the actual text of any of these proposed changes, although we expect such a release to occur in relatively short order. The purpose of the January 29th deferral to the implementation date is to give FINRA time to work with industry participants and other regulators to consider additional changes to these margin requirements, presumably including those changes approved by FINRA’s Board of Governors in September 2018. FINRA Rule 4210 is a step toward market integrity and avoidance of systemic event. On January 29th, FINRA released the following statement: Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to extend, to March 25, 2020, the implementation date of the amendments to FINRA Rule 4210 (Margin Requirements) pursuant to SR-FINRA-2015-036, other than the amendments pursuant to SR-FINRA-2015-036 that were implemented on December 15, 2016. The Derivatives and Repo Report offers insights into regulatory and transactional issues related to derivatives and repurchase agreements. By pursuing your navigation on our website, you allow us to place cookies on your device.

Nevertheless, financial actors may also face roll-out challenges.

This approach mitigates counterparty risk in so far as it provides the buy-side firm with the benefits of events of default and established close-out and netting procedures if a broker-dealer becomes insolvent or defaults under the MSFTA for other reasons. These cookies are set in order to secure your browsing, improve your user experience and enable us to compile statistics. However, FINRA Rule 4210 implementation may be delicate, with consultations continuing throughout 2020 and resulting in scope revision / effective date delay. In the United States, the agency mortgage-backed securities (MBS) market is the second largest after US treasuries. (At the risk of stating the obvious, asset managers that take such an approach can only do so if their client agreements do not require the margining of TBAs.). FINRA Rule 4210 is designed to enforce application of margin requirements (mark-to-market and maintenance margin) to covered agency transactions (bilateral forward-settling transactions in agency MBS), issued in conformity with a program of an agency or Government-Sponsored Enterprise. These agreements often include provisions that defer the exchange of margin until such time as FINRA finalizes its rules. Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and … We expect that FINRA’s request will be honored by the SEC. If such loss is outstanding for 5 consecutive business days, a position liquidation process may be activated to satisfy the loss and reporting made to FINRA, Some counterparties (certain mortgage banks, federal banking agencies) or assets (multifamily housing securities or project loan program securities) are exempt from margin requirements as long as the dealer`s credit risk department enforces due diligence on the counterparty, Repeal of maintenance margin (also known as initial margin) requirement, Allowance for capital charges by dealers in lieu of margin but limited to a certain threshold, Clarification of exemption pertaining to cleared transactions. It is expected that FINRA will revise the initial scope by proposing the following changes: December 2016 – phase 1, FINRA members to enforce written risk limit determination procedure (credit risk due diligence). As a result, addressing counterparty exposure to credit risk remains a priority for the regulators in their quest to secure global financial markets. In the language of FINRA Rule 4210, transactions subject to these margin requirements are referred to as “Covered Agency Transactions,” although many market participants use the “short hand” term of “TBA Margin Requirements” or “TBA Margining” to describe the scope of transactions subject to the requirements. As a result, addressing counterparty exposure to credit risk remains a priority for the regulators in their quest to secure global financial markets. Further, because of the overlap of several ongoing compliance initiatives and deadlines, there is concern of “bottle-neck” situations on legal documentation and KYC framework processing. For additional background on FINRA Rule 4210, please see our post from earlier this year (relating to the prior round of 4210 deferral by FINRA). Most recently, in September 2018, FINRA’s Board of Governors had approved additional changes to FINRA Rule 4210, including an elimination of the 2% maintenance margin requirement. This regulation pursues the following objectives: *Any counterparty, buy-side or sell-side (non-broker) participant, entering into buy/sell transactions (on these assets) with a FINRA member. The new implementation date would be March 25, 2021.

This is not the first time that FINRA has indicated that it is considering amendments to 4210. We welcome the proposal to repeal maintenance margin as a step forward in simplifying regulation. In its filing, FINRA indicated that the purpose of this delay is to consider additional amendments to Rule 4210 that would help to avoid unnecessary disruption to the market for To-Be-Announced securities (or TBAs).

In its filing, FINRA indicated that the purpose of this delay is to consider additional amendments to Rule 4210 that would help to avoid unnecessary disruption to the market for To-Be-Announced securities (or TBAs). The text of the proposed rule change is available here. FINRA has indicated that it will file the proposed rule change with the SEC with a request for “immediate effectiveness,” which means that FINRA desires for the deferred implementation date to become effective immediately upon filing of the rule change by FINRA with the SEC. FINRA has indicated that it will file the proposed rule change with the Securities and Exchange Commission (“SEC”) with a request for “immediate effectiveness,” which means that FINRA is recommending to the SEC that the deferred implementation date will become effective  immediately upon filing of the rule change by FINRA with the SEC. October 2019 – FINRA filed for new delay as to conduct additional consultations on the Rule content alterations, March 2021 – FINRA 4210 regulation new target go-live date, Round-up of the actions taken by EU institutions and by national regulators in response to Covid-19, BNP Paribas Corporate & Institutional Banking, Reduce exposure to counterparty default risk through collateralization process implementation, Promote a harmonized margin requirements framework, Establish monitoring of outstanding mark-to-market deficiency (uncollected margin), Address systemic risk concerns (hypothetically if several large TBA market participants were to fall, it may result in domino effect and contribute to mortgage loan market disruption), To-be-announced (TBAs), adjustable rate mortgages (ARMs) and specified pools having contractual settlement at least one business day after trade date, Collateralized mortgage obligations (CMOs) having contractual settlement date at least three business day after trade date, Executed on a bilateral basis between a counterparty and a broker/dealer regulated by FINRA, not cleared through a registered clearing agency and having a gross open position greater than USD 10 million (per counterparty), Mark-to-market (variation margin) counterparty`s loss resulted from marking eligible transactions to the market (position valuation), Maintenance margin (initial margin) – 2% contract value of net long or net short position, by CUSIP per counterparty (this provision is expected to be repealed in the next amended version of the Rule), Margin may not be exchanged if mark-to-market loss does not exceed a minimum transfer amount (MTA of USD 250,000) aggregated per single counterparty, If mark-to-market loss is not collected by T+1 close of business, the dealer (FINRA member) must take a net capital deduction until such margin call is satisfied. FINRA Rule 4210 (Margin Requirements) describes the margin requirements that determine the amount of collateral customers are expected to maintain in their margin accounts, including both strategy-based margin accounts and portfolio margin accounts. The Derivatives and Repo Report offers insights into regulatory and transactional issues related to derivatives and repurchase agreements.

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