1962 Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Exchange Act Release No. 91789 (May 12, 

2021), 86 FR 26084 (May 12, 2021) (File No. SR– 

FINRA–2021–008) (‘‘Notice’’). 

4Letter from Robert McNamee, Assistant General 

Counsel, Office of General Counsel, FINRA to 

Daniel Fisher, Division of Trading and Markets, 

Commission dated June 14, 2021. 

5Letter from Kyle L. Brandon, Managing Director, 

Head of Derivatives Policy, Securities Industry and 

Financial Markets Association (‘‘SIFMA’’) to 

Vanessa A. Countryman, Secretary, Commission, 

dated June 2, 2021 (‘‘SIFMA Letter’’) and Matthew 

R. Cohen, Chief Executive Officer and Richard C. 

Chase, Chief Compliance Officer, Provable Markets 

LLC to Jill M. Peterson, Assistant Secretary, 

Commission, dated June 7, 2021 (‘‘PML Letter’’). 

Letters are available at the Commission’s website at 

https://www.sec.gov/comments/sr-finra-2021-008/ 

srfinra2021008.htm. 

6See letter from Robert McNamee, Associate 

General Counsel, Office of General Counsel, FINRA, 

to Vanessa Countryman, Secretary, Commission, 

dated Aug. 9, 2021 (‘‘FINRA Letter’’). The FINRA 

Letter is available at the Commission’s website at 

https://www.sec.gov/comments/sr-finra-2021-008/ 

srfinra2021008-9125111-247215.pdf. Amendment 

No. 1 is available at https://www.finra.org/sites/ 

default/files/2021-08/SR-FINRA-2021-008- 

Amendment_1.pdf. 

7See Exchange Act Release No. 92617 (Aug. 9, 

2021), 86 FR 44761 (Aug. 13, 2021) (File No. SR– 

FINRA–2020–008) (‘‘OIP’’). 

8See Letters from Anonymous dated Aug. 10, 

2021; Blake Daniels dated Aug. 10, 2021, Tristan 

Kifer dated Aug. 10, 2021; and Eileen Loh dated 

Aug. 10, 2021 (‘‘Letters’’). Letters are available at 

the Commission’s website at https://www.sec.gov/ 

comments/sr-finra-2021-008/srfinra2021008.htm. 

9Letter from Robert McNamee, Assistant General 

Counsel, Office of General Counsel, FINRA to 

Daniel Fisher, Division of Trading and Markets, 

Commission dated September 30, 2021. 

10Public Law 111–203, 124 Stat. 1376 (2010). 

11The terms ‘‘swap’’ and ‘‘security-based swap’’ 

are defined in Sections 721 and 761 of the DoddFrank Act. The Commission and the CFTC have 

jointly promulgated rules further defining these 

terms. See Exchange Act Release No. 67453 (Jul. 18, 

2012), 77 FR 48208 (Aug. 13, 2012) (Further 

Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and 

‘‘Security-Based Swap Agreement’’; Mixed Swaps; 

Security-Based Swap Agreement Recordkeeping) 

(‘‘Product Definitions’’). Very generally, SBS are 

swaps referencing a single security or loan, or a 

narrow-based security index. Certain products 

sharing characteristics of both swaps and SBS are 

regulated as ‘‘mixed swaps’’ subject to both CFTC 

and SEC jurisdiction. 

12See Dodd-Frank Act Section 763. 13See Exchange Act Release No. 74244 (Feb. 11, 

2015), 80 FR 14564 (Mar. 19, 2015) (Final Rule: 

Regulation SBSR—Reporting and Dissemination of 

Security-Based Swap Information) (‘‘Regulation 

SBSR Release’’); Exchange Act Release No. 75611 

(Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015) (Final 

Rule: Registration Process for Security-Based Swap 

Dealers and Major Security-Based Swap 

Participants) (‘‘Registration Process Release’’); 

Exchange Act Release No. 77617 (Apr. 14, 2016), 81 

FR 29960 (May 13, 2016) (Final Rule: Business 

Conduct Standards for Security-Based Swap Dealers 

and Major Security-Based Swap Participants) 

(‘‘Business Conduct Standards Release’’); Exchange 

Act Release No. 78011 (Jun. 8, 2016), 81 FR 39808 

(Jun. 17, 2016) (Final Rule: Trade Acknowledgment 

and Verification of Security-Based Swap 

Transactions) (‘‘Trade Acknowledgment and 

Verification Release’’); Exchange Act Release No. 

86175 (Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019) 

(Final Rule: Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital 

and Segregation Requirements for Broker-Dealers) 

(‘‘Capital, Margin, and Segregation Release’’); 

Exchange Act Release No. 87005 (Sep. 19, 2019), 84 

FR 68550 (Dec. 16, 2019) (Final Rule: 

Recordkeeping and Reporting Requirements for 

Security-Based Swap Dealers, Major Security-Based 

Swap Participants, and Broker-Dealers) 

(‘‘Recordkeeping Release’’); Exchange Act Release 

No. 87780 (Dec. 18, 2019), 85 FR 6270 (Feb. 4, 2020) 

(Final Rules; Guidance: Rule Amendments and 

Guidance Addressing Cross-Border Application of 

Certain Security-Based Swap Requirements) 

(‘‘Cross-Border Release’’); Exchange Act Release No. 

87782 (Dec.18, 2019), 85 FR 6359 (Feb. 4, 2020) 

(Final Rule: Risk Mitigation Techniques for 

Uncleared Security-Based Swaps) (‘‘Risk Mitigation 

Release’’). 

14See Notice at 26085. 

15See Dodd-Frank Act Section 761(a)(2) 

(inserting ‘‘security-based swap’’ in the definition of 

‘‘security’’ in Section 3(a)(10) of the Exchange Act); 

see also 15 U.S.C. 78c(a)(10). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–93914; File No. SR–FINRA– 

2021–008] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change, as Modified by 

Amendment No. 1, Relating to 

Security-Based Swaps 

January 6, 2022. 

I. Introduction 

On April 26, 2021, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend FINRA Rules 0180, 

4120, 4210, 4220, 4240 and 9610 to 

clarify the application of its rules to 

security-based swaps (‘‘SBS’’) following 

the Commission’s completion of its 

rulemaking regarding SBS dealers 

(‘‘SBSDs’’) and major SBS participants 

(‘‘MSBSPs’’) (collectively, ‘‘SBS 

Entities’’). 

The proposed rule change was 

published for comment in the Federal 

Register on May 12, 2021.3 On June 14, 

2021, FINRA consented to an extension 

of the time period in which the 

Commission must approve the proposed 

rule change, disapprove the proposed 

rule change, or institute proceedings to 

determine whether to approve or 

disapprove the proposed rule change to 

August 10, 2021.4 The Commission 

received two comments on the proposed 

rule change during the initial comment 

period.5 On August 9, 2021, FINRA 

responded to the comment letters 

received in response to the Notice and 

filed an amendment to the proposed 

rule change (‘‘Amendment No. 1’’).6 On 

August 9, 2021, the Commission issued 

an Order Instituting Proceedings 

(‘‘OIP’’) to determine whether to 

approve or disapprove the proposed 

rule change, as modified by Amendment 

No.1.7 The Commission received an 

additional four comments in response to 

the OIP.8 On September 30, 2021, the 

FINRA consented to an extension of the 

time period in which the Commission 

must approve or disapprove the 

proposed rule change to January 7, 

2022.9 This order approves the 

proposed rule change, as modified by 

Amendment No. 1. 

II. Description of the Proposed Rule 

Change 

A. Background 

Title VII of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (‘‘Title VII’’ or ‘‘Dodd-Frank Act’’) 10

established a comprehensive new 

regulatory framework for over-thecounter (‘‘OTC’’) derivatives, commonly 

known in the industry as ‘‘swaps.’’ It 

divided regulatory jurisdiction over 

swap products between the Commodity 

Futures Trading Commission (‘‘CFTC’’) 

and the Commission, with the CFTC 

regulating ‘‘swaps’’ and the SEC 

regulating SBS, and the SEC and the 

CFTC regulating mixed swaps.11 The 

Dodd-Frank Act directed the SEC to 

promulgate rulemakings implementing 

the new regulatory framework for SBS, 

including rules requiring SBS Entities to 

register with the Commission and to be 

subject to requirements related to 

business conduct and supervision, 

documentation standards; 

recordkeeping and financial reporting; 

and capital, and margin and segregation. 

The Dodd-Frank Act also directed the 

Commission to promulgate rules 

applicable to all market participants 

including requiring regulatory reporting 

and public dissemination of SBS 

transaction information; and those 

creating processes to require SBS to 

become subject to mandatory clearing 

and execution on a registered or exempt 

execution facility or exchange.12 The 

Commission has now finalized a 

majority of these rulemakings.13 As of 

October 6, 2021, SBS Entities are 

permitted to register with the 

Commission and are required to comply 

with the Title VII rulemakings.14 The 

deadline for the initial wave of SBS 

Entity registrations was November 1, 

2021. 

Title VII also amended the definition 

of ‘‘security’’ under the Exchange Act to 

expressly encompass SBS.15 Therefore, 


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16See Notice at 26085. 

17See Exchange Act Release No. 64884 (Jul. 14, 

2011), 76 FR 42755 (Jul. 19, 2011) (Notice of Filing 

and Immediate Effectiveness of File No. SR– 

FINRA–2011–033). To allow sufficient time to 

consider the complex interpretative issues resulting 

from defining SBS as securities, the Commission 

also issued a number of temporary exemptive 

orders relating to the regulation of SBS as securities, 

all of which have either expired or been made 

permanent now that the October 6, 2021, 

registration compliance date for the Commission’s 

SBS regulatory framework has passed. See 

Exchange Act Release No. 92837 (Sep. 1, 2021), 86 

FR 50391 (Sep. 8, 2021) (Notice of Filing and 

Immediate Effectiveness of File No. SR–FINRA– 

2021–021) (‘‘Extension Notice’’). 

18FINRA has extended the expiration date of 

FINRA Rule 0180 a number of times, most recently 

in September 2021. See, e.g., Extension Notice, 

supra note 17. 

19FINRA Rule 4240 establishes an interim pilot 

program with respect to margin requirements for 

any transactions in credit default swaps (‘‘CDS’’) 

held in an account at a FINRA member. The interim 

pilot program under FINRA Rule 4240 will expire 

on April 6, 2022. See id.; see also FINRA Rule 

4240(a). FINRA Rule 4240 Supplementary Material 

.02 clarifies that the rule does not apply to a 

member that is registered with the Commission as 

an SBSD. See id. 

20See Notice at 26088. 

21 Id. 

22See id. 

23See FINRA Rule 11100(a). Under FINRA Rule 

11100(a)(1), transactions in securities between 

members which are compared, cleared or settled 

through the facilities of a registered clearing agency 

are not subject to the UPC, except to the extent that 

the rules of the clearing agency provide that rules 

of other organizations shall apply. Paragraphs (a)(2) 

through (a)(5) of FINRA Rule 11100 also provide 

exceptions for specific types of securities, including 

exempted securities, municipal securities, 

redeemable securities issued by investment 

companies and Direct Participation Program 

Securities. 

24See Notice at 26088. 

in addition to the comprehensive new 

SBS-specific regulatory framework 

discussed above, SBS are now also 

defined as securities under the 

Exchange Act and the rules thereunder. 

As a result, according to FINRA, any 

FINRA rule applicable to FINRA 

members’ activities involving a security, 

securities business, a transaction 

involving a security or a securities 

position would apply to those activities 

involving SBS.16 Consistent with the 

SEC’s actions in this area, on July 8, 

2011, FINRA filed for immediate 

effectiveness FINRA Rule 0180, which, 

with certain exceptions noted below, 

temporarily limits the application of 

FINRA rules with respect to SBS.17 This 

rule is currently set to expire on 

February 6, 2022.18

Current FINRA Rule 0180 broadly 

excepts SBS activities from most FINRA 

rules. Specifically, FINRA Rule 0180(a) 

provides that FINRA rules shall not 

apply to members’ activities and 

positions with respect to SBS, except 

for: (i) FINRA Rule 2010 (Standards of 

Commercial Honor and Principles of 

Trade); (ii) FINRA Rule 2020 (Use of 

Manipulative, Deceptive or Other 

Fraudulent Devices); (iii) FINRA Rule 

3310 (Anti-Money Laundering 

Compliance Program); and (iv) FINRA 

Rule 4240 (Margin Requirements for 

Credit Default Swaps).19 In addition, 

FINRA Rule 0180(b) provides that the 

following rules apply to members’ 

activities and positions with respect to 

SBS only to the extent they would have 

applied as of July 15, 2011 (i.e., the day 

before the effective date of Title VII): (i) 

NASD Rule 3110 (Supervision) and all 

successor FINRA Rules to such NASD 

Rule; (ii) the FINRA Rule 4500 Series 

(Books, Records, and Reports); and (iii) 

the FINRA Rule 4100 Series (Financial 

Condition). Finally, FINRA Rule 0180(c) 

provides that certain other rules apply 

as necessary to effectuate members’ 

compliance with paragraphs (a) and (c) 

of the rule. 

In light of the Commission’s October 

6, 2021, registration compliance date, 

FINRA proposed in April 2021 to 

amend FINRA Rules 0180, 4120, 4210, 

4220, 4240 and 9610 to clarify the 

application of FINRA rules to members’ 

SBS activities after the Commission’s 

registration compliance date. These 

proposed amendments would: (1) Adopt 

a permanent FINRA Rule 0180 to 

replace the temporary rule set to expire 

on February 6, 2022; (2) amend FINRA’s 

financial responsibility and operational 

rules to conform to the SEC’s 

amendments to its capital, margin and 

segregation requirements for SBSDs and 

broker-dealers, and to otherwise take 

into account members’ SBS activities; 

(3) adopt a new margin rule specifically 

applicable to SBS, replacing the 

expiring interim pilot program 

establishing margin requirements for 

CDS; and (4) amend Rule 9610 to permit 

FINRA to exempt members from Rule 

0180 under the process set forth in 

FINRA’s Rule 9600 series (Procedures 

for Exemptions). 

B. Proposed Rule 0180 (Application of 

FINRA Rules to Security-Based Swaps) 

Proposed Rule 0180(a) would provide 

that FINRA rules generally apply to 

members’ SBS activities unless 

otherwise specifically excepted. This 

would reverse the presumption of the 

applicability of FINRA rules to 

members’ SBS activities in the current, 

expiring temporary Rule 0180, which 

generally does not apply FINRA rules 

unless otherwise specified. 

Proposed Rule 0180 paragraphs (b) 

through (g) would then specify the 

exceptions from the general 

presumption of applicability of FINRA 

rules in proposed Rule 0180(a). These 

proposed exceptions fall into three 

general categories: (1) General 

exceptions based on impracticability or 

operational burdens; (2) exceptions for 

SBS Entities already registered with the 

Commission and associated persons of 

SBS Entities; and (3) exceptions in 

connection with the conditions to the 

SEC’s cross-border SBS counting 

exception. Proposed FINRA Rule 0180(i) 

would further authorize FINRA to 

exempt a person from the application of 

specific FINRA rules to SBS on a caseby-case basis, pursuant to the existing 

procedural framework set forth in the 

FINRA Rule 9600 series and as FINRA 

deems appropriate consistent with the 

protection of investors and the public 

interest. 

C. Proposed Rule 0180(b) (General 

Exceptions From Applicability of FINRA 

Rules) 

Proposed Rule 0180(b) would provide 

that the following FINRA rules shall not 

apply to members’ activities and 

positions with respect to SBS: (1) The 

Rule 6000 Series (Quotation, Order, and 

Transaction Reporting Facilities); (2) the 

Rule 7000 Series (Clearing, Transaction, 

and Order Data Requirements, and 

Facility Charges); and (3) the Rule 11000 

Series (the Uniform Practice Code or 

‘‘UPC’’). The Rule 6000 and 7000 Series 

include rules relating to trading, 

quoting, clearing, and reporting for 

securities other than SBS (e.g., NMS 

stocks and over-the-counter equity 

securities), and therefore are not 

applicable to members’ SBS activities. 

According to FINRA, the UPC, 

contained in the Rule 11000 Series, is a 

series of rules, interpretations and 

explanations designed to make uniform, 

where practicable, custom, practice, 

usage, and trading technique in the 

investment banking and securities 

business, particularly with regard to 

operational and settlement issues.20 The 

Rule 11000 Series contains, for example, 

rules addressing matters relating to the 

delivery of securities, certificated 

security matters, delivery of bonds, and 

close-out procedures.21 According to 

FINRA, the UPC was created to simplify 

and facilitate cash securities 

transactions.22

By its terms, the UPC applies to all 

OTC secondary market transactions in 

securities between members, with 

enumerated exceptions.23 FINRA 

believes that, as a result, the UPC could 

be interpreted as applying to SBS 

transactions in a limited set of 

circumstances—e.g., an SBS transaction 

between two FINRA members.24 FINRA 

further believes that because the UPC 

could only be invoked for a small 

portion of the SBS market—particularly 


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25 Id. 

26 Id. at 26089. 

27See Business Conduct Standards Release; Trade 

Acknowledgment and Verification Release; Risk 

Mitigation Release; Recordkeeping Release, supra 

note 13. 

28 Id. at 26089. 

29See 17 CFR 240.15Fh–3(h)(1). The exceptions 

in Rule 0180(c) would apply to both SBSDs and 

MSBSPs or their associated persons, while the 

exceptions in Rule 0180(d) would apply only to 

SBSDs or their associated persons (and not MSBSPs 

or their associated persons). 

30See Notice at 26089. 

31 17 CFR 240.15Fh–3(h)(1). 

32See Notice at 26089. 

33See Notice at 26089–90; see also 17 CFR 

240.15Fh–3(g); Business Conduct Standards Release 

at 30000–02. 

34See 17 CFR 240.10b–10; see also Notice at 

26089–90. 

35See 17 CFR 240.15Fi–2; see generally Trade 

Acknowledgment and Verification Release, supra 

note 13. 

36See Notice at 26089–90. 

37See 17 CFR 240.15Fk–1. 

38See Notice at 26089. 

39See id. at 26089–90; see also 17 CFR 240.15Fh– 

6; Business Conduct Standards Release at 30045– 

50. 

40See Notice at 26089–90. ‘‘Special entity’’ is 

defined in Exchange Act Rule 15Fh–2(d) and 

includes certain government entities, employee 

benefit plans and endowments. See 17 CFR 

240.15Fh–2(d). 

given that FINRA expects only a small 

number of its members to register as 

SBSDs or otherwise engage in SBS 

activities—applying the UPC to 

members’ SBS activities has the 

potential to create confusion and 

uncertainty in the SBS market.25

Because SBS transactions involve 

bilateral contractual negotiations, often 

utilizing industry-standard SBS 

documentation, FINRA believes that the 

operational and settlement risks of SBS 

transactions are more appropriately 

addressed through other means, 

including standardized contractual 

provisions in that industry 

documentation, as well as, where 

applicable, the Commission’s risk 

mitigation requirements.26

D. Proposed Rule 0180(c) and (d) 

(Exceptions for Registered SBS Entities 

and Associated Persons) 

As discussed above, the Title VII 

rulemakings completed by the 

Commission, including business 

conduct standards, trade 

acknowledgement and verification 

requirements, risk mitigation techniques 

for uncleared SBS, and recordkeeping 

rules for SBS Entities, are now in effect 

for SBS Entities, which are now 

required to be registered with the 

Commission unless their dealing 

activity is below the de minimis 

registration threshold.27 As described 

below, certain of these new SBS-specific 

Commission rules are analogous to 

existing, generally applicable FINRA 

rules. Where the Commission has 

promulgated analogous rules applicable 

to registered SBS Entities, FINRA has 

proposed to provide exceptions from its 

rules for SBS Entities registered with the 

Commission and, in certain 

circumstances, associated persons of 

those SBS Entities.28

Proposed Rules 0180(c) and (d) would 

provide exceptions to specified FINRA 

rules for FINRA members that are also 

registered as SBS Entities with the 

Commission or the associated person of 

the member, where two conditions are 

satisfied: (1) The SBS Entity or 

associated person is acting in the 

capacity of an SBS Entity or associated 

person of that SBS Entity; and (2) the 

activities or positions relate to the 

business of the SBS Entity within the 

meaning of Exchange Act Rule 15Fh– 

3(h)(1) (addressing supervisory 

obligations of SBS Entities).29 The 

proposed exceptions are for FINRA 

rules that FINRA believes are analogous 

to SEC business conduct 

requirements,30 and are limited to the 

members’ SBS business and conditioned 

upon the application of the SEC’s 

supervision rule for SBS Entities.31

Under proposed FINRA Rules 0180(c) 

and (d), these proposed exceptions 

would be available for eight FINRA 

rules that FINRA believes are analogous 

to SEC rules, subject to the conditions 

described above. Specifically, proposed 

FINRA Rule 0180(c) would provide 

exceptions for the following five FINRA 

rules, for registered SBS Entities and 

their associated persons: 32

• FINRA Rule 2210(d) 

(Communications with the Public— 

Content Standards). Among other 

things, FINRA Rule 2210(d) requires 

that member communications be based 

on principles of fair dealing and good 

faith, be fair and balanced, and not omit 

any material facts or make false or 

exaggerated claims. FINRA believes that 

this rule is analogous to Exchange Act 

Rule 15Fh–3(g), which requires SBS 

Entities to, among other things, 

communicate with counterparties in a 

fair and balanced manner.33

• FINRA Rule 2232 (Customer 

Confirmations) generally requires 

members to provide customers with 

written confirmations in conformity 

with Exchange Act Rule 10b–10,34 along 

with specified additional disclosures for 

certain types of securities. FINRA 

believes this is analogous to Exchange 

Act Rule 15Fi–2, which requires SBS 

Entities to provide trade 

acknowledgements and to establish, 

maintain and enforce written policies 

and procedures reasonably designed to 

obtain prompt verification of the terms 

of such trade acknowledgments.35

• FINRA Rules 3110 (Supervision), 

3120 (Supervisory Control System) and 

3130 (Annual Certification of 

Compliance and Supervisory Processes) 

require, among other things, each 

member to establish and maintain a 

supervisory system; establish, maintain 

and enforce written supervisory 

procedures; designate principals to 

establish, maintain and enforce a system 

of supervisory control policies and 

procedures; designate a chief 

compliance officer; and submit annual 

certifications to FINRA related to the 

member’s compliance policies and 

written supervisory procedures. FINRA 

believes this is analogous to the 

supervision rule for SBS Entities in 

Exchange Act Rule 15h–3(h), which 

requires, among other things, an SBS 

Entity to establish and maintain a 

system to supervise, and to diligently 

supervise, its business and the activities 

of its associated persons; designation of 

at least one person with authority to 

carry out supervisory responsibilities; 

and establishment, maintenance and 

enforcement of written policies and 

procedures addressing supervision of 

the SBS Entity’s SBS business.36

Additionally, Exchange Act Rule 15Fk– 

1 requires each SBS Entity to designate 

a chief compliance officer and submit 

annual compliance reports to the SEC.37

In addition, proposed FINRA Rule 

0180(d) would provide exceptions for 

the following three FINRA Rules for 

registered SBSDs and their associated 

persons, but not MSBSPs: 38

• FINRA Rule 2030 (Engaging in 

Distribution and Solicitation Activities 

with Government Entities) is FINRA’s 

‘‘pay-to-play’’ rule, which imposes 

restrictions on member firms engaging 

in distribution or solicitation activities 

with government entities. FINRA 

believes that Exchange Act Rule 15Fh– 

6 imposes analogous restrictions.39

• FINRA Rule 2090 (Know Your 

Customer) generally requires that each 

member use reasonable diligence to 

know and retain essential facts 

concerning every customer and the 

authority of each person acting on 

behalf of such customer. FINRA believes 

this rule is analogous to: Exchange Act 

Rule 15Fh–3(a), which generally 

requires SBS Entities to verify the status 

of their SBS counterparties, including 

verification that the counterparty is an 

eligible contract participant and 

whether the counterparty is a ‘‘special 

entity;’’ 40 and to Exchange Act Rule 

15Fh–3(e), which requires each SBSD to 


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41See Notice at 26089–90; see 17 CFR 240.15Fh– 

3(e). 42See Notice at 26090; see 17 CFR 240.15Fh–3(f). 43See Notice at 26091; see 17 CFR 240.15Fh–5. 44See 17 CFR 240.3a71–3(d)(1). Rule 3a71–3(d)(1) 

provides an exception from counting certain SBS 

transactions against the thresholds associated with 

the de minimis exception to the SBSD definition. 

See id. 

45FINRA believes these proposed exceptions are 

appropriate for similar reasons as the proposed 

exceptions for SBS Entities in proposed FINRA 

Rules 0180(c) and (d). See Notice at 26093, n.64. 

46A member acting as the U.S. Registered 

Affiliate under Exchange Act Rule 3a71–3(d) would 

remain subject to all other FINRA rules applicable 

to such SBS brokerage activity. See supra note 44. 

47See 17 CFR 240.3a71–3(d); Cross-Border 

Release at 6276–92. 

48See 17 CFR 240.3a71–3(d)(1)(i). 

49See 17 CFR 240.3a71–3(d)(1)(ii)(A). 

50Rule 3a71–3(d)(1)(ii)(B)(2) does contain a 

limited exception from the requirement to comply 

with Exchange Act Rule 15Fh–3(f)(1). Specifically, 

if the U.S. Registered Entity reasonably determines 

that the counterparty to whom it recommends an 

SBS or trading strategy involving an SBS is an 

‘‘institutional counterparty’’ as defined in Exchange 

Act Rule 15Fh–3(f)(4), the registered entity instead 

may fulfill its obligations under Rule 15Fh– 

3(f)(1)(ii) if it discloses to the counterparty that it 

is not undertaking to assess the suitability of the 

SBS or trading strategy involving an SBS for the 

counterparty. 

51See 17 CFR 240.3a71–3(d)(1)(ii)(B). 

52See Notice at 26093. 

53 Id. at 26091. 

54 Id. 

establish, maintain and enforce written 

policies and procedures reasonably 

designed to obtain and retain a record 

of the essential facts concerning each 

counterparty whose identity is known to 

the SBSD that are necessary for 

conducting business with such 

counterparty.41

• FINRA Rule 2111 (Suitability) 

generally requires a member or 

associated person to have a reasonable 

basis that a recommended transaction or 

investment strategy is suitable for at 

least some investors as well as for the 

customer receiving the 

recommendation. FINRA believes it is 

analogous to Exchange Act Rule 15Fh– 

3(f), which imposes suitability 

obligations on SBSDs with respect to 

recommendations of SBS or trading 

strategies involving SBS.42 In addition, 

Exchange Act Rule 15Fh–5 applies 

special, enhanced requirements when 

SBS Entities act as counterparties to 

special entities.43

E. Proposed Rule 0180(e) (Exceptions in 

Connection With Arranging, 

Negotiating, and Executing Activity) 

Proposed Rule 0180(e) would provide 

that the following FINRA rules shall not 

apply to members’ activities and 

positions with respect to SBS, to the 

extent that the member or the associated 

person of the member, as applicable, is 

arranging, negotiating or executing SBS 

on behalf of a non-U.S. affiliate 

pursuant to, and in compliance with, 

the conditions of, Exchange Act Rule 

3a71–3(d)(1): 44 (1) FINRA Rule 2111 

(Suitability); (2) FINRA Rule 2210(d) 

(Communications with the Public— 

Content Standards); and (3) FINRA Rule 

2232 (Customer Confirmations).45 The 

availability of the exceptions under 

proposed FINRA Rule 0180(e) would 

require the member’s compliance with 

the conditions specified in Exchange 

Act Rule 3a71–3(d)(1)(ii)(B) as if the 

member were the counterparty to the 

SBS transactions (as opposed the nonU.S. affiliate).46

In connection with finalizing certain 

Title VII rulemakings, the SEC also 

adopted a number of rules and provided 

guidance to address the cross-border 

application of various SBS 

requirements. One of these rules, 

Exchange Act Rule 3a71–3(d), provides 

a conditional exception to the 

provisions of Exchange Act Rule 3a71– 

3 that otherwise would require non-U.S. 

persons to count—against the thresholds 

associated with the de minimis 

exception to the SBSD definition—SBS 

dealing transactions between non-U.S. 

counterparties when U.S. personnel 

arrange, negotiate or execute those 

transactions.47 To qualify for this 

exception, all such arranging, 

negotiating or executing activity must, 

among other things, be conducted by 

U.S. personnel in their capacity as 

persons associated with a registered 

broker that meets certain capital 

requirements, or a registered SBSD, in 

each case so long as such entity is a 

majority-owned affiliate of the non-U.S. 

person relying on the exception (the 

‘‘U.S. Registered Affiliate’’).48 The U.S. 

Registered Affiliate also must comply 

with certain rules applicable to SBSDs 

with respect to such SBS transactions as 

if the counterparties to the non-U.S. 

person relying on the exception also 

were counterparties to the U.S. 

Registered Affiliate and as if the U.S. 

Registered Affiliate were registered as 

an SBSD, if not so registered.49

Specifically, Exchange Act Rule 3a71– 

3(d)(1)(ii)(B) requires the U.S. 

Registered Affiliate to comply with, as 

a condition of the exception: (1) Section 

15F(h)(3)(B)(i) and (ii) of the Exchange 

Act and Rule 15Fh–3(b) thereunder 

(disclosures of material risks and 

characteristics and material incentives 

or conflicts of interest), (2) Exchange 

Act Rule 15Fh–3(f)(1) 

(recommendations and suitability),50 (3) 

Section 15F(h)(3)(C) of the Exchange 

Act and Rule 15Fh–3(g) thereunder (fair 

and balanced communications); and (4) 

Exchange Act Rule 15Fi–2 

(acknowledgement and verification of 

SBS transactions) and the underlying 

definitions in Exchange Act Rule 15Fi– 

1.51 FINRA believes it is appropriate to 

provide exceptions from the parallel 

FINRA rules to provide clarity and 

avoid unnecessary regulatory 

duplication, but only where the member 

is in fact complying with the rules 

specified in Exchange Act Rule 3a71– 

3(d)(1)(ii)(B).52

F. Proposed Rule 0180(f) (Exceptions 

From Rules 2231, Customer Account 

Statements, and 4512, Customer 

Account Information) 

Proposed FINRA Rule 0180(f) would 

provide that FINRA Rules 2231 

(Customer Account Statements) and 

4512 (Customer Account Information) 

shall not apply to members’ activities 

and positions with respect to SBS, to the 

extent that the member is acting in its 

capacity as an SBS Entity and the 

customer’s account solely holds SBS 

and collateral posted as margin in 

connection with such SBS, provided 

that the member complies with the 

portfolio reconciliation requirements of 

Exchange Act Rule 15Fi–3 with respect 

to such account and that such portfolio 

reconciliations include collateral posted 

as margin in connection with SBS in the 

account. FINRA Rule 2231 generally 

requires each member to provide, on at 

least a quarterly basis, an account 

statement to each customer containing a 

description of any securities positions, 

money balances or account activity 

during the period since the last 

customer account statement. FINRA 

Rule 4512 generally requires each 

member to maintain specified 

information for each customer account, 

including specified identifying 

information about the customer. 

FINRA believes that the customer 

account statements required under 

FINRA Rule 2231 generally should 

reflect a holistic view of a member’s 

relationship with its customer, 

including SBS transactions, positions 

and related collateral, if applicable.53

Therefore, to the extent that a 

customer’s account includes SBS along 

with other securities positions or 

activity, or related money balances, then 

FINRA believes that the account 

statement under FINRA Rule 2231 

should include SBS.54 However, FINRA 

understands that members that are also 

registered as SBS Entities may have 

customer accounts that hold solely SBS 

and related collateral, and do not hold 

any other securities positions or have 


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55 Id. 

56See 17 CFR 240.15Fi–3; Risk Mitigation Release 

at 6362–70. For purposes of Exchange Act Rule 

15Fi–3, ‘‘portfolio reconciliation’’ is defined as 

‘‘any process by which counterparties to one or 

more SBS’’ (1) exchange the material terms of all 

SBS in the SBS portfolio between the 

counterparties, (2) exchange each counterparty’s 

valuation of each SBS in the SBS portfolio between 

the counterparties as of the close of business on the 

immediately preceding day and (3) resolve any 

discrepancy in valuations or material terms. See 17 

CFR 240.15Fi–1(l). 

57See 17 CFR 240.15Fi–3(a). 

58See 17 CFR 240.15Fi–3(b). 

59See Notice at 26091. 

60 Id. 

61 Id. 

62 Id. 

63 Id. 

64See 17 CFR 240.15Fi–5; Risk Mitigation Release 

at 6372–6377. Such documentation also must 

include all terms governing the trading relationship 

between the SBS Entity and its counterparty, 

including, without limitation, certain terms 

specified in the rule. SBS Entities are also required 

to maintain records of SBS trading relationship 

documentation. See 17 CFR 17a–4(e)(12)(ii). 

65See 17 CFR 240.17a–3; see generally 

Recordkeeping Release, supra note 13. FINRA states 

in particular Exchange Act Rule 17a–3(a)(9)(iv), 

which requires an SBS Entity to keep a record, for 

each SBS account, of the unique identification code 

of the counterparty, the name and address of the 

counterparty, and a record of the authorization of 

each person the counterparty has granted authority 

to transact business in the SBS account. See 17 CFR 

240.17a–3(a)(9)(iv). 

66See Notice at 26092. 

67 Id. 

68This proposed exception is structured similarly 

to existing exceptions from registration for persons 

associated with a member whose functions are 

related solely and exclusively to certain other 

product types (such as municipal securities, 

commodities or security futures), as found in 

FINRA Rule 1230. 

any other securities activity.55 While 

SBS Entities are not subject to a 

customer account statement 

requirement with respect to SBS, 

Exchange Act Rule 15Fi–3 includes 

requirements applicable to SBS Entities 

with respect to engaging in portfolio 

reconciliation with applicable 

counterparties on a periodic basis, 

which the Commission adopted as part 

of a broader set of risk mitigation 

requirements for SBS Entities.56

Exchange Act Rule 15Fi–3(a) 

generally requires SBS Entities to 

engage in portfolio reconciliation for all 

SBS with their SBS Entity 

counterparties, with the frequency of 

such portfolio reconciliations based on 

the size of the SBS portfolio with the 

applicable counterparty, ranging from 

once each business day (for SBS 

portfolios that include 500 or more 

SBS), to once each week (for SBS 

portfolios that include more than 50 but 

fewer than 500 SBS on any business day 

during the week), to once each calendar 

quarter (for SBS portfolios that include 

no more than 50 SBS at any time during 

the calendar quarter).57 Exchange Act 

Rule 15Fi–3(b) requires each SBS Entity 

to establish, maintain, and follow 

written policies and procedures 

reasonably designed to ensure that it 

engages in portfolio reconciliation for 

all SBS with non-SBS Entity 

counterparties, with the frequency of 

such portfolio reconciliations ranging 

from once each calendar quarter (for 

SBS portfolios that include more than 

100 SBS at any time during the calendar 

quarter) to once annually (for SBS 

portfolios that include no more than 100 

SBS at any time during the calendar 

year).58

FINRA acknowledges that the 

portfolio reconciliation requirements in 

Exchange Act Rule 15Fi–3 differ in 

some respects from the customer 

account statement requirements under 

FINRA Rule 2231.59 For example, the 

frequency of portfolio reconciliations 

varies as described above, while 

customer account statements must be 

delivered at least quarterly. In addition, 

as described above, an SBS Entity must 

have policies and procedures in place to 

ensure that it engages in portfolio 

reconciliation with non-SBS Entity 

counterparties, while a member must 

provide a customer account statement to 

each customer unless a specific 

exception under FINRA Rule 2231(b) 

applies. However, FINRA believes that, 

while not identical, Exchange Act Rule 

15Fi–3 serves analogous purposes to 

FINRA Rule 2231, such that requiring 

members that are SBS Entities to also 

provide customer account statements for 

accounts holding solely SBS and related 

collateral would be unnecessarily 

duplicative.60 Accordingly, FINRA 

believes to promote regulatory clarity 

and avoid unnecessary duplication, 

proposed FINRA Rule 0180(f) would 

provide an exception from FINRA Rule 

2231 in the limited circumstances 

where the member is acting in its 

capacity as an SBS Entity and the 

account holds solely SBS and collateral 

posted as margin in connection with 

such SBS.61 FINRA states that collateral 

in a customer’s account would be 

included in account statements 

provided under FINRA Rule 2231.62

Therefore, in FINRA’s view, the 

proposed rule change includes as a 

condition to the proposed exception 

that the member comply with Exchange 

Act Rule 15Fi–3 with respect to an 

account qualifying for the exception and 

include collateral in the portfolio 

reconciliation and dispute resolutions 

requirements as applied to such an 

account.63

SBS Entities also are subject to 

Exchange Act Rule 15Fi–5, which 

requires them to establish, maintain, 

and follow written policies and 

procedures reasonably designed to 

ensure that it executes written SBS 

trading relationship documentation 

with each of its counterparties prior to, 

or contemporaneously with, executing 

an SBS with any counterparty.64 In 

addition, SBS Entities that are also 

registered broker-dealers are subject to 

the SEC’s recordkeeping requirements 

under Exchange Act Rule 17a–3, which 

require, among other things, certain 

records to be kept for each SBS 

account.65 These SEC rules generally 

require SBS Entities to obtain and keep 

records of certain information in 

connection with their SBS accounts, 

including SBS-specific identifying 

information. FINRA believes that, while 

not identical to FINRA Rule 4512, these 

SEC rules serve analogous purposes, 

and that also applying FINRA Rule 4512 

to SBS-only accounts would be 

duplicative.66 Accordingly, in order to 

promote regulatory clarity and avoid 

unnecessary duplication, FINRA 

believes it is appropriate to provide an 

exception from FINRA Rule 4512 in the 

limited circumstances where the 

member is acting in its capacity as an 

SBS Entity and the account solely holds 

SBS and collateral posted as margin in 

connection with such SBS.67 Both 

exceptions under proposed FINRA Rule 

0180(f) would not apply to accounts 

holding SBS together with other 

securities or to members that are not 

also registered SBS Entities. 

G. Proposed Rule 0180(g) (Exception 

From FINRA Registration for Certain 

Associated Persons of Registered SBS 

Entities) 

Proposed FINRA Rule 0180(g) would 

provide that persons associated with a 

member whose functions are related 

solely and exclusively to SBS, and 

undertaken in such person’s capacity as 

an associated person of an SBS Entity, 

are not required to be registered with 

FINRA.68 Generally, FINRA Rule 1210 

requires that each person engaged in the 

investment banking or securities 

business of a member must be registered 

with FINRA as a representative or 

principal in each category of registration 

appropriate to his or her functions and 

responsibilities as specified in FINRA 

Rule 1220. Individuals seeking to 

become registered with FINRA generally 

must pass an appropriate qualification 

examination, and registered individuals 

are subject to continuing education 

(‘‘CE’’) requirements under FINRA Rule 


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69See Notice at 26092. 70 Id. 71 Id. 72FINRA states that associated persons of SBS 

Entities are not independently subject to 

registration, licensing or CE requirements. See id. at 

26109, n.58. However, an SBS Entity is prohibited 

from permitting an associated person that is subject 

to a statutory disqualification to effect or be 

involved in effecting SBS on behalf of the SBS 

Entity. See 15 U.S.C. 78o–10(b)(6). The SEC’s SBS 

Entity registration rules also require an SBS Entity 

to certify that it neither knows, nor in the exercise 

of reasonable care should have known, of any such 

statutory disqualification. Such certifications must 

be supported by questionnaires or employment 

applications serving as the basis for background 

checks. See 17 CFR 240.15Fb6–2; Registration 

Process Release at 48973–79. 

73See 17 CFR 240.17F–2. 

74See Notice at 26092, n.57; see also FINRA Rule 

1230. 

75See Notice at 26092. 

76 Id. 77 Id. 78See Notice at 26093. 79 Id. 80 Id. 81 Id. 82 Id. 83See FINRA Rule 9610(a) and (b). 

84See Notice at 26093. FINRA would consider 

any such application based on the specific 

circumstances described in the application and 

whether the requested exemptive relief would be 

consistent with the protection of investors and the 

public interest. Id. at 26093, n.66. 

85 Id. at 26093. 

86 Id. 

87 Id. 

88See FINRA Rule 9610(a); see also Notice at 

26093. 

89See Capital, Margin, and Segregation Release, 

supra note 13. 

90See id. at 43954. 

91See 17 CFR 240.15c3–1. 

92 Generally, a broker-dealer may apply to the 

SEC for authorization to use the alternative method 

for computing net capital contained in Appendix E 

to Exchange Act Rule 15c3–1. See 17 CFR 

240.15c3–1(a)(7). Such broker-dealers are known as 

Continued 

1240.69 The exception from registration 

would apply only to individuals 

engaged solely in SBS activities on 

behalf of the SBS Entity (and potentially 

non-securities activities, such as 

swaps).70 Under FINRA’s proposed 

exception, if an associated person of the 

SBS Entity engaged in any other 

securities activities in addition to SBS, 

that individual must register with 

FINRA in accordance with FINRA Rule 

1210.71 Associated persons of members 

that are not registered SBS Entities 

would also still be required to register 

with FINRA, even if those individuals 

engage solely in SBS activities.72

Additionally, although individuals 

qualifying for the proposed exception 

would not be required to register with 

FINRA, they would remain associated 

persons of the member subject to all 

FINRA and SEC rules applicable to such 

associated persons, including 

fingerprinting requirements under 

Exchange Act Rule 17f–2.73

FINRA stated that it structured this 

exception similarly to existing 

exceptions from registration for persons 

associated with a member whose 

functions are related solely and 

exclusively to certain other product 

types (such as municipal securities, 

commodities or security futures).74

FINRA also stated that it based the 

proposed exception in Rule 0180(g) on 

its analysis of existing registration and 

related requirements, and its 

understanding that the number of 

associated persons that would qualify 

for the exception is limited.75 FINRA 

stated that it will monitor developments 

with respect to the SBS activities of its 

members and will continue to consider 

whether it would be appropriate to 

tailor the registration and related 

requirements to SBS, for example 

through targeted SBS-related 

registration categories or the addition of 

SBS-specific content to qualification 

examinations or CE content.76 FINRA 

stated that it will consider whether it 

would be appropriate to rescind the 

exception under proposed FINRA Rule 

0180(g) in such circumstances.77

H. Proposed Rule 0180(i) (Authority To 

Grant Exemptions From the Application 

of Rule 0180 Upon Member Application) 

and 9610 (Application for Exemptive 

Relief) 

Proposed FINRA Rule 0180(i) would 

provide that, pursuant to the FINRA 

Rule 9600 Series (Procedures for 

Exemptions), FINRA may, taking into 

consideration all relevant factors, 

exempt a person unconditionally or on 

specified terms from the application of 

FINRA rules (other than an exemption 

from the general application of 

proposed FINRA Rule 0180(a)) to the 

person’s SBS activities or positions, as 

it deems appropriate, consistent with 

the protection of investors and the 

public interest.78 FINRA believes it is 

appropriate and in the public interest to 

provide this exemptive authority so that 

FINRA can account for specific 

situations that may arise with respect to 

SBS in the future on a case-by-case 

basis.79 In formulating the proposed rule 

change, FINRA stated that it consulted 

with its members and reviewed its 

rulebook to determine whether 

continuing exceptions from any of its 

rules are appropriate.80 FINRA stated 

that it is proposing FINRA Rule 0180(i) 

in recognition that the SBS market 

continues to evolve and that particular 

circumstances may arise in which 

applying specific FINRA rules not 

otherwise covered by the proposed 

exceptions to SBS activities may not be 

appropriate or feasible.81

As proposed, FINRA would consider 

written applications for exemptive 

relief, on a rule-by-rule and member-bymember basis, under the existing 

process set forth in FINRA Rule 9610.82

Rule 9610 requires a member seeking 

exemptive relief to file a written 

application with the appropriate 

department or staff of FINRA 

containing, among other things, a 

detailed statement of the grounds for 

granting an exemption from the 

application of a specific FINRA rule.83

Pursuant to FINRA Rule 9620, FINRA 

staff is then required to issue a written 

decision setting forth its findings and 

conclusions, which may be made 

publicly available.84 A member would 

have the ability to appeal such a 

decision pursuant to FINRA Rule 

9630.85 FINRA stated that it expects to 

apply heightened scrutiny to 

applications for exemptive relief from 

members that are not also registered 

with the SEC as SBS Entities, and 

therefore not subject to the SEC’s 

regulatory framework for SBS.86 FINRA 

believes it is appropriate and in the 

public interest to provide this 

exemptive authority so that FINRA can 

account for specific situations that may 

arise with respect to SBS in the future 

on a case-by-case basis.87

Finally, FINRA proposed a 

conforming change to Rule 9610 to add 

Rule 0180 to the list of over 30 rules 

pursuant to which FINRA already has 

exemptive authority.88

I. Financial Responsibility and 

Operational Requirements 

In June 2019, the Commission 

adopted final capital, margin and 

segregation requirements for SBS 

Entities, along with amendments to the 

existing capital and segregation 

requirements for broker-dealers, in the 

Capital, Margin, and Segregation 

Release.89 As with other Title VII 

rulemakings, the SEC aligned the 

compliance date for the amendments 

under the Capital, Margin, and 

Segregation Release with the SBS Entity 

registration compliance date.90 Among 

other things, the Capital, Margin, and 

Segregation Release amended the 

existing net capital rule for brokerdealers, Exchange Act Rule 15c3–1,91 in 

two key respects relevant to FINRA’s 

rules: 

• First, the SEC adopted new 

minimum net capital requirements for 

broker-dealers that are also registered as 

SBSDs, but that do not operate pursuant 

to the alternative net capital (‘‘ANC’’) 

requirements of Exchange Act Rule 

15c3–1 (‘‘Non-ANC Firms’’).92 NonVerDate Sep<11>2014 19:03 Jan 11, 2022 Jkt 256001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4703 E:\FR\FM\12JAN2.SGM 12JAN2

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‘‘ANC broker-dealers.’’ There are currently five 

approved ANC broker-dealers. See SEC, BrokerDealers Using the Alternative Net Capital 

Computation under Appendix E to Rule 15c3–1, 

available at https://www.sec.gov/tm/broker-dealersalternative-net-capital-computation. Other brokerdealers are known as non-ANC broker-dealers and 

must compute net capital pursuant to the 

provisions of Exchange Act Rule 15c3–1. See Notice 

at 26093. 

93See 17 CFR 240.15c3–1(a)(10). 

94For example, the new minimum net capital 

requirements do not apply to a Non-ANC Firm 

engaged in SBS dealing activity below the de 

minimis threshold for SBSD registration, or to a 

Non-ANC Firm engaged in SBS brokerage activity 

or entering into non-dealing SBS transactions (e.g., 

hedging). FINRA stated that the SEC also adopted 

new minimum capital requirements for MSBSPs, 

including that such entities must at all times have 

and maintain a tangible net worth. See Capital, 

Margin, and Segregation Release at 43906–07. 

FINRA does not believe any changes to FINRA rules 

are necessary with respect to the new MSBSP 

capital requirements. See Notice at 26094, n.71. 

95See 17 CFR 240.15c3–1(a)(7). 

96As discussed below, FINRA also proposed to 

apply all requirements in the FINRA Rule 4000 

Series applicable to carrying or clearing firms to 

members that act as principal counterparty to an 

SBS, clear or carry an SBS, guarantee an SBS or 

otherwise have financial exposure to an SBS. See 

Notice at 26094, n.73. 

97See Notice at 26094. 

98As noted above, the SEC did not amend 

Exchange Act Rule 15c3–1 to apply increased 

minimum capital requirements to Non-ANC Firms 

that engage in SBS activities but that are not 

registered SBSDs. FINRA is therefore not proposing 

to amend FINRA Rule 4120 to impose any 

additional minimum thresholds on such members. 

However, FINRA states that, as a general matter, 

FINRA Rule 4120 would apply to all members that 

engage in SBS transactions (and any related 

transactions) because net capital is a holistic 

calculation based on a firm’s liquid net worth, 

which includes all of a firm’s activities. See Notice 

at 26094, n.74. 

99The proposed rule change would also make 

non-substantive and conforming changes to other 

subparagraphs of FINRA Rule 4120(a) to reflect the 

insertion of new subparagraph (E), update crossreferences to SEC rules that have been amended and 

reflect FINRA rulebook format conventions. 

100See Notice at 26094. 

101See 17 CFR 240.15c3–1(a)(7)(i)(A). Under 

Exchange Act Rule 15c3–1(a)(1)(i), a broker-dealer 

generally may not permit its aggregate indebtedness 

to exceed 1500 percent of its net capital. A brokerdealer may elect not to be subject to the aggregate 

indebtedness standard if it complies with an 

alternative method of computing net capital. See 17 

CFR 240.15c3–1(a)(1)(ii). 

102The ‘‘risk margin amount’’ means the total 

initial margin for SBS. See 17 CFR 15c3–1(c)(17). 

Exchange Act Rule 15c3–1(a)(7)(i)(A) provides that 

initially the requirement will be two percent of the 

risk margin amount. However, the SEC may issue 

an order raising the requirement to four percent on 

or after the third anniversary of the amended rule’s 

compliance date and to eight percent on or after the 

fifth anniversary of the amended rule’s compliance 

date. See 17 CFR 15c3–1(a)(7)(i)(A)(2) and (3) and 

15c3–1(a)(7)(i)(B). 

103See Notice at 26094. 

104 Id. 

ANC Firms that are also registered as 

SBSDs must comply with a new 

minimum dollar net capital requirement 

and a new component for determining 

their minimum capital requirement that 

is based on a percentage of initial 

margin computed for SBS (in addition 

to other minimum requirements 

applicable to the broker-dealer).93 These 

changes do not apply to broker-dealers 

that operate pursuant to the ANC 

requirements of the rule (‘‘ANC Firms’’). 

These new minimum net capital 

requirements also do not impact NonANC Firms that are not also registered 

as SBSDs, regardless of whether such 

Non-ANC Firms engage in SBS 

activities.94

• Second, the SEC changed the 

minimum net capital requirements for 

ANC Firms, regardless of whether they 

transact in SBS. For ANC Firms, the 

SEC increased the minimum dollar net 

capital requirement, added a new 

component for determining the 

minimum capital requirement that is 

based on a percentage of initial margin 

computed for SBS (in addition to other 

minimum requirements applicable to 

the broker-dealer), increased the 

minimum tentative net capital 

requirement and amended the early 

warning notification requirement for 

tentative net capital.95

FINRA Rule 4120 (Regulatory 

Notification and Business Curtailment) 

sets forth certain early warning 

notification and business curtailment 

requirements if a member’s capital falls 

below certain thresholds. Specifically, 

FINRA Rule 4120(a) requires each 

carrying or clearing member to notify 

FINRA if its net capital falls below 

certain specified levels.96 FINRA Rule 

4120(b) allows FINRA to restrict a 

member from expanding its business in 

certain circumstances and FINRA Rule 

4120(c) allows FINRA to require a 

member to reduce its business if its net 

capital falls below certain specified 

levels (generally lower than those 

required for notification under FINRA 

Rule 4120(a)). According to FINRA, 

these requirements are based on the 

minimum capital requirements 

applicable to a member broker-dealer 

under Exchange Act Rule 15c3–1.97

FINRA believes it is necessary to amend 

FINRA Rule 4120 to conform the rule to 

the new and increased minimum capital 

requirements for Non-ANC Firms that 

are also registered as SBSDs and for 

ANC Firms, as described above.98

FINRA Rule 4120(a) requires each 

carrying or clearing firm to promptly, 

but in any event within 24 hours, notify 

FINRA in writing if its net capital falls 

below any of the percentages specified 

in subparagraphs (A) through (F) of 

FINRA Rule 4120(a)(1). The proposed 

rule change would modify subparagraph 

(D), which applies to ANC Firms, and 

also add new subparagraph (E), 

applicable to Non-ANC Firm members 

that are also registered as SBSDs.99

Prior to the amendments in the 

Capital, Margin and Segregation 

Release, Exchange Act Rule 15c3– 

1(a)(7)(i) required an ANC Firm to 

maintain minimum tentative net capital 

of not less than $1 billion and minimum 

net capital of not less than $500 million. 

In addition, Exchange Act Rule 15c3– 

1(a)(7)(ii) required an ANC Firm to 

provide an ‘‘early warning’’ notice to the 

Commission when its tentative net 

capital fell below $5 billion (or a lower 

threshold, if the Commission has 

granted an ANC Firm’s application to 

use such lower threshold). 

Subparagraph (D) of FINRA Rule 

4120(a) is based on these net capital 

requirements, requiring notification to 

FINRA if the member is an ANC Firm 

and (i) its tentative net capital under 

Exchange Act Rule 15c3–1(c)(15) is less 

than 50 percent of the early warning 

notification amount required by 

Exchange Act Rule 15c3–1(a)(7)(ii) or 

(ii) its net capital is less than $1.25 

billion. In other words, notification to 

FINRA is required if an ANC Firm’s 

tentative net capital falls below $2.5 

billion (or a lower amount, if the ANC 

Firm has been permitted to use a lower 

early warning notice threshold), which 

is half of the SEC’s early warning 

notification amount, or its net capital 

falls below $1.25 billion, which is 2.5 

times the SEC’s net capital requirement 

for ANC Firms.100

In the Capital, Margin, and 

Segregation Release, the Commission 

amended the net capital requirements 

for ANC Firms in three ways. First, the 

Commission raised the tentative net 

capital requirement for ANC Firms from 

$1 billion to $5 billion. Second, the 

Commission raised the minimum net 

capital requirement for ANC Firms from 

$500 million to the greater of $1 billion 

or the sum of the applicable ratio 

requirement under Exchange Act Rule 

15c3–1(a)(1) 101 and two percent of the 

risk margin amount.102 Third, the 

Commission raised the tentative net 

capital early warning notification 

threshold from $5 billion to $6 billion. 

In light of these increased capital 

requirements under the Commission’s 

net capital rule, FINRA believes it is 

appropriate to also modify the 

thresholds for required notification to 

FINRA for ANC Firms under FINRA 

Rule 4120(a)(1)(D).103 Specifically, 

under the proposed rule change, an 

ANC Firm would be required to notify 

FINRA if, in addition to the conditions 

currently prescribed under FINRA Rule 

4120(a)(1)(A), (E) and (F): 104


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105See 17 CFR 240.17a–11(b)(2). Exchange Act 

Rule 17a–11 requires broker-dealers to promptly 

notify the SEC after the occurrence of certain 

events. Exchange Act Rule 17a–11(b)(2) requires 

such notification for broker-dealers using the 

alternative method of computing net capital 

pursuant to Exchange Act Rule 15c3–1(a)(1)(ii) 

when net capital is less than five percent of 

aggregate debit items under the Exchange Act Rule 

15c3–3 reserve formula. 

106See Notice at 26094. 

107See Notice at 26094–95. 

108 Id. at 26095. 

109See 17 CFR 15c3–1(a)(10). 

110See Notice at 26095. 

111 Id. 

112 Id. 

113 Id. 

114 Id. 

115 Id. 

116 Id. 

117 Id. 

118The proposed rule change would also make 

non-substantive and conforming changes to other 

subparagraphs of FINRA Rule 4120(c)(1) to reflect 

the insertion of new subparagraph (E), update crossreferences to SEC rules that have been amended and 

reflect FINRA rulebook format conventions. Similar 

non-substantive changes would be made to 

paragraph (b)(1) and Supplementary Material .01 to 

FINRA Rule 4120 to reflect FINRA rulebook format 

conventions. See id., n.87. 

119See Capital, Margin, and Segregation Release, 

supra note 13. 

• Its tentative net capital is less than 

150 percent of the minimum tentative 

net capital amount required by 

Exchange Act Rule 15c3–1(a)(7)(i)(A) 

(i.e., $5 billion, such that the 

notification amount would be $7.5 

billion), 

• the member is subject to the 

aggregate indebtedness requirement of 

Exchange Act Rule 15c3–1(a)(1)(i), and 

its net capital is less than the sum of 1/ 

10th of its aggregate indebtedness and 

150 percent of the required percentage 

of the risk margin amount, or 

• the member elects to use the 

alternative method of computing net 

capital pursuant to Exchange Act Rule 

15c3–1(a)(1)(ii), and its net capital is 

less than the sum of the level specified 

in Exchange Act Rule 17a–11(b)(2) 105

and 150 percent of the required 

percentage of the risk margin amount. 

FINRA believes these modified 

thresholds are appropriately calibrated 

to provide FINRA with sufficient early 

warning that an ANC Firm’s capital 

levels may be deteriorating.106 By 

revising the early warning levels as 

proposed, FINRA believes the proposed 

rule change aligns the historical 

thresholds in FINRA Rule 4120(a) for 

early warning notification for ANC 

Firms with the revised capital 

requirements applicable to such firms 

under the Commission’s amended 

rules.107 Additionally, according to 

FINRA, ANC Firms historically 

maintain capital far in excess of the 

proposed amounts, so FINRA does not 

expect these levels to be problematic for 

firms to maintain.108

In the Capital, Margin, and 

Segregation Release, the Commission 

also adopted a new minimum net 

capital requirement for Non-ANC Firms 

that are also registered as SBSDs.109

Specifically, a Non-ANC Firm that is 

registered as an SBSD must maintain 

minimum net capital of not less than the 

greater of $20 million or the sum of the 

ratio requirements under Exchange Act 

Rule 15c3–1(a)(1) and two percent of the 

risk margin amount.110 Accordingly, 

FINRA believes it is necessary to add 

corresponding new thresholds for 

required notification to FINRA for NonANC Firms that are also registered as 

SBSDs under new FINRA Rule 

4120(a)(1)(E).111 Specifically, under the 

proposed rule change, a Non-ANC Firm 

that is also a registered SBSD would be 

required to notify FINRA if, in addition 

to the conditions currently prescribed 

under FINRA Rule 4120(a)(1)(A), (E) 

and (F): 

• The member is subject to the 

aggregate indebtedness requirement of 

Exchange Act Rule 15c3–1(a)(1)(i), and 

its net capital is less than the sum of 1/ 

10th of its aggregate indebtedness and 

150 percent of the required percentage 

of the risk margin amount, or 

• the member elects to use the 

alternative method of computing net 

capital pursuant to Exchange Act Rule 

15c3–1(a)(1)(ii), and its net capital is 

less than the sum of the level specified 

in Exchange Act Rule 17a–11(b)(2) and 

150 percent of the required percentage 

of the risk margin amount.112

FINRA believes it is appropriate to 

include specific thresholds for early 

notification to FINRA based on the new 

minimum net capital requirements for 

Non-ANC Firms that are registered 

SBSDs.113 FINRA also believes that the 

thresholds described above are 

appropriately calibrated to provide 

FINRA with sufficient early warning 

that such a firm’s capital levels may be 

deteriorating.114 By defining the early 

warning levels as proposed, the 

proposed rule change, in FINRA’s view, 

aligns the historical thresholds in 

FINRA Rule 4120(a) for early warning 

notification with the new capital 

requirements applicable to Non-ANC 

Firms that are registered SBSDs under 

the SEC’s amended rules.115

FINRA Rule 4120(b) allows FINRA to 

require a member that carries customer 

accounts or clears transactions to not 

expand its business during any period 

in which any of the conditions 

described in paragraph (a)(1) of FINRA 

Rule 4120 continue to exist for more 

than 15 consecutive business days, 

provided that such condition(s) has 

been known to FINRA or the member 

for at least five consecutive business 

days. Since the proposed rule change 

would modify the conditions specified 

in FINRA Rule 4120(a)(1) as described 

above, the triggers for the application of 

restrictions under FINRA Rule 4120(b) 

would be similarly affected. However, 

FINRA does not believe that any 

conforming changes are needed at this 

time to the restrictions on business 

expansion requirements under FINRA 

Rule 4120(b).116 FINRA states that 

FINRA Rule 4120(b)(3)(A)–(G) includes 

a non-exclusive list of activities that 

may constitute an ‘‘expansion of 

business’’ for these purposes, and 

FINRA Rule 4120(b)(3)(H) provides that 

the term ‘‘expansion of business’’ may 

include such other activities as FINRA 

deems appropriate under the 

circumstances, in the public interest or 

for the protection of investors. FINRA 

believes that a member firm’s SBS 

activities would be within the scope of 

‘‘other activities’’ contemplated by 

FINRA Rule 4120(b)(3)(H).117

FINRA Rule 4120(c) allows FINRA to 

require a member to reduce its business 

if its net capital falls below any of the 

percentages specified in subparagraphs 

(A) through (F) of FINRA Rule 

4120(c)(1). Similar to the proposed 

modifications to FINRA Rule 4120(a) 

described above, the proposed rule 

change would modify subparagraph (D) 

of FINRA Rule 4120(c)(1), which applies 

to ANC Firms, and also add new 

subparagraph (E), applicable to NonANC Firm members that are also 

registered as SBSDs.118

Current subparagraph (D) of FINRA 

Rule 4120(c)(1) permits business 

curtailment if the member is an ANC 

Firm and (i) its tentative net capital 

under Exchange Act Rule 15c3–1(c)(15) 

is less than 40 percent of the early 

warning notification amount required 

by Exchange Act Rule 15c3–1(a)(7)(ii) or 

(ii) its net capital is less than $1 billion. 

These thresholds are based on the 

broker-dealer net capital rule prior to 

the amendments in the Capital, Margin, 

and Segregation Release. As described 

above, the Commission amended the net 

capital requirements for broker-dealers 

in the Capital, Margin, and Segregation 

Release.119 Accordingly, under the 

proposed rule change, a member that is 

an ANC Firm would be subject to the 

business curtailment provisions of 

FINRA Rule 4120(c)(1) if, in addition to 

the conditions currently prescribed 

under FINRA Rule 4120(c)(1)(A), (E) 

and (F): 


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120See Notice at 26095. 

121 Id. 

122See supra note 101. 

123See supra note 105. 

124See Notice at 26095. 

125 Id. 

126 Id. at 26096. 

127 Id. 

128 Id. 

129 Id. 

130 Id. 

131 Id. 

132 Id. 

133 Id. 

134Although this proposed tiering provision 

relates to the financial responsibility and 

operational rules, FINRA believes it should be 

included as a paragraph in proposed FINRA Rule 

0180 so that all provisions relating to the treatment 

of SBS under FINRA rules are found in a single, 

consolidated rule. See id. at 26096, n.95. 

• Its tentative net capital is less than 

the amount specified under Exchange 

Act Rule 15c3–1(a)(7)(ii) (i.e., the early 

warning amount, $6 billion), 

• The member is subject to the 

aggregate indebtedness requirement of 

Exchange Act Rule 15c3–1(a)(1)(i), and 

its net capital is less than the sum of 1/ 

12th of its aggregate indebtedness and 

125 percent of the required percentage 

of the risk margin amount, or 

• the member elects to use the 

alternative method of computing net 

capital pursuant to Exchange Act Rule 

15c3–1(a)(1)(ii), and its net capital is 

less than the sum of one percentage 

point below the level specified in 

Exchange Act Rule 17a–11(b)(2) and 125 

percent of the required percentage of the 

risk margin amount.120

FINRA believes these modified 

thresholds are appropriately calibrated 

to provide FINRA with the ability to 

require ANC Firms to reduce their 

business when their capital levels have 

deteriorated to a level that may 

jeopardize their ability to continue to 

comply with their capital 

requirements.121

As described above, in the Capital, 

Margin, and Segregation Release, the 

Commission also added a new 

minimum net capital requirement for 

Non-ANC Firms that are also registered 

as SBSDs. Accordingly, the proposed 

rule change would add corresponding 

new thresholds for business curtailment 

for Non-ANC Firms that are also 

registered as SBSDs under new FINRA 

Rule 4120(c)(1)(E). Specifically, under 

the proposed rule change, a Non-ANC 

Firm that is also a registered SBSD 

would be subject to the business 

curtailment provisions of FINRA Rule 

4120(c)(1) if, in addition to the 

conditions currently prescribed under 

FINRA Rule 4120(c)(1)(A), (E) and (F): 

• The member is subject to the 

aggregate indebtedness requirement of 

Exchange Act Rule 15c3–1(a)(1)(i), and 

its net capital is less than the sum of 1/ 

12th of its aggregate indebtedness and 

125 percent of the required percentage 

of the risk margin amount,122 or 

• the member elects to use the 

alternative method of computing net 

capital pursuant to Exchange Act Rule 

15c3–1(a)(1)(ii), and its net capital is 

less than the sum of one percentage 

point below the level specified in 

Exchange Act Rule 17a–11(b)(2) 123 and 

125 percent of the required percentage 

of the risk margin amount.124

FINRA believes it is appropriate to 

include specific thresholds for business 

curtailment based on the new minimum 

net capital requirements for Non-ANC 

Firms that are registered as SBSDs.125

FINRA also believes that the thresholds 

described above are appropriately 

calibrated to provide FINRA with the 

ability to require such firms to reduce 

their business when their capital levels 

have deteriorated to a level that may 

jeopardize their ability to continue to 

comply with their capital 

requirements.126

Lastly, FINRA states that FINRA Rule 

4120(c)(3)(A)–(J) includes a nonexclusive list of activities that may 

constitute a ‘‘business reduction’’ for 

these purposes, and FINRA Rule 

4120(c)(3)(K) provides that the term 

‘‘business reduction’’ may include such 

other activities as FINRA deems 

appropriate under the circumstances, in 

the public interest or for the protection 

of investors.127 FINRA believes that a 

member firm’s SBS activities would be 

within the scope of ‘‘other activities’’ 

contemplated by FINRA Rule 

4120(c)(3)(K).128

In addition to these conforming 

changes to FINRA Rule 4120, the 

proposed rule change would apply 

FINRA’s financial and operational rules 

more broadly to firms that enter into, or 

otherwise have exposure to, SBS. 

Specifically, certain rules in the FINRA 

Rule 4000 Series (Financial and 

Operational Rules) include provisions 

that impose higher standards, or provide 

FINRA the authority to impose 

additional requirements, on firms that 

carry or clear transactions or accounts 

(generally referred to as ‘‘carrying or 

clearing firms’’). This ‘‘tiering’’ structure 

was built into certain rules so that firms 

that only introduce their customer 

accounts and do not have exposure to 

the settlement system are provided 

relief from the higher standards required 

of firms that carry or clear transactions 

and accounts. Below is a list of rules in 

the FINRA Rule 4000 Series where 

tiering has been employed for carrying 

or clearing firms and a brief description 

of the tiered requirements for such 

firms: 

• FINRA Rule 4110 (Capital 

Compliance) includes requirements for 

carrying or clearing firms to keep greater 

net capital, seek permission for 

withdrawals of capital and seek 

approval for certain add-backs to net 

capital. 

• FINRA Rule 4120 (Regulatory 

Notification and Business Curtailment) 

includes restrictions on expanding, or 

requirements to reduce business, if 

sufficient capital levels are not 

maintained. 

• FINRA Rule 4521 (Notifications, 

Questionnaires and Reports) allows 

FINRA to collect additional data and 

require reporting of a material decline in 

tentative net capital. 

• FINRA Rule 4522 (Periodic Security 

Counts, Verification and Comparison) 

requires more frequent security counts, 

verifications and comparisons than 

would be required under Exchange Act 

Rule 17a–13. 

• Rule 4523 (Assignment of 

Responsibility for General Ledger 

Accounts and Identification of Suspense 

Accounts) requires a record of primary 

and supervisory named individuals over 

general ledger bookkeeping accounts.129

According to FINRA, the intent of the 

tiering employed in these rules in the 

FINRA Rule 4000 Series is to impose 

higher capital, recordkeeping and 

operational standards on firms that 

carry or clear transactions and accounts, 

and therefore may have financial 

exposure to customers, other brokerdealers, central counterparties or 

others.130 FINRA believes that similar 

considerations apply for members with 

exposure to SBS.131 FINRA states that 

SBS are complex transactions that will, 

by their nature, require detailed 

recordkeeping, margining, legal 

agreements, collateral management, 

reconciliation and risk management.132

FINRA therefore believes it is 

appropriate to also employ tiering in the 

FINRA Rule 4000 Series for members 

that enter into SBS on a principal basis 

or otherwise have financial exposure to 

SBS.133 Specifically, under the 

proposed rule change, proposed FINRA 

Rule 0180(h) would provide that, for 

purposes of the FINRA Rule 4000 

Series, all requirements that apply to a 

member that clears or carries customer 

accounts shall also apply to any member 

that acts as a principal counterparty to 

an SBS, clears or carries an SBS, 

guarantees an SBS or otherwise has 

financial exposure to an SBS.134 FINRA 

believes that applying these higher 


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135See id. at 26096. 

136See Capital, Margin, and Segregation Release 

at 43954. 

137See 17 CFR 240.18a–3. Exchange Act Rule 

18a–3 also prescribes margin requirements for 

nonbank MSBSPs with respect to uncleared SBS. 

As discussed above, Exchange Act Rule 18a–3 

generally requires SBSDs to collect or deliver 

variation margin, and also to collect initial margin, 

with respect to its SBS counterparties. However, 

Exchange Act Rule 18a–3 requires that a nonbank 

MSBSP only collect and deliver variation margin, 

without prescribing any initial margin requirement. 

See Capital, Margin, and Segregation Release at 

43877. As discussed below, FINRA believes it is 

appropriate to apply variation margin and initial 

margin requirements to all of its members that 

transact in uncleared SBS. Therefore, proposed 

FINRA Rule 4240 would provide an exception for 

members that are registered as SBSDs (and therefore 

subject to the variation and initial margin 

requirements of Exchange Act Rule 18a–3), but not 

for members that are registered as MSBSPs. See 

Notice at 26096, n.97. 

138See 17 CFR 240.18a–3(c)(1)(i); Capital, Margin, 

and Segregation Release at 43876. 

139See 17 CFR 240.18a–3(d). 

140See Capital, Margin, and Segregation Release 

at 43876. 

141See 17 CFR 240.18a–3(c)(1)(ii). 

142For purposes of current FINRA Rule 4240, the 

term ‘‘credit default swap’’ includes any product 

that is commonly known to the trade as a ‘‘credit 

default swap’’ and is an SBS as defined pursuant 

to Section 3(a)(68) of the Exchange Act or the rules 

and guidance of the SEC and its staff. See FINRA 

Rule 4240(a). 

143See Notice at 26097. 

144See Exchange Act Release No. 59955 (May 22, 

2009), 74 FR 25586 (May 28, 2009) (Notice of Filing 

and Order Approving File No. SR–FINRA–2009– 

012). 

145See Extension Notice at 50392. 

146See supra note 19. 

147See Notice at 26097. FINRA states that, under 

the proposed rule change, proposed FINRA Rule 

0180 would no longer provide an exception from 

current FINRA Rule 4210 applying to members’ 

activities and positions with respect to SBS. Absent 

additional changes, therefore, the general margin 

requirements under FINRA Rule 4210 would apply 

to SBS. However, as described above, FINRA 

proposed to specifically list SBS within the 

exceptions listed in FINRA Rule 4210, and adopt 

a separate, new FINRA Rule 4240 applicable to 

SBS. See id., n.106. 

148See id. at 26097. 

standards when a member enters into 

SBS or otherwise has exposure to SBS 

is appropriate and consistent with the 

protection of investors and the public 

interest.135

J. Margin Requirements 

As discussed above, in June 2019 the 

Commission adopted its final Capital, 

Margin, and Segregation Release.136

Among other things, the Capital, 

Margin, and Segregation Release 

adopted new Exchange Act Rule 18a–3, 

which prescribes margin requirements 

for uncleared SBS for SBSDs for which 

there is not a prudential regulator 

(‘‘nonbank SBSD’’).137 Generally, 

Exchange Act Rule 18a–3 requires a 

nonbank SBSD to calculate, for each 

account of an SBS counterparty as of the 

close of business of each day: (i) The 

amount of current exposure in the 

account (i.e., variation margin) and (ii) 

the initial margin amount for the 

account.138 Under Exchange Act Rule 

18a–3, variation margin is calculated by 

marking the position to market, while 

initial margin must generally be 

calculated using standardized haircuts, 

which are prescribed in Exchange Act 

Rule 15c3–1 for nonbank SBSDs that are 

registered broker-dealers.139 Nonbank 

SBSDs may apply to the SEC for 

authorization to use models to calculate 

initial margin instead of the 

standardized haircuts (including the 

option to use the more risk sensitive 

methodology in Exchange Act Rule 

15c3–1a), but nonbank SBSDs that are 

registered broker-dealers must use 

standardized haircuts to calculate initial 

margin for uncleared equity SBS.140

Based on these calculations, Exchange 

Act Rule 18a–3 generally requires a 

nonbank SBSD to collect and deliver 

variation margin, and to collect (but not 

deliver) initial margin.141 Exchange Act 

Rule 18a–3 also provides certain 

exceptions from the margin 

requirements, establishes thresholds 

and minimum transfer amounts, 

specifies collateral requirements 

(including collateral haircuts), 

establishes risk monitoring 

requirements and includes other 

miscellaneous provisions, such as 

definitions. All nonbank SBSDs, 

including nonbank SBSDs that are 

FINRA members, are subject to the 

margin requirements set forth in 

Exchange Act Rule 18a–3. 

The FINRA Rule 4200 Series sets forth 

margin requirements applicable to 

FINRA members. In particular, FINRA 

Rule 4210 describes the margin 

requirements that determine the amount 

of equity or ‘‘margin’’ customers are 

expected to maintain in their securities 

accounts, including margin 

requirements for equity and fixed 

income securities as well as options, 

warrants and security futures. Current 

FINRA Rule 4240 separately establishes 

an interim pilot program with respect to 

margin requirements for any 

transactions in CDS held in an account 

at a member (the ‘‘Interim Pilot 

Program’’). Under current FINRA Rule 

0180, FINRA Rule 4210 does not apply 

to members’ activities and positions 

with respect to SBS, but current FINRA 

Rule 4240 does apply to activities and 

positions within its scope. Therefore, to 

the extent that a FINRA member enters 

into SBS that are CDS, the margin 

requirements under the Interim Pilot 

Program apply to such SBS.142

However, the Interim Pilot Program is a 

temporary rule, and SBS that are not 

CDS are not currently subject to any 

margin requirements under FINRA 

rules.143

The Interim Pilot Program was 

originally proposed by FINRA and 

approved by the Commission in 2009 

specifically to address concerns arising 

from systemic risk posed by CDS.144

Pending the SEC’s final implementation 

of the Title VII rulemakings, FINRA has 

extended the expiration date of the 

Interim Pilot Program a number of 

times, most recently in September 

2021.145 The Interim Pilot Program 

under current FINRA Rule 4240 is 

currently set to expire on April 6, 

2022.146

In light of the finalization of the 

Commission’s margin requirements for 

nonbank SBSDs under Exchange Act 

Rule 18a–3 and the registration 

compliance date, FINRA believes it is 

appropriate and in the public interest 

for the Interim Pilot Program to expire 

and for FINRA to adopt a new margin 

rule specifically applicable to SBS.147

Accordingly, under the proposed rule 

change, current FINRA Rule 4240 would 

be replaced by a new FINRA Rule 4240 

that would prescribe margin 

requirements for SBS. Consistent with 

Exchange Act Rule 18a–3—and unlike 

the Interim Pilot Program—proposed 

new Rule 4240 would apply margin 

requirements to all SBS, not just CDS. 

However, proposed new FINRA Rule 

4240 would not apply to any member 

that is registered as an SBSD, as such 

members are subject to the margin 

requirements of Exchange Act Rule 18a– 

3. Additionally, proposed FINRA Rule 

4240 would defer to registered clearing 

agencies to set the margin requirements 

for cleared SBS, and as such would only 

specify new variation margin and initial 

margin requirements for uncleared SBS. 

Therefore, the specific new margin 

requirements prescribed under 

proposed FINRA Rule 4240 would only 

apply to uncleared SBS transacted by 

FINRA members that are not registered 

as SBSDs. FINRA believes that, by 

applying margin requirements in these 

circumstances, the proposed rule 

change would fill an important 

regulatory gap, protect FINRA members 

against counterparty credit risk, 

maintain a level playing field for 

members and prevent regulatory 

arbitrage.148 As described in further 

detail below, the margin requirements 

under proposed FINRA Rule 4240 

would be structurally aligned with the 

margin requirements that will apply to 

nonbank SBSDs under Exchange Act 

Rule 18a–3, with certain modifications 

that FINRA believes are necessary given 


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149 Id. 

150 In addition to the new provisions under 

proposed FINRA Rule 4240 discussed above, the 

implementation of new margin requirements for 

SBS under proposed FINRA Rule 4240 would also 

require a conforming change to FINRA Rule 4220 

(Daily Record of Required Margin). FINRA Rule 

4220 requires each member carrying securities 

margin accounts for customers to make a record 

each day of every case in which initial or additional 

margin must be obtained in a customer’s account. 

To ensure that similar records are maintained for 

SBS margin required under proposed new FINRA 

Rule 4240, the proposed rule change would update 

FINRA Rule 4220 to also require such records for 

each member subject to proposed FINRA Rule 4240. 

In addition, the proposed rule change would add 

new Supplementary Material .06 to FINRA Rule 

4210 to clarify that a Regulation T good faith 

account, other than a non-securities account, is a 

margin account for purposes of FINRA Rule 4210. 

This provision is intended merely to codify 

FINRA’s existing interpretation regarding the scope 

of FINRA Rule 4210. The proposed rule change 

would also include a parallel provision in new 

Supplementary Material .01 to proposed new Rule 

4240. 

Finally, the proposed rule change would make 

two other conforming changes to FINRA Rule 4210, 

including to add proposed new FINRA Rule 

4240(e)(9) and to make a technical adjustment to 

FINRA Rule 4240(g)(2)(H). See id. at 26097–98, 

n.107. 

151 ‘‘Counterparty’’ would be defined under 

proposed FINRA Rule 4240(d)(5) to mean a person 

with whom a member has entered into an uncleared 

SBS. An ‘‘SBS’’ would be defined in proposed 

FINRA Rule 4240(d)(16) by reference to the 

definition of ‘‘security-based swap’’ under Section 

3(a)(68) of the Exchange Act and ‘‘Uncleared’’ 

would be defined in proposed FINRA Rule 

4240(d)(18) as an SBS that is not Cleared. Under 

proposed FINRA Rule 4240(d)(3), an SBS would be 

considered Cleared if it is cleared through a 

Clearing Agency by or on behalf of the member, and 

Clearing Agency would be defined under proposed 

FINRA Rule 4240(d)(4) as a clearing agency 

registered pursuant to Section 17A of the Exchange 

Act or exempted by the SEC from such registration 

by a rule or order pursuant to Section 17A of the 

Exchange Act. 

152See id. at 26098. 

153 Id. 

154 Id. 

155Under proposed FINRA Rule 4240(d)(19), an 

‘‘Uncleared SBS Account’’ would be defined to 

mean an account with respect to a Counterparty 

consisting of all Uncleared SBS between the 

member and the Counterparty, together with long 

or short positions for Variation Margin in the form 

of securities collected or delivered, respectively, 

credit or debit balances for Variation Margin in the 

form of cash collected or delivered, respectively, 

and long positions or credit balances for Initial 

Margin collected in the form of securities or cash, 

respectively. 

156 ‘‘Value’’ would be defined in proposed FINRA 

Rule 4240(d)(20). Under this definition, the Value 

of one or more SBS would be the mid-market 

replacement cost for such SBS. The Value of a 

security position would be the current market value 

of such margin securities, as defined in FINRA Rule 

4210(a)(2) and determined in accordance with 

FINRA Rule 4210(f)(1) (i.e., the provisions of 

FINRA’s general margin rule used to determine the 

current market value of margin securities). 

Alternatively, a member could elect to determine 

the Value of margin securities collected as Variation 

Margin or Initial Margin by applying a haircut to 

the current market value of such securities equal to 

the margin requirement that would be applicable to 

them under FINRA Rule 4210 if they were held in 

the Counterparty’s margin account (in which case, 

however, such margin securities would not be 

required to be themselves margined under proposed 

FINRA Rule 4240(b)(2)(A)(iii)). The Value of cash 

in U.S. dollars would be the amount of such cash, 

while the Value of freely convertible foreign 

currency would be the amount of U.S. dollars into 

which the currency could be converted, provided 

the currency is marked-to-market daily. See id. at 

26098, n.110. 

that such members will not be subject 

to the SEC’s comprehensive regulatory 

framework for SBSDs.149 Thus, subject 

to certain exceptions described in the 

proposed rule, proposed FINRA Rule 

4240 would require members that are 

not SBSDs to collect and deliver 

variation margin on a daily basis to 

cover the member’s current exposure to 

or from each uncleared SBS 

counterparty, and also to collect (but not 

deliver) initial margin from each SBS 

counterparty. 

Proposed FINRA Rule 4240 is divided 

into a header followed by paragraphs (a) 

through (d). The header would specify 

the scope of the margin requirements 

under proposed FINRA Rule 4240. 

Paragraph (a) would describe the margin 

requirements for cleared SBS. Paragraph 

(b) would describe the margin 

requirements for uncleared SBS. 

Specifically, paragraph (b)(1) would set 

forth how variation margin must be 

calculated, paragraph (b)(2) would set 

forth how initial margin must be 

calculated, paragraph (b)(3) would 

prescribe the collection and delivery 

requirements for variation and initial 

margin, paragraph (b)(4) would specify 

the manner and time of collection or 

delivery of variation and initial margin, 

and paragraph (b)(5) would list certain 

exceptions from the margin 

requirements. Paragraph (c) would 

require members to employ specified 

risk monitoring procedures and 

guidelines for uncleared SBS. Finally, 

paragraph (d) would define certain 

terms used in proposed FINRA Rule 

4240. Each of these aspects of the 

proposed rule change is described in 

further detail below. 

Proposed FINRA Rule 4240 would be 

entitled ‘‘Security-Based Swap Margin 

Requirements.’’ 150 The header text to 

the rule would state that each member 

that is a party to an SBS with a 

customer, broker or dealer, or other 

Counterparty,151 or who has guaranteed 

or otherwise become responsible for any 

other person’s SBS obligations, shall 

comply with the requirements of 

proposed FINRA Rule 4240, except that 

a member that is registered as an SBSD 

shall instead comply with Exchange Act 

Rule 18a–3. This provision of the 

proposed rule is intended to clarify that 

the margin requirements under 

proposed FINRA Rule 4240 apply in all 

circumstances where a member is a 

party to an SBS, regardless of the type 

of counterparty, and also where a 

member has financial exposure to an 

SBS, whether through a guarantee or 

other arrangements under which the 

member is responsible for another 

person’s SBS obligations. FINRA 

believes that this provision is necessary 

to ensure that the proposed margin 

requirements adequately protect 

member firms against counterparty 

credit risk, regardless of the specific 

manner through which the member has 

become exposed to such risk.152

Additionally, as discussed above, this 

provision clarifies that members that are 

registered as SBSDs are not subject to 

the proposed margin requirements 

because they must comply with 

Exchange Act Rule 18a–3. FINRA 

believes it should defer to the SEC’s 

margin framework for registered SBSDs 

rather than impose additional or 

different requirements on such 

entities.153 Proposed FINRA Rule 

4240(a), entitled ‘‘Cleared SBS Margin 

Requirements,’’ would state that, except 

as provided in paragraph (b)(5) (i.e., 

specified exceptions from proposed 

FINRA Rule 4240, discussed below), the 

margin to be maintained on any Cleared 

SBS is the margin on such Cleared SBS 

required by the Clearing Agency 

through which such SBS is Cleared. As 

discussed above, this provision clarifies 

that proposed FINRA Rule 4240 defers 

to registered clearing agencies to set the 

margin requirements for cleared SBS. 

FINRA believes that it is appropriate to 

defer to clearing agencies to establish 

margin requirements for cleared SBS in 

light of the SEC’s comprehensive 

regulation of clearing agencies, 

including their required margin levels, 

under the Exchange Act.154

Proposed FINRA Rule 4240(b), 

entitled ‘‘Uncleared SBS Margin 

Requirements,’’ would set forth the 

substantive margin requirements 

applicable to members that are not 

SBSDs when such members transact in 

uncleared SBS. Paragraph (b)(1), 

entitled ‘‘Current Exposure 

Calculation,’’ would require that, as of 

the close of business of each business 

day, the member calculate, with respect 

to each Uncleared SBS Account,155 the 

Counterparty’s Current Exposure to the 

member (if positive) or the member’s 

Current Exposure to the Counterparty (if 

negative). Current Exposure would be 

calculated as an amount equal to the net 

Value 156 of all uncleared SBS in the 

Uncleared SBS Account plus the Value 

of all Variation Margin collected from 

the Counterparty minus the Value of all 

Variation margin delivered to the 


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157Under proposed FINRA Rule 4240(d)(21), 

‘‘Variation Margin’’ would be defined to mean the 

cash or margin securities collected from, or 

delivered to, a Counterparty in accordance with 

proposed FINRA Rule 4240(b)(3)(A), as discussed 

below. Under proposed FINRA Rule 

4240(b)(2)(A)(iii), all securities deposited as 

Variation Margin for uncleared SBS would 

themselves be margined in accordance with FINRA 

Rule 4210, unless the member has chosen to haircut 

them for purposes of determining their Value. 

158See id. at 26098. 

159Under proposed FINRA Rule 4240(d)(9), the 

term ‘‘Initial Margin’’ would be defined to mean all 

cash or marginable securities, excluding Variation 

Margin, received by the member for a 

Counterparty’s Uncleared SBS Account or 

transferred to the Counterparty’s Uncleared SBS 

Account from another account at the member, 

including margin collected from a Counterparty in 

accordance with proposed FINRA Rule 

4240(b)(3)(B), as discussed below, that in each case 

have not been returned to the Counterparty or 

applied to an obligation of the Counterparty. Under 

proposed FINRA Rule 4240(b)(2)(A)(iii), all 

securities deposited as Initial Margin for uncleared 

SBS would themselves be margined in accordance 

with FINRA Rule 4210, unless the member has 

chosen to haircut them for purposes of determining 

their Value. 

160See id. at 26099. 

161Under proposed FINRA Rule 4240(d)(1), a 

‘‘Basic CDS’’ would be defined to mean a Basic 

Single Name Credit Default Swap or a Basic 

Narrow-Based Index Credit Default Swap. A Basic 

Single-Name Credit Default Swap would mean an 

SBS in which one party pays either a single fixed 

amount or periodic fixed amounts or floating 

amounts determined by reference to a specified 

notional amount, and the other party pays either a 

fixed amount or an amount determined by reference 

to the value of one or more loans, debt securities 

or other financial instruments issued, guaranteed or 

otherwise entered into by a third party (i.e., the 

‘‘Reference Entity’’) upon the occurrence of one or 

more specified credit events with respect to the 

Reference Entity (for example, bankruptcy or 

payment default). The term ‘‘Basic Single-Name 

Credit Default Swap’’ would also include a swap 

that, upon the occurrence of one or more specified 

credit events with respect to the Reference Entity, 

is physically settled by payment of a specified fixed 

amount by one party against delivery by the other 

party of eligible obligations of the Reference Entity. 

A Basic Narrow-Based Index Credit Default Swap 

would be defined to mean an SBS consisting of 

multiple component Basic Single-Name Credit 

Default Swaps. See id. at 26099, n.113. 

162Under proposed FINRA Rule 4240(d)(2), a 

‘‘Basic SBS’’ would be defined to mean an SBS, 

other than a CDS, under which each party is 

contractually obligated to provide the other the 

economic equivalent of a margin account 

containing a portfolio of long or short positions in 

securities or options (i.e., an ‘‘Equivalent Margin 

Account’’). See id. at 26099, n.114. 

163See 17 CFR 240.15c3–1(c)(2)(vi)(P). This 

provision of the SEC’s broker-dealer net capital rule 

prescribes the haircuts applicable to uncleared SBS. 

164See Notice at 26099. 

165 Id. 

166 Id. 

167 Id. 

Counterparty.157 This provision would 

define a member’s Current Exposure for 

purposes of collecting or delivering 

Variation Margin under proposed 

FINRA Rule 4240(b)(3), discussed 

below, by taking into account the net 

Value of SBS in the Counterparty’s 

account together with any Variation 

Margin that has already been collected 

or delivered. FINRA believes this 

calculation is consistent with the 

variation margin requirements under 

Exchange Act Rule 18a–3.158

Proposed FINRA Rule 4240(b)(2), 

entitled ‘‘Initial Margin Computation,’’ 

would require that, as of the close of 

business on each business day, the 

member compute the Initial Margin 

Requirement for each Uncleared SBS 

Account equal to the sum of the Initial 

Margin Requirements on the Uncleared 

SBS and securities positions in that 

Uncleared SBS Account. The remainder 

of proposed FINRA Rule 4240(b)(2) 

would describe how a member must 

calculate the Initial Margin 

Requirement, which is then used for 

purposes of collecting Initial Margin 

under proposed FINRA Rule 4240(b)(3), 

discussed below.159 Under the proposed 

rule change, the Initial Margin 

Requirement would depend on the type 

of uncleared SBS involved, with 

different requirements depending on 

whether the uncleared SBS is (i) a 

‘‘plain vanilla’’ CDS; (ii) a ‘‘plain 

vanilla’’ SBS other than an CDS (i.e., an 

SBS that is the economic equivalent of 

a margin account containing a portfolio 

of long or short positions in securities 

or options, such as a ‘‘plain vanilla’’ 

equity total return swap (‘‘TRS’’)); or 

(iii) any other type of SBS (e.g., a 

complex CDS or equity TRS that would 

not be considered ‘‘plain vanilla’’ under 

the proposed rule, including for 

example a CDS swaption, or a dividend 

swap). FINRA believes that 

differentiation as to initial margin 

requirements among these different 

types of SBS is appropriate and 

necessary given the unique 

characteristics and risks posed by 

different SBS products.160

Proposed paragraphs (b)(2)(A)(i) and 

(ii) would define the Initial Margin 

Requirements for uncleared plain 

vanilla CDS (referred to as ‘‘Basic 

CDS’’) 161 and other uncleared ‘‘plain 

vanilla’’ SBS (referred to as ‘‘Basic 

SBS’’),162 respectively. First, the Initial 

Margin Requirement for an uncleared 

Basic CDS would generally be computed 

based on the term and spread of the 

uncleared Basic CDS, using the chart 

and offsets set out in Exchange Act Rule 

15c3–1(c)(2)(vi)(P).163 In FINRA’s view, 

the proposed rule would therefore 

follow Exchange Act Rule 18a–3(d)(1)(i) 

by determining the Initial Margin 

Requirement for uncleared Basic CDS 

using the haircuts applicable to such 

SBS under the SEC’s net capital rule.164

FINRA believes that determining initial 

margin for CDS in this manner would 

promote regulatory consistency and 

reduce potential arbitrage.165

Additionally, in FINRA’s view, the 

haircuts prescribed in Exchange Act 

Rule 15c3–1(c)(2)(vi)(P) are analogous to 

existing FINRA Rule 4240 margin 

requirements, so in effect the proposed 

requirements have already been used 

during the Interim Pilot Program.166

Second, the Initial Margin Requirement 

for a Basic SBS would generally be 

computed by applying FINRA Rule 4210 

to the Equivalent Margin Account. Since 

an uncleared Basic SBS would be the 

economic equivalent of a margin 

account that would otherwise be 

governed by the margin provisions of 

FINRA Rule 4210, FINRA believes it is 

appropriate to treat such SBS 

similarly.167

In addition, proposed FINRA Rule 

4240(b)(2)(A) would permit the Initial 

Margin Requirements for both uncleared 

Basic CDS and uncleared Basic SBS to 

be computed based on a combination of 

multiple SBS and securities or options 

positions, as applicable and subject to 

certain conditions. Specifically, 

proposed FINRA Rule 4240(b)(2)(A)(i) 

would provide that, if the member has 

a netting or collateral agreement that is 

legally enforceable against the 

Counterparty and covers any 

combination of uncleared Basic CDS or 

securities specified in clause (iii), (iv) or 

(v) of Exchange Act Rule 15c3– 

1(c)(2)(vi)(P)(1) (i.e., specified offsetting 

debt securities), the member may 

compute the Initial Margin Requirement 

on such combination of positions equal 

to the ‘‘haircut’’ on that combination 

under Exchange Act Rule 15c3– 

1(c)(2)(vi)(P)(1). Proposed FINRA Rule 

4240(b)(2)(A)(ii) would similarly 

provide that, if the member has a netting 

or collateral agreement that is legally 

enforceable against the Counterparty 

and covers any combination of 

uncleared Basic SBS, securities or 

options positions, the member may 

compute the Initial Margin Requirement 

on the combination of such positions 

equal to the margin that FINRA Rule 

4210 would require to be maintained on 

the combination of Equivalent Margin 

Accounts for such uncleared Basic SBS 

and securities or options positions. 

Proposed FINRA Rule 4240(b)(2)(B) 

would impose conditions on computing 

the Initial Margin Requirement using 

these combination methods, including 

that (i) securities positions must be in 

the Counterparty’s uncleared SBS 

Account or margin account at the 

member; (ii) securities may not be 

included if the member has chosen to 

haircut them for purposes of 

determining their Value; (iii) options 


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168 Id. 

169 Id. 

170 Id. In connection with this proposed provision 

of FINRA Rule 4240(b)(2)(B), the proposed rule 

change would also add a new paragraph (e)(9) to 

FINRA Rule 4210, entitled ‘‘Security-Based Swaps; 

SBS Offsets.’’ Specifically, where the Initial Margin 

Requirement on the combination of SBS and 

securities or options position in the margin account 

would be less than the FINRA Rule 4210 

maintenance requirement on the margin account 

positions, proposed FINRA Rule 4210(e)(9) would 

reduce the FINRA Rule 4210 maintenance 

requirement on the margin account positions to 

equal the computed Initial Margin Requirement. 

In addition, proposed FINRA Rule 4210(e)(9) 

would clarify that, except for SBS carried by a 

member in a portfolio margin account subject to the 

requirements of FINRA Rule 4210(g), as discussed 

below, margin requirements on SBS and positions 

in Uncleared SBS Accounts are determined by 

proposed FINRA Rule 4240, rather than FINRA 

Rule 4210. See id. at 26099, n.117. 

171See Notice at 26100. 

172 Id. 

173 Id. 

174 Id. 

175 Id. 

176Under proposed FINRA Rule 4240(d)(10), the 

term ‘‘Initial Margin Deficit’’ would be defined as 

the amount, if any, by which (A) the sum of the 

Value of the Initial Margin in an Uncleared SBS 

Account and the Counterparty’s Rule 4210 Excess 

is less than (B) the Initial Margin Requirement for 

the Uncleared SBS Account. A person’s ‘‘Rule 4210 

Excess’’ would be defined in proposed FINRA Rule 

4240(d)(15) to mean the amount, if any, by which 

the equity (as defined in FINRA Rule 4210(a)(5)) in 

the Counterparty’s margin account at the member 

exceeds the amount required by FINRA Rule 4210. 

See id. at 26100, n.118. 

positions must be in the Counterparty’s 

margin account at the member; (iv) no 

SBS, security or option positions may be 

included in more than one combination; 

and (v) no combinations may include 

securities or options positions for which 

reduced margin requirements are 

computed under FINRA Rule 4210(e)(1) 

(i.e., reduced margin requirements for 

offsetting long and short positions) or 

4210(f)(2)(F)(ii) through (f)(2)(l) (i.e., 

various reduced margin requirements 

for certain options, including covered 

options and offsetting options 

positions).168 FINRA believes these 

conditions would ensure that the Initial 

Margin Requirement calculated using 

the combination method is based on 

securities and options positions that the 

member actually has in its possession 

and does not reflect reductions in value 

that would inappropriately lower the 

margin requirement.169 In addition, 

proposed FINRA Rule 4240(b)(2)(B) 

would provide that if the Initial Margin 

Requirement is computed on a 

combination as described above, the 

Initial Margin Requirement on the 

uncleared SBS included in the 

combination shall be reduced (but not 

below zero) by the aggregate 

maintenance margin requirements 

under FINRA Rule 4210 applicable to 

such margin account positions. FINRA 

believes that this provision would 

appropriately take into account margin 

already collected under FINRA Rule 

4210 with respect to such positions.170

The proposed rule change would not 

specify Initial Margin Requirements for 

other uncleared SBS that do not qualify 

as Basic CDS or Basic SBS. Instead, 

proposed FINRA Rule 4240(b)(2)(A)(iv) 

would provide that the Initial Margin 

Requirement for any uncleared SBS 

other than a Basic CDS or Basic SBS 

would be determined in a manner 

approved by FINRA pursuant to 

proposed FINRA Rule 4240(b)(2)(C), 

which would permit a member to apply 

to FINRA for the approval of an Initial 

Margin Requirement for any other type 

of SBS. Under the proposed rule change, 

any such application would be required 

to: 

• Define the specific type of SBS 

covered by the application; 

• describe the purpose(s) that the 

member and its Counterparties would 

have for entering that type of SBS; 

• identify all variables that influence 

the value of that type of SBS; 

• explain all risks of that type of SBS; 

• propose a specific Initial Margin 

Requirement (not a margin model) for 

that type of SBS; 

• explain how the proposed specific 

Initial Margin Requirement would 

adequately protect a member and its 

capital against each of those risks; 

• attach copies of the member’s SBS 

risk management procedures and 

describe the application of those 

procedures to that type of SBS; and 

• provide the results of backtesting of 

the proposed specific Initial Margin 

Requirement over periods of significant 

volatility in the variables influencing 

the value of that type of SBS.171

Proposed FINRA Rule 4240(b)(2)(C) 

would further provide that, if FINRA 

approves any such application, the 

approval may be unconditional or 

conditional, including in the form of a 

time-limited pilot program; may 

approve the use of the specific Initial 

Margin Requirement only by the 

applicant; or may take the form of a 

Regulatory Notice or other 

communication approving the use of the 

specific margin requirements by 

members generally. Under proposed 

FINRA Rule 4240(b)(2)(C), no member 

would be permitted to become a party 

to an SBS other than a Basic CDS or 

Basic SBS unless FINRA has approved 

an Initial Margin Requirement for such 

member’s use with respect to that type 

of SBS. As described above, FINRA 

states that the Initial Margin 

Requirements for Basic CDS are based 

on the Commission’s treatment of such 

SBS under its net capital rule, while the 

Initial Margin Requirements for Basic 

SBS are based on the margin that would 

be required for a margin account that 

would be the economic equivalent of 

such SBS.172 However, in FINRA’s 

view, other types of SBS—including 

CDS and equity TRS with complex 

features—may not be easily 

accommodated under these frameworks, 

and the specific risks that accompany 

such SBS may not be readily apparent 

or quantifiable to FINRA without 

additional information.173 Moreover, as 

noted above, SBS can be complex 

financial instruments that pose 

substantial risks to members and margin 

serves as an important means of 

protecting member firms, and thereby 

their customers and investors, from 

such risks. FINRA therefore believes 

that members that are not SBSDs (and 

therefore not subject to the SEC’s 

comprehensive regulatory framework 

for registrants under Title VII of DoddFrank) should not be permitted to enter 

into other types of SBS unless and until 

FINRA has evaluated the risks of such 

SBS and approved margin requirements 

that adequately address such risks.174 If 

FINRA determines that a proposed 

margin requirement does not adequately 

address the risks for a particular type of 

SBS, FINRA would not approve the 

application under proposed FINRA Rule 

4240(b)(2)(C), and members would not 

be permitted to enter into such SBS. To 

FINRA’s knowledge, this SBS activity 

by members that do not plan to register 

as SBSDs is relatively limited.175

Proposed FINRA Rule 4240(b)(3), 

entitled ‘‘Collection or Delivery of 

Variation and Initial Margin,’’ would set 

forth a member’s obligation to collect or 

deliver margin as calculated pursuant to 

proposed FINRA Rule 4240(b)(1) and 

(2), as described above. Paragraph 

(b)(3)(A) would require each member to 

deliver or return to each Counterparty 

cash or margin securities with a Value 

equal to the Counterparty’s Current 

Exposure (if any) to the member, or 

collect or retrieve from the Counterparty 

cash or margin securities with a Value 

equal to the member’s Current Exposure 

(if any) to the Counterparty. Paragraph 

(b)(3)(B) would require each member to 

collect from each Counterparty cash or 

margin securities with a Value at least 

equal to any Initial Margin Deficit.176

Therefore, consistent with Exchange Act 

Rule 18a–3, proposed FINRA Rule 

4240(b)(3) would require members that 

are not SBSDs to collect and deliver 

Variation Margin, and also to collect 

(but not deliver) Initial Margin, in 

amounts determined pursuant to the 


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177To account for situations where a member is 

not the actual party to an SBS, but nonetheless has 

financial exposure for uncleared SBS (e.g., through 

a guarantee), proposed FINRA Rule 4240(b)(3)(C) 

would also require a member to collect both 

Variation Margin and Initial Margin from the party 

that has obligations under the uncleared SBS for 

which the member has responsibility, to the extent 

that such collection would be required if the 

member were a party to the uncleared SBS, unless 

the member can establish that such margin has been 

delivered to the other party. See id. at 26100, n.119. 

178See id. at 26100. 

179See id. at 26101. 

180 Id. 

181 Id. 

182 Id. 

183Under proposed FINRA Rule 4240(d)(12), a 

‘‘Legacy SBS’’ would be defined as an uncleared 

SBS entered into before April 6, 2022. See 

Amendment No. 1. Proposed FINRA Rule 

4240(b)(2)(A)(iv) would also clarify that for any 

Legacy SBS for which proposed Rule 4240 does not 

specify an Initial Margin Requirement (i.e., an SBS 

other than a Basic CDS, Basic SBS or other SBS for 

which FINRA has approved specific margin 

requirements), the Initial Margin Requirement must 

be calculated using the applicable method specified 

in Exchange Act Rule 15c3–1(c)(2)(vi)(P). The 

Initial Margin Requirement for Legacy SBS 

calculated under this provision would be used for 

purposes of determining the appropriate 

corresponding capital charge, as well as to 

determine the Initial Margin Requirement for a 

Legacy SBS to the extent that a member elects not 

to utilize the Legacy SBS exception under proposed 

FINRA Rule 4240(b)(5). See id. at 26101, n.120. 

184See id. at 26101. 

185 Id. 

186Under proposed FINRA Rule 4240(d)(13), a 

‘‘Multilateral Organization’’ would be defined to 

mean the Bank for International Settlements, the 

European Stability Mechanism, the International 

Bank for Reconstruction and Development, the 

Multilateral Investment Guarantee Agency, the 

International Finance Corporation, the InterContinued 

provisions of FINRA Rule 4240(b)(1) 

and (2) as described above, for their 

transactions in uncleared SBS.177

Proposed FINRA Rule 4240(b)(4), 

entitled ‘‘Manner and Time of 

Collection or Delivery of Variation and 

Initial Margin; Prohibited Returns and 

Withdrawals,’’ would set forth 

additional detailed requirements and 

clarifications regarding the manner and 

time of collection or delivery of 

variation and initial margin, as 

calculated pursuant to proposed FINRA 

Rules 4240(b)(1) and (2) and collected or 

delivered in accordance with proposed 

FINRA Rule 4240(b)(3), as described 

above. Specifically, proposed FINRA 

Rule 4240(b)(4) would provide for the 

following: 178

• Under proposed FINRA Rule 

4240(b)(4)(A), margin would be deemed 

collected or returned to the member 

when it is received in the 

Counterparty’s Uncleared SBS Account 

at the member (or transferred to such 

account from another account at the 

member). 

• Under proposed FINRA Rule 

4240(b)(4)(B), margin would be deemed 

collected or returned to the 

Counterparty when it is transferred from 

the Counterparty’s Uncleared SBS 

Account at the member in accordance 

with the Counterparty’s instructions or 

agreement with the member, which 

could potentially include transfer to 

another account of the Counterparty 

carried by the member. 

• Under proposed FINRA Rule 

4240(b)(4)(C), margin would be required 

to be collected or delivered pursuant to 

proposed FINRA Rule 4240(b)(3) as 

promptly as possible, but in any case no 

later than the close of business on the 

business day after the date on which the 

Current Exposure or Initial Margin 

Requirement was required to be 

computed in accordance with proposed 

FINRA Rule 4240(b)(1) or (2) (i.e., 

margin would generally be required to 

be delivered or collected on a T+1 

basis). Further, unless FINRA has 

specifically granted the member 

additional time, a member that has not 

collected margin as required by the 

close of business on the third business 

day (i.e., by T+3) would be required to 

take prompt steps to liquidate positions 

in the Counterparty’s Uncleared SBS 

Account to eliminate the margin 

deficiency. 

• Proposed FINRA Rule 4240(b)(4)(D) 

would require a member to net the 

delivery or return of Variation Margin 

against the collection of Initial Margin, 

if applicable, and would further permit 

a member to net the return of Initial 

Margin against the collection or retrieval 

of Variation Margin, if applicable. 

• Proposed FINRA Rule 4240(b)(4)(E) 

would prohibit a member from 

returning Initial Margin to a 

Counterparty, or permitting a 

Counterparty to make a withdrawal 

from the Counterparty’s margin account, 

if doing so would create or increase an 

Initial Margin Deficit. 

FINRA believes it is appropriate and 

consistent with the protection of 

member firms and investors to require 

margin for uncleared SBS to be 

delivered or collected, as applicable, on 

a T+1 basis, and to further require that 

uncleared SBS positions be liquidated if 

margin is not collected within a T+3 

timeframe.179 FINRA also believes the 

other clarifications described above are 

necessary to ensure that members and 

their uncleared SBS counterparties have 

a clear and consistent understanding of 

when and how margin must be 

delivered or collected under the 

proposed rule change.180

Proposed FINRA Rule 4240(b)(5), 

entitled ‘‘Exceptions,’’ would provide 

eight specific exceptions from a 

member’s general obligation to collect or 

deliver margin, as applicable, under 

proposed FINRA Rule 4240(b)(3), as 

described above. FINRA believes the 

proposed exceptions would further 

align the requirements of proposed 

FINRA Rule 4240 with the margin 

requirements applicable to SBSDs under 

Exchange Act Rule 18a–3 and provide 

members with additional flexibility in 

managing their risk exposures, while 

still ensuring that the risks to members 

with respect to their uncleared SBS 

exposures are adequately addressed.181

The proposed exceptions under FINRA 

Rule 4240(b)(5) would include the 

following: 

• Clearing Agencies. A member 

would not be required to deliver 

Variation Margin to, or collect Initial 

Margin or Variation Margin from, any 

Clearing Agency, and would also not be 

required to deduct otherwise required 

Variation Margin or Initial Margin in the 

computation of its net capital under 

Exchange Act Rule 15c3–1 or, if 

applicable, FINRA Rule 4110(a). FINRA 

believes this exception is consistent 

with its determination to defer to 

Clearing Agency margin requirements 

with respect to Cleared SBS.182

• Legacy SBS. A member would be 

permitted to omit all (but not less than 

all) Legacy SBS with a Counterparty 

from the Counterparty’s Uncleared SBS 

Account when computing Current 

Exposure and the Initial Margin 

Requirement, provided that the member 

collects and delivers margin on Legacy 

SBS to the extent of its contractual 

rights and obligations to do so.183

However, a member would be required 

to take a capital deduction under 

Exchange Act Rule 15c3–1 or, if 

applicable, FINRA Rule 4110(a), to 

reflect the amount of any margin that it 

would have otherwise been required to 

collect if the Legacy SBS had been 

included in the Counterparty’s 

Uncleared SBS Account. FINRA 

believes it is appropriate to provide a 

general exception for legacy SBS, as 

members would not be in a position to 

require their counterparties to legacy 

SBS to exchange margin under existing 

SBS agreements as would otherwise be 

required under proposed FINRA Rule 

4240.184 However, in such cases, FINRA 

believes it is appropriate to require a 

member to take a corresponding capital 

charge to account for the member’s 

ongoing risk exposure under such 

SBS.185

• Multilateral Organizations. A 

member would not be required to 

deliver Variation Margin to, or collect 

Initial Margin or Variation Margin from, 

any Multilateral Organization.186


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American Development Bank, the Asian 

Development Bank, the African Development Bank, 

the European Bank for Reconstruction and 

Development, the European Investment Bank, the 

European Investment Fund, the Nordic Investment 

Bank, the Caribbean Development Bank, the Islamic 

Development Bank, the Council of Europe 

Development Bank, or any other multilateral 

development bank that provides financing for 

national or regional development in which the U.S. 

government is a shareholder or contributing 

member. See id. at 26101, n.121. 

187See id. at 26101. 

188Under proposed FINRA Rule 4240(d)(8), a 

‘‘Financial Market Intermediary’’ would be defined 

to mean an SBSD, swap dealer, broker or dealer, 

FCM, bank, foreign bank, or foreign broker or 

dealer. See id. at 26101, n.122. 

189See id. at 26101. 

190 Id. 

191Under proposed FINRA Rule 4240(d)(17), a 

‘‘Sovereign Counterparty’’ would be defined as a 

Counterparty that is a central government 

(including the U.S. government) or an agency, 

department, ministry or central bank of a central 

government. See id. at 26101, n.122. 

192See id. at 26101–102. 

193 Id. at 26102. 

194 Id. 

195 Id. 

196 Id. 

197Under proposed FINRA Rule 4240(d)(14), a 

‘‘Registered or Foreign SBS Dealer’’ would be 

defined to mean (i) any person registered with the 

SEC as an SBSD or (ii) any foreign person if the SEC 

has made a substituted compliance determination 

under Exchange Act Rule 3a71–6(a)(1) that 

compliance by an SBSD or class thereof with 

specified requirements of a foreign regulatory 

system that are applicable to such foreign person 

may satisfy the capital requirements of Section 

15F(e) of the Exchange Act and Exchange Act Rule 

18a–1 that would otherwise apply to such SBSD or 

class thereof. Therefore, the definition would cover 

registered SBSDs and entities that are subject to 

equivalent SBSD capital requirements in a foreign 

jurisdiction. See id. at 26102, n.124. 

198FINRA states that an ANC Firm transacting 

with a Counterparty that is its Majority Owner 

would also benefit from the general exception for 

collecting Initial Margin from Majority Owners, as 

described above. However, under this additional 

exception, an ANC Firm would be permitted to take 

only a deduction for the credit risk on its 

transactions with Majority Owner counterparties as 

calculated in accordance with Exchange Act Rule 

15c3–1e, rather than the full amount of the Initial 

Margin Requirement that would otherwise have 

applied. See id. at 26102, n.125. 

199See id. at 26102. 

200 Id. 

However, a member would be required 

to take a capital deduction to reflect the 

amount of any margin that it would 

otherwise have been required to collect 

from such a Multilateral Organization. 

FINRA believes it is appropriate to 

follow Exchange Act Rule 18a–3 by 

providing an exception for Multilateral 

Organizations and requiring the risk 

posed by such SBS to be accounted for 

in a member’s capital computations.187

• Financial Market Intermediaries. A 

member would not be required to 

collect Initial Margin from a 

Counterparty that is a Financial Market 

Intermediary (but would still be 

required to collect or deliver Variation 

Margin, as applicable).188 In such case, 

a member would be required to take a 

capital deduction to reflect the amount 

of any Initial Margin that it would have 

otherwise been required to collect from 

such Financial Market Intermediary. A 

Counterparty that is a Financial Market 

Intermediary generally would be subject 

to a comprehensive regulatory 

framework, including capital 

requirements. FINRA therefore believes 

it is appropriate to account for the 

reduced counterparty credit risk posed 

by such Counterparties by permitting a 

member to take a capital charge in lieu 

of requiring such Counterparties to post 

Initial Margin.189 However, FINRA 

continues to believe that Variation 

Margin should be exchanged with such 

Counterparties to account for ongoing 

the market risk posed by such uncleared 

SBS.190

• Sovereign Counterparties. A 

member would generally be required to 

deliver Variation Margin to, and collect 

Initial Margin or Variation Margin from, 

a Sovereign Counterparty.191 However, 

under proposed FINRA Rule 

4240(b)(5)(E), if the member has 

determined pursuant to policies and 

procedures or credit risk models 

established pursuant to Exchange Act 

Rule 15c3–1(c)(2)(vi)(l) that the 

Sovereign Counterparty has only a 

minimal amount of credit risk, the 

member would not be required to 

collect Initial Margin from such 

Sovereign Counterparty (but would still 

be required to collect or deliver 

Variation Margin, as applicable). In such 

case, a member would be required to 

take a capital deduction to reflect the 

amount of any Initial Margin that it 

would have otherwise been required to 

collect from such Sovereign 

Counterparty. As for Financial Market 

Intermediaries, FINRA believes it is 

appropriate to account for the reduced 

counterparty credit risk posted by 

highly creditworthy Sovereign 

Counterparties by permitting a member 

to take a capital charge in lieu of 

requiring such Counterparties to post 

Initial Margin.192 However, FINRA 

continues to believe that Variation 

Margin should be exchanged with such 

Counterparties to account for ongoing 

the market risk posed by such uncleared 

SBS.193

• Majority Owners; ANC Firms 

Transacting with Majority Owners or 

Registered or Foreign SBS Dealers 

Under Common Ownership. FINRA 

states that it understands that members 

may enter into uncleared SBS with 

affiliated entities for a variety of 

reasons, including for risk management 

purposes.194 FINRA does not believe a 

broad exception from the proposed 

margin requirements for uncleared SBS 

with all affiliates would adequately 

account for the risks posed to its 

members by uncleared SBS in such 

circumstances.195 However, FINRA does 

believe that two specific, more limited 

exceptions for SBS entered into with 

certain affiliates would be 

appropriate.196 First, under proposed 

FINRA Rule 4240(b)(5)(F), a member 

would not be required to collect Initial 

Margin from a Counterparty that is a 

direct or indirect owner of a majority of 

the equity and voting interests in the 

member (a ‘‘Majority Owner’’) (but 

would still be required to collect or 

deliver Variation Margin, as applicable). 

In such case, a member would be 

required to take a capital deduction to 

reflect the amount of any Initial Margin 

that it would have otherwise been 

required to collect from such Majority 

Owner. Second, under proposed FINRA 

Rule 4240(b)(5)(G), a member that is an 

ANC Firm would not be required to 

collect Initial Margin from a 

Counterparty that is a Majority Owner 

or a Registered or Foreign SBS Dealer 

under common ownership (but would 

still be required to collect or deliver 

Variation Margin, as applicable).197 In 

such case, an ANC Firm member would 

be required to take a deduction for 

credit risk on such transactions 

computed in accordance with Exchange 

Act Rule 15c3–1e(c).198 FINRA believes 

that the proposed exception from the 

Initial Margin Requirements for 

uncleared SBS with Majority Owners, 

provided that the member takes a 

capital charge in lieu of collecting Initial 

Margin, would adequately protect 

members in such circumstances due to 

the lower risk presented by Majority 

Owners, which typically must satisfy 

capital and other requirements 

applicable to bank holding companies 

and similar entities.199 FINRA also 

believes that the proposed exception for 

ANC Firms with respect to SBS with 

Majority Owners and Registered or 

Foreign SBS Dealer affiliates, provided 

that the member takes a corresponding 

credit risk charge, would adequately 

protect such members while reducing 

potential competitive disparity as 

between ANC Firms that are registered 

as SBSDs (and therefore subject to 

Exchange Act Rule 18a–3) and ANC 

Firms that are not registered as SBSDs 

(and therefore would be subject to 

proposed FINRA Rule 4240 with respect 

to their uncleared SBS).200

• Portfolio Margin. Proposed FINRA 

Rule 4240(b)(5)(H) would provide that 

proposed FINRA Rule 4240 would not 


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201FINRA is also proposing a technical 

adjustment to the definition of ‘‘unlisted 

derivative’’ under FINRA Rule 4210(g)(2)(H) to 

clarify that, to qualify under the definition, the 

option, forward contract or SBS must be able to be 

valued by a theoretical pricing model that is 

approved by the SEC for valuing that type of 

options, forward contract or SBS. 202 Id. 203 Id. 204 Id. 205 Id. 

206See id. at 26103; see also 17 CFR 240.18a–3(e); 

Capital, Margin, and Segregation Release at 43930. 

207See Notice at 26103. 

208 Id. 

apply to any unlisted derivative, as 

defined in FINRA Rule 4120(g)(2)(H), 

carried by the member in a portfolio 

margin account subject to the 

requirements of FINRA Rule 4210(g) if 

such unlisted derivative is of a type 

addressed in the comprehensive written 

risk analysis methodology filed by the 

member with FINRA in accordance with 

FINRA Rule 4210(g)(1).201 In addition, 

proposed FINRA Rule 4240 would not 

apply to any SBS carried in a 

commodity account or other account 

under the jurisdiction of the CFTC in 

accordance with an SEC rule, order or 

no-action letter permitting SBS and 

swaps to be carried and portfolio 

margined together in such an account. 

According to FINRA, portfolio 

margining provides members with the 

flexibility to manage their risk 

exposures based on a broader view of 

their overall relationship with a 

particular Counterparty.202 FINRA 

believes it is appropriate to provide an 

exception from proposed FINRA Rule 

4240 for any SBS in a portfolio margin 

account if the SBS is of a type whose 

risk is appropriately addressed by an 

approved theoretical pricing model (e.g., 

TIMS) and covered by portfolio risk 

management procedures filed by the 

member with FINRA, as well as for SBS 

permitted by the SEC to be portfolio 

margined in a commodity account.203 In 

these circumstances, in FINRA’s view, 

the risks presented by such SBS would 

already be subject to a comprehensive 

risk management framework, and 

therefore FINRA does not believe it is 

necessary to apply the proposed new 

margin requirements to such SBS.204

Proposed FINRA Rule 4240(c), 

entitled ‘‘Risk Monitoring Procedures 

and Guidelines,’’ would require 

members to monitor the risk of any 

Uncleared SBS Accounts and maintain 

a comprehensive risk analysis 

methodology for assessing the potential 

risk to the member’s capital over a 

specified range of possible market 

movements over a specified time period. 

For purposes of this requirement, 

members would be required to employ 

the following risk monitoring 

procedures and guidelines: 205

• Obtaining and reviewing the 

required documentation and financial 

information necessary for assessing the 

amount of credit to be extended to SBS 

Counterparties; 

• determining and documenting the 

legal enforceability of netting or 

collateral agreements, including 

enforceability in the event a 

Counterparty becomes subject to 

bankruptcy or other insolvency 

proceedings; 

• assessing the determination, review 

and approval of credit limits to each 

Counterparty, and across all 

Counterparties; 

• monitoring credit risk exposure to 

the member from SBS, including the 

type, scope and frequency of reporting 

to senior management; 

• the use of stress testing of accounts 

containing SBS contracts in order to 

monitor market risk exposure from 

individual accounts and in the 

aggregate; 

• managing the impact of credit 

extended related to SBS contracts on the 

member’s overall risk exposure; 

• determining the need to collect 

additional margin from a particular 

customer or broker or dealer, including 

whether that determination was based 

upon the creditworthiness of the 

customer or broker or dealer and/or the 

risk of the specific contracts; 

• determining the need for higher 

margin requirements than required by 

proposed FINRA Rule 4240 and 

formulating the member’s own margin 

requirements, including procedures for 

identifying unusually volatile positions, 

concentrated positions (with a 

particular Counterparty and across all 

Counterparties and customers), or 

positions that cannot be liquidated 

promptly; 

• monitoring the credit exposure 

resulting from concentrated positions 

with a single Counterparty and across 

all Counterparties, and during periods 

of extreme volatility; 

• identifying any Uncleared SBS 

Accounts with intraday risk exposures 

that are not reflected in their end of day 

positions (e.g., Uncleared SBS Accounts 

that frequently establish positions and 

then trade out of, or hedge, those 

positions by the end of the day) and 

collecting appropriate margin to address 

those intraday risk exposures; 

• identifying any Uncleared SBS 

Account that, in light of current market 

conditions, could not be promptly 

liquidated for an amount corresponding 

to the Current Exposure computed with 

respect to such account and determining 

the need for higher margin requirements 

on such accounts or the positions 

therein; 

• maintaining sufficient Initial 

Margin in the accounts of each 

Counterparty to protect against the 

largest individual potential future 

exposure of an Uncleared SBS in such 

Counterparty’s Uncleared SBS Account, 

as measured by computing the largest 

maximum possible loss that could result 

from the exposure; and 

• increasing the frequency of 

calculations of Current Exposure and 

Initial Margin Requirements during 

periods of extreme volatility and for 

accounts with concentrated positions. 

Proposed FINRA Rule 4240(c) would 

further require a member to review, in 

accordance with the member’s written 

procedures, at reasonable periodic 

intervals, the member’s SBS activities 

for consistency with these risk 

monitoring procedures and guidelines, 

and to determine whether the data 

necessary to apply the risk monitoring 

procedures and guidelines is accessible 

on a timely basis and information 

systems are available to adequately 

capture, monitor, analyze and report 

relevant data. 

In FINRA’s view, the risk monitoring 

procedures and guidelines under 

proposed FINRA Rule 4240(c) are 

analogous to the risk monitoring and 

procedure requirements applicable to 

nonbank SBSDs with respect to their 

uncleared SBS transactions under 

Exchange Act Rule 18a–3.206 These 

requirements are also based in part on 

aspects of FINRA Rule 4210, including 

procedures related to the need for 

additional margin under FINRA Rule 

4210(d) and the portfolio margin risk 

monitoring requirements under FINRA 

Rule 4210(g)(1). In FINRA’s view, SBS 

are complex financial instruments that 

may expose a member to significant 

risks, including, for example, market 

risk, counterparty credit risk, 

operational risk and legal risk.207 FINRA 

accordingly believes it is appropriate 

and necessary, and consistent with the 

protection of investors, for members 

with exposure to uncleared SBS to 

maintain a comprehensive risk 

monitoring program, including the 

specific elements described above, to 

address such risks.208

K. Effective Date 

As discussed above in Section II.A., 

current FINRA Rule 0180 temporarily 

excepts the application of most FINRA 

rules to the SBS activities of its 

members. Now that the Commission has 

finalized the majority of its Title VII 

rulemakings, FINRA believes it is 

appropriate and in the public interest 


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209See Notice at 26086. 

210See id. 

211A commenter expressed concern as to FINRA’s 

initial proposed effective date for the proposed rule 

change. See SIFMA Letter at 1–3, 11. In response, 

on August 9, 2021, FINRA filed Amendment No. 1, 

which: (1) Extended the effective date of the 

proposed amendments to FINRA Rules 0180, 4120 

and 9610 to February 6, 2022; (2) extended the 

effective date of the proposed amendments to 

FINRA Rules 4210, 4220 and 4240 to April 6, 2022; 

and (3) conformed the proposed definition of 

‘‘Legacy Swap’’ in proposed FINRA Rule 

4240(d)(12) to reflect the new effective date of April 

6, 2022. See FINRA Letter at 14–15. 

212As discussed above in Section II.A, in 

September 2021, the existing exceptions for current 

FINRA Rules 0180 and 4240 were extended to 

February 6, 2022 and April 6, 2022, respectively, 

and current Rule 4240 was amended to add 

Supplementary Material .02, which clarifies that the 

rule does not apply to a member that is registered 

with the Commission as an SBSD. See Extension 

Notice, supra note 17. 

213 In approving this rule change, the Commission 

has considered the rule’s impact on efficiency, 

competition, and capital formation. See 15 U.S.C. 

78c(f). 

214 15 U.S.C. 78o–3(b)(6). 

215See Letters at 1 (stating the need for the 

proposed rule change ‘‘to be enacted, as is, for the 

protection and operation of free and fair markets.’’); 

see also SIFMA Letter at 1 (stating support for many 

aspects of the proposed rule change). 

216See PML Letter at 4. 

217 Id. 

218See FINRA Letter at 3. 

219 Id. 

220 Id. 

221 Id. at 3–4. 

222See Notice at 26086. FINRA believes this 

determination is consistent with both Congress’s 

intent and FINRA’s regulatory responsibility. Id. 

223See Exchange Act Section 15A(b)(2); (6). 

224As discussed below, the proposed exception 

in FINRA Rule 0180(b) is not conditioned on 

registration as an SBS Entity but rather the general 

inapplicability of those rule sets to SBS activity. 

for the current temporary FINRA Rule 

0180 to expire and for FINRA to clarify 

the application of FINRA rules to SBS 

through a permanent FINRA rule.209

Additionally, since FINRA filed its 

proposed rule change, as modified by 

Amendment No. 1, the Commission’s 

regulatory framework governing SBS 

Entities has gone into effect. FINRA is 

proposing to amend FINRA Rules 0180, 

4120, 4210, 4220, 4240 and 9610 to take 

into account members’ SBS activities.210

FINRA states that if the proposed rule 

change, as modified by Amendment No. 

1, is approved by the Commission, the 

effective date for the proposed 

amendments to FINRA Rules 0180, 4120 

and 9610 will be February 6, 2022, and 

the effective date for the proposed 

amendments to FINRA Rules 4210, 4220 

and 4240 will be April 6, 2022.211

The proposed effective dates will also 

align with the new expiration dates of 

current FINRA Rules 0180 and 4240, 

such that the temporary rules will 

expire on the day the proposed 

permanent rules become effective.212

III. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, as modified by Amendment 

No. 1, the comment letters, and FINRA’s 

responses to the comments, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

that are applicable to a national 

securities association.213 Specifically, 

the Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with Section 

15A(b)(6) of the Exchange Act,214 which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, to facilitate 

transactions in securities, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and, in general, to protect investors and 

the public interest. 

A. Proposed Rule 0180(a) (Application 

of FINRA Rules to Security-Based 

Swaps) 

As discussed above in Section II.B., 

the proposed rule change would replace 

current FINRA Rule 0180 with new 

FINRA Rule 0180 and would apply all 

FINRA rules to SBS activities and 

positions with respect to SBS, unless 

subject to specific exceptions set forth 

in proposed FINRA Rule 0180. Five 

commenters were supportive of the 

proposed rule change generally.215 One 

commenter suggested that, as an 

alternative, FINRA members be 

permitted to comply with the 

Commission’s SBS rules in lieu of a 

parallel FINRA rule.216 The commenter 

proposed that FINRA could either 

consider incorporating into the FINRA 

rules a reference to the analogous 

Commission rules or permit FINRAregulated broker-dealers not registered 

with the Commission as an SBSD to 

‘‘opt-in’’ to the relevant Commission 

SBS rules.217

In its response, FINRA stated that 

neither of these alternatives would be 

appropriate.218 FINRA believes the 

limited exceptions in proposed Rules 

0180(c) through (g) are appropriate only 

in the context of registered SBS Entities 

subject to the SEC’s full regulatory 

framework applicable to such 

registrants.219 FINRA does not believe 

that it would be appropriate to permit 

members that are not SBS Entities 

registered with the Commission to ‘‘optin’’ to the parallel SEC rules, or to 

incorporate SEC rules by reference for 

FINRA members not registered with the 

Commission as SBS Entities.220 FINRA 

stated that a FINRA member engaged in 

SBS activities below the de minimis 

threshold for registration with the 

Commission may nonetheless elect to 

register with the Commission on a 

voluntary basis, and thereby become 

subject to the Commission’s full 

regulatory framework for SBS.221

FINRA’s determination to generally 

apply FINRA rules to members’ 

activities and positions with respect to 

SBS,222 other than the specific 

enumerated exceptions discussed 

below, is reasonable. Specifically, 

FINRA reasonably determined that, 

because SBS are securities under the 

Exchange Act, FINRA’s existing rule 

framework, which is designed to 

regulate the securities activity of its 

members, should apply absent a specific 

exception. FINRA’s determination is 

consistent with the requirement in the 

Exchange Act that FINRA, as a 

registered securities association, have 

rules designed to, among other things, 

facilitate transactions in securities and 

enforce compliance with the Exchange 

Act by its members.223 Applying these 

rules to FINRA members’ SBS activities 

and positions with respect to SBS will 

help prevent fraudulent and 

manipulative acts and practices, 

promote just and equitable principles of 

trade, and protect investors and the 

public interest. 

The general presumption under Rule 

0180(a) that FINRA rules apply to 

members’ SBS activities and positions, 

except where otherwise specified in the 

rule, would help ensure that FINRA 

members that are not also registered as 

an SBS Entity with the Commission will 

be subject to a comprehensive set of 

FINRA rules governing, among other 

things, conduct and communication by 

members, with respect to the members’ 

SBS activities and positions. It is 

appropriate that, with the exception of 

proposed Rule 0180(b),224 an exception 

to this general presumption will apply 

only where a FINRA member is 

registered with the Commission as an 

SBS Entity. This important limitation 

will provide appropriate regulatory 

oversight with respect to SBS activity— 

where the FINRA member is registered 

with the Commission as an SBS Entity, 

the comprehensive framework the 

Commission has adopted for regulation 

of SBS, including its examination 

program, will apply. Conversely, where 

the FINRA member is not registered 

with the Commission as an SBS Entity, 

it is appropriate for the member to 


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225See SIFMA Letter at 3; PML Letter at 2; Letters 

at 1. 

226See SIFMA Letter at 3. 

227See Notice at 26088. 

228See id. 

229See id. 

230See id.; see also FINRA Rules 6000 and 7000 

series. 

231See Notice at 26088. 

232See id. 

233See supra note 23 and related text; see also 

Notice at 26088. 

234See Notice at 26089. 

235See SIFMA Letter at 3 (stating the rules to be 

excepted under the proposal and noting that ‘‘[a]s 

FINRA observes, these rules would unnecessarily 

duplicate certain of the Commission’s SBS rules if 

they applied to SBS Entities or their associated 

persons’’). 

236See Notice at 26089. 

237 Id. 

comply with a comprehensive set of 

FINRA rules as set forth in the proposed 

rule change and be primarily subject to 

FINRA’s examination program. In the 

event a FINRA member that is not 

required to be registered with the 

Commission as an SBS Entity would 

prefer to instead comply with the 

Commission’s SBS regulatory 

framework (and avail itself of the 

exceptions specified in proposed FINRA 

Rule 0180(b)–(g)), the member may 

voluntarily elect to register as an SBS 

Entity with the Commission and thus 

become subject to the full regulatory 

framework for registered SBS Entities, 

which includes Commission 

examination authority for compliance 

with such rules. Accordingly, for the 

foregoing reasons, the Commission finds 

the proposed rule change is consistent 

with the protection of investors and in 

the public interest. 

B. Proposed Rule 0180(b) (General 

Exceptions From Applicability to FINRA 

Rules) 

Proposed FINRA Rule 0180(b) would 

specify certain exceptions from the 

general presumption of applicability of 

FINRA rules to SBS. Specifically, 

FINRA Rule 0180(b) would except 

members’ SBS activities and positions 

from the FINRA Rule 6000 Series 

(Quotation, Order, and Transaction 

Reporting Facilities); the FINRA Rule 

7000 Series (Clearing, Transaction, and 

Order Data Requirements, and Facility 

Charges); and the FINRA Rule 11000 

Series (Uniform Practice Code). All 

commenters expressed support for 

FINRA’s proposed rule change to 

exempt members’ SBS activities and 

positions from these rules.225 One 

commenter stated that ‘‘providing 

exceptions for [FINRA Rules 6000 

Series, 7000 Series, and 11000 Series] 

will promote clarity, considering that 

these rules are not designed to apply to 

SBS, and arguably overlap with some of 

the [Commission’s] SBS rules (such as 

reporting and public dissemination 

under Regulation SBSR).’’ 226

As discussed above in Section II.C., 

FINRA believes that the 6000, 7000 and 

11000 series rules are not designed to 

apply to SBS and are not particularly 

well-adapted to positions in or activities 

involving SBS.227 FINRA believes that 

while some of these rules could 

potentially be interpreted as applying to 

SBS activities by their terms, doing so 

could create operational difficulties 

and/or create confusion and uncertainty 

in the SBS market.228 FINRA believes 

the proposed rule change would provide 

legal certainty and clarity for its 

members by specifically excepting these 

rules from applying to members’ 

activities and positions with respect to 

SBS.229

The FINRA Rule 6000 and 7000 Series 

include various rules relating to trading, 

quoting, clearing and reporting for 

different types of securities. Many of 

these rules do not appear to apply to 

SBS by their terms.230 As discussed in 

Section II.C, the FINRA Rule 11000 

Series sets forth the UPC, a series of 

rules, interpretations and explanations 

created to simplify and facilitate the 

day-to-day business of investment 

banking and securities between FINRA 

members, particularly with respect to 

operational and settlement issues.231

Because the UPC generally applies to all 

OTC secondary market transactions in 

securities, it could be interpreted as 

applying to SBS transactions. However, 

because the UPC applies only to 

transactions between FINRA members, 

even if the UPC were to apply, it could 

be invoked only for those specific 

transactions.232 FINRA believes that 

applying the UPC rules to such a limited 

subset of SBS in the overall SBS market 

could create confusion and 

uncertainty.233

The Commission finds that the 

proposed rule change would avoid 

unnecessary and potentially duplicative 

regulation in this area by specifically 

providing exceptions for SBS from the 

FINRA Rule 6000, 7000, and 11000 

series, and is designed to protect 

investors and the public interest. These 

rules were not designed to provide 

regulatory oversight of SBS activity, and 

even if certain of these rules were 

interpreted to apply to SBS activity, 

they would apply only to a subset of 

SBS activity, leading to the potential for 

regulatory inconsistency. Accordingly, 

the Commission finds that the 

exceptions for the Rule 6000, 7000, and 

11000 series in Rule 0180(b) is designed 

to protect investors and the public 

interest. 

C. Proposed Rules 0180(c) and (d) 

(Exceptions for Registered SBS Entities 

and Associated Persons) 

Proposed Rules 0180(c) and (d), as 

discussed above in Section II.D., would 

provide that specified FINRA Rules 

shall not apply to members’ activities 

and positions with respect to SBS, only 

where the following conditions are met: 

(1) The member is acting in its capacity 

as an SBS Entity or the associated 

person of the member is acting in his or 

her capacity as an associated person of 

an SBS Entity, as applicable; and (2) 

that such activities or positions relate to 

the business of the SBS Entity within 

the meaning of the Exchange Act Rule 

15Fh–3(h)(1), the Commission’s 

supervision rule for SBS Entities. The 

exceptions in Rule 0180(c) would apply 

to both SBSDs and MSBSPs or their 

associated persons, while the exceptions 

in Rule 0180(d) would apply only to 

SBSDs or their associated persons (and 

not MSBSPs or their associated 

persons), consistent with whether the 

Commission rule that FINRA believes is 

analogous with a corresponding FINRA 

rule is applicable to all SBS Entities or 

their associated persons, or only SBSDs 

(and not MSBSPs or their associated 

persons).234 One commenter specifically 

addressed these exceptions, offering 

support for their inclusion in the 

proposed rule, subject to requests for 

clarifications as to some aspects of the 

proposed exceptions that are addressed 

below.235

1. Proposed Rule 0180(c) 

Proposed Rule 0180(c) would except 

five FINRA rules from applying to 

members’ SBS activities and positions 

where the conditions described above 

are met: (1) Rule 2210(d) 

(Communications with the Public— 

Content Standards); (2) Rule 2232 

(Customer Confirmations); (3) Rule 3110 

(Supervision); (4) Rule 3120 

(Supervisory Control System); and (5) 

Rule 3130 (Certification of Compliance 

and Supervisory Procedures). As 

discussed below, FINRA believes that 

each of these rules is similar to a 

particular Commission rule or set of 

rules applicable to SBS Entities.236

FINRA further believes that these 

proposed exceptions are appropriate 

only to the extent that the Commission’s 

parallel SBS Entity rules will apply to 

the SBS activity, and only where the 

SBS activity relates to the business of 

the SBS Entity within the meaning of 

the Commission’s SBS Entity 

supervision rule.237


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1980 Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices 

238See Exchange Act Release No. 64766 (Jun. 29, 

2011) at 86–7, 76 FR 42396 at 42418 (Jul. 18, 2011) 

(Proposed Rule: Business Conduct Standards for 

Security-Based Swap Dealers and Major SecurityBased Swap Participants). 239FINRA stated that the SEC’s business conduct 

rules also include requirements for SBS Entities to 

make certain disclosures to their SBS 

counterparties, including disclosures of material 

risks and characteristics and material incentives or 

conflicts of interest; daily mark disclosures; and 

disclosures regarding clearing rights. See Notice at 

26090; see also Exchange Act Rules 15Fh–3(b)—(d) 

(addressing requirements for disclosures of material 

risks and characteristics and material incentives of 

conflicts of interest; daily mark disclosures; and 

disclosures regarding clearing rights). 

240See Notice at 26090; see also FINRA Rule 

2210(d)(1)(A). 

241See Notice at 26089–90. 

242See Notice at 26090; see also 17 CFR 240.10b– 

10. 

243See Notice at 26090; see also 17 CFR 

240.15Fi–2; see generally Trade Acknowledgment 

and Verification Release, supra note 13. 

244See Notice at 26090; see also 17 CFR 

240.15Fi–2(g); Trade Acknowledgment and 

Verification Release at 39824–25. 

245Trade Acknowledgment and Verification 

Release at 39821. 

246See Notice at 26106. 

247See SIFMA Letter at 3. 

248See 17 CFR 240.3a71–3(d)(5). 

249See SIFMA Letter at 4; see also Exchange Act 

Release No. 90308 (Nov. 2, 2020), 85 FR 70667 

(Nov. 5, 2020) (Order Granting Exemptions from 

Sections 8 and 15(a)(1) of the Securities Exchange 

Act of 1934 and Rules 3b–13(b)(2), 8c–1, 10b–10, 

15a–1(c), 15a–1(d) and 15c2–1 Thereunder in 

Connection with the Revision of the Definition of 

‘‘Security’’ to Encompass Security-Based Swaps and 

Determining the Expiration Date for a Temporary 

Exemption from Section 29(b) of the Securities 

Exchange Act of 1934 in Connection with 

Registration of Security-Based Swap Dealers and 

Major Security-Based Swap Participants). 

250See FINRA Letter at 4. 251 Id. 252See Notice at 26090. 

Rule 2210(d) (Communications With 

the Public—Content Standards). FINRA 

Rule 2210(d) governs the content 

standards of members’ communications 

with the public and requires 

communications be based on principles 

of fair dealing and good faith. Under 

FINRA’s proposed rule change, where 

Exchange Act Rule 15Fh–3(g) applies to 

SBS Entities—imposing communication 

standards on both registered SBS 

Entities that are modeled after several of 

the existing requirements in FINRA 

Rule 2210(d)—those FINRA 

requirements would not also apply. 

Exchange Act Rule 15Fh–3(g) requires 

SBS Entities to communicate with 

parties in a fair and balanced manner 

based on principles of fair dealing and 

good faith. As the Commission has 

previously noted, this standard is 

consistent with the similarly worded 

requirement in FINRA Rule 2210(d).238

Three additional Exchange Act Rule 

provisions supplement the required 

content standards of SBS Entities.239

Taken together, FINRA believes that 

these provisions are analogous to FINRA 

requirements contained in Rule 2210(d) 

that require, among other things, 

member communications be based on 

principles of fair dealing and good faith, 

be fair and balanced, and not omit any 

material facts or make false or 

exaggerated claims.240

Rule 2232 (Customer Confirmations). 

Proposed Rule 0180(c) would except 

members registered as SBS Entities from 

the application of FINRA Rule 2232 

(Customer Confirmations) with respect 

to their SBS positions and activities 

when such activities or positions relate 

to their business as SBS Entities within 

the meaning of the SBS supervision 

rule.241

FINRA Rule 2232 (Customer 

Confirmations) generally requires 

members to provide customers with 

written confirmations in conformity 

with Exchange Act Rule 10b–10,242

along with specified additional 

disclosures for certain types of 

securities. Exchange Act Rule 15Fi–2 

requires SBS Entities to provide trade 

acknowledgments and to establish, 

maintain and enforce written policies 

and procedures reasonably designed to 

obtain prompt verification of the terms 

of such trade acknowledgments.243

FINRA states that the SEC’s trade 

acknowledgement and verification rule 

provides that an SBS Entity that is also 

a broker or dealer, is purchasing from or 

selling to any counterparty, and that 

complies with the relevant requirements 

of the trade acknowledgment and 

verification rule, is exempt from the 

requirements of Exchange Act Rule 10b– 

10 with respect to the SBS 

transaction.244

In the Trade Acknowledgement and 

Verification Release, the Commission 

stated that requiring an SBS Entity that 

is also a broker or a dealer to comply 

with both Rule 10b–10 and Rule 15Fi– 

2 could be duplicative and overly 

burdensome.245 In seeking the requested 

exemption from Rule 2232, FINRA has 

stated that FINRA similarly believes that 

applying both the SEC’s rules for SBS 

Entities and FINRA’s parallel rules for 

its members to the same SBS activity 

would result in unnecessary regulatory 

duplication.246

One commenter requested 

clarification concerning customer 

confirmations.247 The commenter stated 

that the Commission has adopted an 

exemption concerning a broker-dealer’s 

requirement to give or send the 

disclosure required by Exchange Act 

Rule 10b–10(a) at or before completion 

of the transaction in connection with 

such broker-dealer or its associated 

persons arranging, negotiating or 

executing an SBS transaction on behalf 

of an affiliated SBSD, provided that the 

broker-dealer gives or sends the 

customer written notification containing 

such disclosures in accordance with the 

time and form requirements for an 

SBSD’s trade acknowledgment under 

Exchange Act Rule 15Fi–2(b) and (c) 

and, as applicable, Rule 10b–10(c).248

The commenter requested that FINRA 

clarify that, to the extent a member 

would be eligible for this exemption, 

but not the proposed FINRA Rule 

0180(c) exception from FINRA Rule 

2232 (Customer Confirmations), it can 

satisfy Rule 2232 by giving and sending 

a written notification to its customer in 

accordance with the timing reflected in 

the exemption provided by the 

Commission in Exchange Act Rule 

3a71–3(d)(5).249

In response, FINRA stated that FINRA 

Rule 2232(a) requires that a member 

shall, at or before the completion of any 

transaction in a security effected for or 

with an account of a customer, give or 

send to such customer a confirmation in 

conformity with the requirements of 

Exchange Act Rule 10b–10.250 FINRA 

further stated that since the Commission 

has provided an exemption permitting a 

broker-dealer to provide the disclosures 

required by Exchange Act Rule 10b– 

10(a) in accordance with the time and 

form requirements for an SBSD’s trade 

acknowledgment, a member acting in 

conformity with the requirements of 

Exchange Act Rule 10b–10, including 

where the member is acting in 

accordance with an applicable SEC 

exemption, would satisfy the 

requirements of Rule 2232(a) (provided 

that the member complies with all other 

provisions of Rule 2232, as 

applicable).251

Rules 3110 (Supervision), 3120 

(Supervisory Control System) and 3130 

(Annual Certification of Compliance 

and Supervisory Processes). Proposed 

Rule 0180(c) would except FINRA 

members that are also registered SBS 

Entities from the application of FINRA 

Rules 3110 (Supervision), 3120 

(Supervisory Control System) and 3130 

(Annual Certification of Compliance 

and Supervisory Processes) with respect 

to their SBS positions and activities 

where the conditions described above 

are met. Taken together, these rules 

require, among other things, that FINRA 

members establish and maintain a 

supervisory system, designate a chief 

compliance officer, and submit annual 

certifications to FINRA related to the 

member’s compliance policies and 

written supervisory procedures.252

FINRA believes that the Commission 

has adopted an analogous framework for 


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253See id. at 26089. 

254See Notice at 26089. 

255 Id. 

256See FINRA Regulatory Notice 16–40 (October 

2016). 

257Business Conduct Standards Release at 29962. 

258See Notice at 26090. Although Rule 15Fh–3(a) 

is applicable to both SBSDs and MSBSPs, FINRA 

Rule 2090 applies to requires members to use 

reasonable diligence ‘‘in regard to the opening or 

maintenance of’’ an account. FINRA Rule 2090. As 

MSBSPs are by definition not SBSDs, MSBSPs do 

not have customer accounts; therefore, Rule 2090 is 

inapplicable as to MSBSPs even if they are FINRA 

members. See, e.g., 17 CFR 240.3a67–1. 

259See Business Conduct Proposal at 42414. 

260Business Conduct Standards Release at 29967, 

n.68. 

261FINRA also noted that Exchange Act Rule 

15Fh–5 applies special, enhanced requirements 

when SBS Entities act as counterparties to special 

entities. See Notice at 26091. 

supervision of SBS Entities that applies 

to all FINRA members that are also 

registered SBS Entities.253 Exchange Act 

Rule 15h–3(h) requires, among other 

things, that an SBS Entity establish and 

maintain a system to supervise, and to 

diligently supervise, its business and 

the activities of its associated persons; 

designate at least one person with 

authority to carry out supervisory 

responsibilities; and establish, maintain 

and enforce written policies and 

procedures addressing supervision of 

the SBS Entity’s SBS business. 

Exchange Act Rule 15Fk–1 requires 

each SBS Entity to designate a chief 

compliance officer and submit annual 

compliance reports to the Commission. 

2. Proposed Rule 0180(d) 

Proposed Rule 0180(d) would except 

three additional FINRA rules from 

applying to members’ SBS activities and 

positions where the conditions 

described above are met and the FINRA 

member is a registered SBSD (but not a 

MSBSP): (1) Rule 2030 (Engaging in 

Distribution and Solicitation Activities 

with Government Entities); (2) Rule 

2090 (Know Your Customer); and (3) 

Rule 2111 (Suitability). As discussed 

below, FINRA believes that each of 

these rules is similar to a particular 

Commission rule or set of rules 

specifically applicable to SBSDs but not 

MSBSPs.254 FINRA further believes that 

these proposed exceptions are 

appropriate only to the extent that the 

Commission’s parallel rules applicable 

to SBSDs (but not MSBSPs) will apply 

to the SBS activity, and only where the 

SBS activity relates to the business of 

the SBSD (but not an MSBSP) within 

the meaning of the Commission’s SBS 

Entity supervision rule.255

Rule 2030 (Engaging in Distribution 

and Solicitation Activities with 

Government Entities). FINRA Rule 2030 

governs ‘‘pay-to-play’’ activities by 

member firms that engage in 

distribution or solicitation activities for 

compensation with government entities 

on behalf of investment advisers. In 

particular, FINRA Rule 2030(a) 

prohibits a member from engaging in 

distribution or solicitation activities for 

compensation with a government entity 

within two years after a contribution to 

an official of the government entity is 

made by the covered member or a 

covered associate (including a person 

who becomes a covered associate within 

two years after the contribution is 

made).256 Similarly, Exchange Act Rule 

15Fh–6 generally prohibits an SBSD 

from engaging in SBS transactions with 

a municipal entity within two years 

after certain political contributions have 

been made to officials of the municipal 

entity.257 Under FINRA’s proposed rule 

change, where Exchange Act Rule 

15Fh–6 applies to SBS Entities, the SBS 

Entity would be excepted from FINRA 

Rule 2030. 

Rule 2090 (Know Your Customer). 

FINRA Rule 2090 requires members to 

use due diligence to know the essential 

facts concerning every customer 

(including the customer’s financial 

profile and investment objectives or 

policy). Under FINRA’s proposed rule 

change, where Exchange Act Rules 

15Fh–3(a) and (e) applies to SBSDs, the 

SBSDs would be excepted from FINRA 

Rule 2090. Rule 15Fh–3(a) generally 

requires SBS Entities to verify the status 

of their SBS counterparties.258 Rule 

15Fh–3(e) requires an SBSD to establish, 

maintain and enforce policies and 

procedures reasonably designed to 

obtain and retain a record of the 

essential facts that are necessary for 

conducting business with each 

counterparty that is known to the SBSD. 

Rule 15Fh–3(e) is a modified version of 

the ‘‘know your customer’’ 

requirements, such as those in FINRA 

Rule 2090, to which broker-dealers are 

subject.259 Under FINRA’s proposal, 

where SBSDs are subject to Rule 15Fh– 

3(a) and (e), the analogous FINRA 

requirements would not also apply. 

Rule 2111 (Suitability). FINRA Rule 

2111(a) requires members, when making 

a recommendation, to have a reasonable 

basis to believe that recommendation is 

suitable for the customer, based on the 

information obtained through the 

reasonable diligence of the member or 

associated person to ascertain the 

customer’s investment profile. FINRA 

Rule 2111(b) provides that a member 

fulfills this suitability obligation for an 

institutional account if the member has 

a reasonable basis to believe that the 

institutional customer is capable of 

evaluating investment risks 

independently and the institutional 

customer exercises independent 

judgment in evaluating the 

recommendations. Where the 

institutional customer has delegated 

decision-making authority to an agent, 

such as an investment adviser, these 

suitability rule factors apply to the agent 

under FINRA’s rule. Exchange Act Rule 

15h–3(f) creates a suitability obligation 

for SBSDs, including an institutional 

suitability alternative that is modeled 

after FINRA Rule 2111(b).260 Under 

FINRA’s proposed rule change, where 

Exchange Act Rule 15Fh–3(f) applies, 

the SBS Entity would be excepted from 

FINRA Rule 2111.261

As to each of the FINRA rules 

proposed to be excepted under Rule 

0180(c) and Rule 0180(d), an analogous 

Commission rule already applies to a 

registered SBS Entity (under Rule 

0180(c)) or SBSD (under Rule 0180(d)). 

Without these proposed exceptions, a 

FINRA member that is also registered 

with the Commission as an SBS entity 

(under Rule 0180(c)) or as an SBSD 

(under Rule 0180(d)) would be required 

to comply with both the Commission’s 

comprehensive framework enacted 

under Title VII as well as FINRA rules 

with analogous requirements. The 

Commission concludes it is generally 

unnecessary for FINRA rules to apply in 

circumstances where the SBS activities, 

and the SBS entities (under Rule 

0180(c)) or SBSDs (under Rule 0180(d)), 

are already regulated directly by the 

Commission. The Commission further 

concludes it is reasonable that the 

exceptions in FINRA Rule 0180(d) do 

not apply to MSBSPs, because they are 

not subject to either the FINRA rule 

referenced in Rule 0180(d) and/or the 

analogous Commission rule. Therefore, 

FINRA’s proposal to provide the limited 

exceptions in proposed FINRA Rule 

0180(c) and 0180(d), is a reasonable, 

tailored approach that reduces 

potentially unnecessary and duplicative 

regulatory requirements. 

D. Proposed Rule 0180(e) (Exceptions in 

Connection With Arranging, 

Negotiating, and Executing Activity) 

As discussed above in Section II.E., 

Proposed Rule 0180(e) would provide 

that the following FINRA rules shall not 

apply to members’ activities with 

respect to SBS, to the extent that the 

member or the associated person of the 

member, as applicable, is arranging, 

negotiating or executing SBS on behalf 

of a non-U.S. affiliate pursuant to, and 

in compliance with the conditions of, 

the exception from counting certain SBS 


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262As discussed above, all other FINRA rules 

would remain applicable to a member acting as the 

U.S. Registered Affiliate under Exchange Act Rule 

3a71–3(d). See supra note 46. 

263See Notice at 26092–93. 

264 Id. at 26093. 

265See SIFMA Letter at 1 (stating, ‘‘[w]e support 

this exception, which appropriately avoids overlaps 

between FINRA’s suitability, communication 

standards, and confirmation requirements, on the 

one hand, and SEC Rules 15Fh–3(f)(1), 15Fh–3(g), 

and 15Fi–2, on the other hand, which the FINRA 

member would be required to satisfy when acting 

for its non-U.S. affiliate pursuant to SEC Rule 3a71– 

3(d)(1)(ii).’’). 

266As a practical matter, the Commission states 

that most, if not all, requirements pertaining to the 

amount of collateral posted will be a ‘‘material 

term’’ for purposes of Exchange Act Rule 15Fi–1(i), 

such that this information would be required to be 

reconciled pursuant to Exchange Act Rule 15Fi–3. 

267See SIFMA Letter at 4. 

268See id. 

269See FINRA Letter at 5; see also Exchange Act 

Release No. 90246 (Oct. 22, 2020), 85 FR 70536 

(Nov. 5, 2020) (Request for Comment: Portfolio 

Margining of Uncleared Swaps and Non-Cleared 

Security-Based Swaps). 

270See FINRA Letter at 5. 

271See PML Letter at 5. 

272 Id. 

273See id. at 6. 

274 Id. 

275 Id. 

276See FINRA Letter at 5. 

277See supra note 56. 

under Exchange Act Rule 3a71–3(d)(1): 

(1) FINRA Rule 2111 (Suitability); (2) 

FINRA Rule 2210(d) (Communications 

with the Public—Content Standards); 

and (3) FINRA Rule 2232 (Customer 

Confirmations). The availability of the 

exceptions under proposed FINRA Rule 

0180(e) would require the member’s 

compliance with the conditions 

specified in Exchange Act Rule 3a71– 

3(d)(1)(ii)(B) as if the member were the 

counterparty to the SBS transactions.262

Specifically, to satisfy the exception 

from counting certain SBS under 

Exchange Act Rule 3a71–3(d)(1), the 

member must comply with, among other 

things, Exchange Act Rule 15Fh–3(b) 

(disclosures of material risks and 

characteristics and material incentives 

or conflicts of interest), Exchange Act 

Rule 15Fh–3(f)(1) (recommendations 

and suitability), Exchange Act Rule 

15Fh–3(g) (fair and balanced 

communications) and Exchange Act 

Rule 15Fi–2 (acknowledgement and 

verification of SBS transactions).263 If a 

member fails to comply with these 

Commission rules, the member’s foreign 

affiliate would be required to count each 

applicable SBS transaction toward its de 

minimis registration threshold.264 One 

commenter specifically addressed this 

exception, offering support for its 

inclusion in the proposed rule.265

The Commission believes that 

members whose foreign affiliates are 

seeking to rely on the exception from 

counting certain SBS transactions under 

Exchange Act Rule 3a71–3(d)(1), may 

have their own obligations to comply 

with FINRA’s rules governing 

suitability, customer communications, 

and customer confirmations, apart from 

any obligation to comply with 

analogous Commission rules noted 

above as a condition of Exchange Act 

Rule 3a71–3(d)(1). Without the 

exceptions in proposed FINRA Rule 

0180(e), this could result in 

unnecessarily duplicative obligations. 

Where the member is in fact complying 

with the specified Commission rules, 

the proposed rule change is designed to 

help protect investors and the public 

interest by avoiding potential confusion 

surrounding whether FINRA rules apply 

in addition to analogous Commission 

rules to regulate the same conduct. It is 

appropriate to provide exceptions from 

these FINRA rules to provide clarity and 

avoid unnecessary regulatory 

duplication. Accordingly, the 

Commission finds that the proposed 

rule change is designed to protect 

investors and the public interest. 

E. Proposed Rule 0180(f) (Exceptions 

From Rules 2231, Customer Account 

Statements, and 4512, Customer 

Account Information) 

Proposed Rule 0180(f), as discussed 

above in Section II.F., would provide 

that FINRA Rules 2231 (Customer 

Account Statements) and 4512 

(Customer Account Information) shall 

not apply to members’ activities and 

positions with respect to SBS, to the 

extent that the member is acting in its 

capacity as an SBS Entity and the 

customer’s account solely holds SBS 

and collateral posted as margin in 

connection with such SBS, provided 

that the member complies with the 

portfolio reconciliation requirements of 

Exchange Act Rule 15Fi–3 with respect 

to such account and that such portfolio 

reconciliations include collateral posted 

as margin in connection with SBS in the 

account.266

A commenter requested that FINRA 

provide two clarifications with respect 

to proposed FINRA Rule 0180(f). First, 

the commenter stated that FINRA 

should clarify that a member may rely 

on the Rule 0180(f) exception in 

circumstances where the member’s SBS 

account for the customer also includes 

non-securities positions, such as 

swaps.267 Second, the commenter stated 

that FINRA should clarify that a 

member may rely on the Rule 0180(f) 

exception when, in addition to a 

customer’s SBS account, the member 

carries a non-SBS securities account for 

the customer and there is no portfolio 

margining or other commingling 

between the two accounts.268 In 

response, FINRA stated that the 

Commission, jointly with the CFTC, has 

published a request for comment on the 

portfolio margining of uncleared swaps 

and uncleared SBS.269 As such, FINRA 

believes it would be premature to 

provide further guidance in this area at 

this time, but will consider addressing 

remaining questions through 

interpretive guidance when 

appropriate.270

Another commenter expressed 

support for eliminating the exceptions 

set forth in FINRA’s proposed Rule 

0180(f), maintaining that there is 

potential for confusion and disparate 

treatment as it pertains to FINRA Rules 

2231 (Customer Account Statements) 

and 4512 (Books and Records/Customer 

Account Information) relative to 

Exchange Act Rule 15Fi–3 (the 

Commission’s portfolio reconciliation 

rule for SBS Entities).271 While the 

commenter respected FINRA’s attempt 

to reduce burdens for participants, the 

commenter believes that with increased 

SBS activity, the exemption could be 

burdensome to some SBS Entities, while 

providing relief to other SBS Entities.272

The commenter further believes that 

differences between FINRA Rule 2231 

and Exchange Act Rule 15Fi–3 are 

‘‘stark.’’ 273 The commenter strongly 

supports portfolio reconciliation as a 

vital component to reducing systemic 

risk and other issues associated with 

SBS. However, as a practical matter this 

commenter believes that the burden of 

providing account statements based on 

a pre-defined methodology serves an 

important purpose for risk control as 

well.274 Further, the commenter stated 

that there is a high likelihood that an 

existing SBS Entity that solely holds 

SBS and related collateral also is an 

affiliate of larger organizations with 

sufficient infrastructure to comply with 

FINRA Rule 2231.275

FINRA responded that the exception 

in proposed Rule 0180(f) applies only 

where a member is acting in its capacity 

as a registered SBS Entity and a 

customer’s account solely holds SBS 

and collateral posted as margin in 

connection with SBS, provided that the 

member complies with the portfolio 

reconciliation requirements of Exchange 

Act Rule 15Fi–3 with respect to such 

account and that such portfolio 

reconciliations include collateral posted 

as margin in connection with SBS in the 

account.276 FINRA believes that the 

SEC’s portfolio reconciliation 

requirements set forth in Exchange Act 

Rule 15Fi–3 277 and the customer 


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278 Id. at 6. 

279 Id. FINRA further explained that it believes 

that a member that is not an SBS Entity and thus 

not subject to the SEC’s portfolio reconciliation 

requirements—as well as other Commission rules 

related to risk mitigation, such as portfolio 

compression and trading relationship 

documentation—should include any SBS on a 

customer’s account statements, regardless of 

whether such SBS are in a separate account from 

other securities, because SBS are securities. See id. 

280Specifically, FINRA Rule 2231 requires each 

member to provide its customer with an account 

statement that satisfies the requirements of the rule 

on at least a quarterly basis. By contrast, the timing 

requirements in Exchange Act Rule 15Fi–3 vary, 

depending on whether the applicable counterparty 

is also an SBS Entity and the size of the SBS 

portfolio. The only time that portfolio reconciliation 

would be required to occur less frequently than 

quarterly would when an SBS Entity is facing a 

counterparty that is not also an SBS Entity and the 

size of the SBS portfolio does not exceed 100 SBS 

at any time during the calendar year, in which case 

the SBS Entity would only be required to have 

policies and procedures reasonably designed to 

ensure reconciliation on an annual basis. See 17 

CFR 240.15Fi–3(b)(3)(ii). 

281See e.g., Exchange Act Release No. 90246 (Oct. 

22, 2020), 85 FR 70536 (Nov. 5, 2020) (Request for 

Comment: Portfolio Margining of Uncleared Swaps 

and Non-Cleared Security-Based Swaps). 

282FINRA Rule 1210 requires that each person 

engaged in the securities business of a member 

register with FINRA unless an exemption applies. 

See FINRA Rule 1210. 

283See SIFMA Letter at 5. 

284 Id. 

285See PML Letter at 4. 

286 Id. 

287 Id. 

288 Id. 

289 Id. at 5. With respect to the applicable 

suitability standard specifically, the commenter 

Continued 

account statement requirements under 

FINRA Rule 2231 serve similar purposes 

such that requiring delivery of customer 

account statements for SBS-only 

accounts that are also subject to 

portfolio reconciliation would be 

unnecessary duplication.278 FINRA 

further believes that it does not 

anticipate that this exception would 

create confusion, as SBS customers of 

an SBS Entity would expect to engage 

in portfolio reconciliation for their SBS 

accounts in accordance with the 

Commission rules, rather than for such 

SBS to appear on the customer account 

statement they may receive because the 

firm is also a FINRA member brokerdealer.279

The Commission recognizes that there 

are differences with respect to the 

frequency and timing requirements 

under Exchange Act Rule 15Fi–3 and 

FINRA Rule 2231. For example, whereas 

Exchange Act Rule 15Fi–3 requires SBS 

Entities to reconcile their portfolios 

with other counterparties more 

frequently than FINRA Rule 2231 

requires its members to deliver an 

account statement to its customers, in 

some limited circumstances the 

Commission’s rule would require 

portfolio reconciliation to occur less 

frequently than the timing requirements 

of FINRA’s account statement rule.280

Nevertheless, the Commission finds that 

under the limited circumstances in 

which the exception from FINRA Rule 

2231 in proposed FINRA Rule 0180(f) 

applies, Exchange Act Rule 15Fi–3 

should sufficiently serve similar 

purposes to FINRA Rule 2231, as it 

relates to providing information about 

an SBS with a customer who is a 

counterparty to an SBS, such that 

requiring members that are SBS Entities 

to also provide customer account 

statements for accounts holding solely 

SBS and related collateral would be 

unnecessarily duplicative. Further, as 

the exception only applies to accounts 

holding solely SBS and related 

collateral, the portfolio reconciliation 

requirements of Rule 15Fi–3 should 

provide sufficient risk control. To the 

extent that a customer’s account 

includes SBS along with other securities 

positions or activity, or related money 

balances, then the account statement 

under FINRA Rule 2231 should include 

SBS. Thus, it is appropriate and 

consistent with the protection of 

investors and the public interest to 

provide an exception from FINRA Rule 

2231 under circumstances when the 

Commission’s risk mitigation 

requirements for SBS Entities under 

Exchange Act Rule 15Fi–3 will apply to 

SBS Entities, subject to the conditions 

discussed above. The Commission also 

recognizes, however, that this is an 

evolving market and a new regulatory 

framework, and acknowledges FINRA’s 

commitment to consider providing 

interpretive guidance as appropriate.281

Similarly, the Commission’s 

requirements pertaining to written SBS 

trading relationship documentation 

pursuant to Exchange Act Rule 15Fi–5, 

and the books and records requirements 

for SBS Entities that are also registered 

broker-dealers Exchange Act Rule 17a– 

3 will also continue to apply. These 

rules sufficiently serve similar purposes 

to FINRA Rule 4512, such that also 

applying FINRA Rule 4512 to SBS-only 

accounts would be duplicative. 

Accordingly, these limited 

circumstances in Proposed Rule 0180(f) 

reduce unnecessary and duplicative 

regulation. 

F. Proposed Rule 0180(g) (Exception 

From FINRA Registration for Certain 

Associated Persons of Registered SBS 

Entities) 

The FINRA qualification and 

registration requirements are set forth in 

the FINRA Rule 1200 series.282

Proposed Rule 0180(g), as discussed 

above in Section II.G., would provide 

that persons associated with a member 

whose functions are related solely and 

exclusively to SBS, and undertaken in 

such person’s capacity as an associated 

person of an SBS Entity, are not 

required to be registered with FINRA. 

One commenter generally supported 

the exception but requested clarification 

that an associated person relying on the 

exception set forth in FINRA’s proposed 

Rule 0810(g) may, in addition to their 

SBS activities, also engage in nonsecurities activities on behalf of the 

member, such as soliciting or accepting 

swaps in the capacity as an associated 

person or a swap dealer, and that 

additional activity would not otherwise 

trigger FINRA registration or continuing 

education requirements and would not 

prevent reliance on the proposed 

exception.283 Further, the commenter 

suggested that FINRA Rule 0180(g) 

should clarify that the person’s 

‘‘securities-related functions’’ must be 

related solely and exclusively to SBS 

undertaken in such person’s capacity as 

an associated person of a registered SBS 

Entity.284

A second commenter questioned the 

exemptions provided in proposed Rule 

0180(g) and whether there are likely 

many, or even any, individuals 

associated with a FINRA member who 

would trade in SBS exclusively without 

also engaging in transactions in the 

underlying equity.285 To the extent 

there are such individuals, the 

commenter further questioned whether 

such individuals should be exempt from 

FINRA’s qualifications and registration 

requirements.286 The commenter also 

expressed the belief that the likelihood 

of such individuals to enter the SBS 

market has the potential to increase.287

It is the commenter’s belief that, 

although the qualification examinations 

and continuing education (‘‘CE’’) 

requirements may not specifically 

address SBS, the examination and CE 

requirements do require an associated 

person to have familiarity with the 

characteristics of the underlying equity 

securities and regulatory framework, 

which the commenter considers 

important to have for anyone engaged in 

SBS activities.288 The commenter 

further maintained that the exemptions 

provided in proposed Rule 0180(g) may 

potentially cause ‘‘confusion for both 

exempt persons and ‘dual-hatted’ 

personnel,’’ and that such persons could 

avoid regulations such as FINRA Rule 

2111 (Suitability) to which other 

registered persons are subject.289 The 


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stated that SBSDs are afforded different treatment 

under the proposed rule change, as the 

Commission’s suitability rules would apply, 

creating another disparity for a non-SBS Entities 

participating in SBS to manage competing 

regulations. Id. As explained further below, 

contrary to the commenter’s assertion, proposed 

Rule 0810(g) provides no exemption to FINRA Rule 

2111 for an associated person (unless the FINRA 

member satisfied the conditions of the exception in 

proposed FINRA Rule 0180(d)). 

290 Id. 291FINRA Letter at 6. 292 Id. at 6, n.9. FINRA Rule 1220 sets forth 

registration categories. See FINRA Rule 1220. 293 Id.; see also FINRA Rule 1210. 294FINRA Letter at 6. 295 Id. at 6–7. 

296 Id. at 7. 

297 Id. at 7; see also FINRA Rule 1230. 

298 Id. at 7–8. 

299 Id. at 8. 

300 Id. 

301 Id. at 8, n.12. 

302 Id. at 8. 

303 Id. The Commission notes that Exchange Act 

Rules 15Fh–3(f) and 15Fh–5 contain requirements 

that extend beyond the requirements found in 

FINRA Rule 2111—for example, an explicit 

requirement that an SBSD have a reasonable basis 

to believe the counterparty have an ability to absorb 

potential losses associated with the 

recommendation. 

304 Id. 

305 Id. at 9. 

306For example, Exchange Act Rule 15Fh– 

3(h)(2)(iii)(D) requires an SBS Entity to have 

procedures to conduct a reasonable investigation 

regarding, among other things, the qualifications 

and experience of any potential associated person. 

commenter also stated that it may be 

unclear if FINRA Rule 4530 (Reporting 

Requirements) would apply to a 

member if the potentially reportable 

conduct involved a person associated 

with a member whose functions are 

related solely and exclusively to SBS 

undertaken in the person’s capacity as 

an associated person of a registered SBS 

Entity.290

In response to the comments, FINRA 

stated that a member is responsible for 

monitoring the activities of each of its 

associated persons to determine 

whether such person is required to be 

registered with FINRA and, if so 

required, to ensure that each associated 

person is registered in the appropriate 

category or categories.291 FINRA cited to 

FINRA Rule 1210 (Registration 

Requirements), which requires persons 

engaged in the investment banking or 

securities business of a member to be 

registered ‘‘in each category of 

registration appropriate to his or her 

functions and responsibilities as 

specified’’ in FINRA Rule 1220.292

FINRA Rule 1210 further states that 

persons ‘‘shall not be qualified to 

function in any registered capacity other 

than that for which the person is 

registered, unless otherwise stated in 

the rules.’’ 293 FINRA also stated that the 

exception in proposed FINRA Rule 

0180(g) would only apply to associated 

persons in the limited circumstances set 

forth in Rule 0180(g), and does not 

otherwise affect FINRA members’ 

responsibilities regarding the 

registration of their associated 

persons.294 Thus, according to FINRA, a 

member relying on the proposed 

exception with respect to one or more 

of its associated persons would still 

need to monitor the activities of all of 

its associated persons, including any 

associated persons relying on the 

exception, to determine whether any of 

the person’s activities require 

registration under FINRA rules.295

Accordingly, with respect to the 

commenter’s request for clarification, 

FINRA stated that it was not necessary 

to change to the text of proposed FINRA 

Rule 0180(g).296 In so concluding, 

FINRA stated that the exception is 

structured similarly to existing 

exceptions from registration for persons 

associated with a member whose 

functions are related solely and 

exclusively to certain other products— 

specifically, associated persons 

transacting solely and exclusively in 

municipal securities, commodities, and 

security futures.297

FINRA stated that although it 

understands that the number of 

associated persons that would be 

eligible for the exception is likely to be 

limited, it believes the proposed 

exception is nonetheless appropriate to 

avoid unnecessary regulatory burdens 

with respect to even this limited set of 

individuals.298 FINRA further stated 

that, under Commission rules, 

associated persons of SBS Entities, 

while subject to statutory 

disqualification prohibitions (and 

related background check 

requirements), are not independently 

subject to registration, licensing or 

continuing education (‘‘CE’’) 

requirements imposed or administered 

by the Commission.299 FINRA believes 

that, at the current time, there would be 

limited benefit to requiring FINRA 

registration for the limited group of 

individuals that would qualify for the 

proposed exception.300 FINRA stated 

that it will monitor developments and 

continue to consider whether requiring 

registration for an associated person 

whose functions are related solely and 

exclusively to SBS in such person’s 

capacity as an associated person of a 

registered SBS Entity would be 

appropriate.301

In response to the comments 

concerning the potential for persons to 

avoid regulation, FINRA further stated 

that even in instances where an 

associated person is exempt from 

registration under proposed Rule 

0180(g), the associated person would 

remain subject to all FINRA rules 

applicable to associated persons with 

respect to their SBS activities, unless 

another specific exception applied.302

For example, an associated person 

excepted under proposed Rule 0180(g) 

would remain subject to suitability 

obligations under FINRA Rule 2111 (as 

well as Exchange Act Rule 15Fh–3(f) 

and, as applicable Rule 15Fh–5) when 

recommending SBS, unless the member 

satisfied the conditions of the exception 

in proposed FINRA Rule 0180(d) with 

respect to such activity.303 In such 

circumstances, the member and the 

associated person would be required to 

comply with the Commission’s business 

conduct obligations, which impose 

analogous requirements.304 FINRA also 

stated that, notwithstanding the 

proposed rule change, a member and its 

associated persons would still be subject 

to FINRA Rule 4530 and related 

guidance with respect to their SBS 

activities (regardless of whether a 

particular individual relies on the 

exception from registration under 

proposed Rule 0180(g)).305

The Commission finds that the 

proposed registration exception is 

reasonable. The exception is limited in 

scope and applies only to persons 

associated with a FINRA member that is 

also a Commission-registered SBS 

Entity, where the associated person’s 

functions are related solely and 

exclusively to SBS undertaken in such 

person’s capacity as an associated 

person of the registered SBS Entity. 

Additionally, not only is the exception 

expected to apply to a limited number 

of persons, those individuals are still 

subject to other regulatory obligations. 

In particular: (1) Persons qualifying for 

the Rule 0180(g) exceptions are still 

subject to all FINRA rules applicable to 

associated persons unless another 

specific exception applies; (2) all 

Commission rules applicable to 

associated persons of SBS Entities, 

including rules designed to prevent a 

statutorily disqualified person from 

associating with an SBS Entity, will 

apply; 306 and (3) FINRA members are 

obligated to monitor the activities of 

their associated persons and determine 

whether those activities give rise to an 

obligation to register the person under 

FINRA’s rules. For the foregoing 

reasons, the Commission finds that the 

proposed exemption in Rule 0180(g) is 

designed to protect investors and the 

public interest. The Commission also 

recognizes, however, that this is an 

evolving market and a new regulatory 


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307See FINRA Letter at 9, n.11–12; see also 

Notice at 26092. 

308See Notice at 26093. 

309 Id. 

310 Id. 

311 Id. A FINRA member seeking a non-public 

exemption under Rule 9600 must include in its 

application a detailed statement, including 

supporting facts, showing good cause for treating 

the application or decision as confidential in whole 

or in part. See FINRA Rule 9610(b). 

312See Notice at 26093. 

313 Id. 

314 Id. 

315 Id. 

316 Id. 

317 Id. 

318See SIFMA Letter at 6. 

319 Id. 

320See Notice at 26086. 321See Notice at 26093, n.66. 

framework, and acknowledges FINRA’s 

commitment to monitor developments 

and to consider whether it would be 

appropriate to rescind the exception as 

the market develops further.307

G. Proposed Rule 0180(i) (Authority To 

Grant Exemptions From the Application 

of Rule 0180 Upon Member Application) 

and 9610 (Application for Exemptive 

Relief) 

Proposed FINRA Rule 0180(i), as 

discussed above in Section II.H., would 

provide FINRA with authority to 

consider exemptive relief from the 

application of specific FINRA rules to 

SBS on a rule-by-rule, member-bymember basis, other than the general 

presumption of applicability contained 

in proposed Rule 0180(a), which is not 

subject to exemption.308 FINRA’s 

proposed rule change would also make 

a conforming change to FINRA Rule 

9610 to add FINRA Rule 0180 to the list 

of rules pursuant to which FINRA has 

exemptive authority.309 A member’s 

application for an exemption under 

proposed FINRA Rule 0180(i) would be 

subject to FINRA’s existing procedures 

for all exemptive applications set forth 

in its Rule 9600 Series and described in 

more detail in Section II.G.310 Pursuant 

to its procedures in FINRA Rule 9620, 

FINRA would be required to issue a 

written decision setting forth its 

findings and conclusions in response to 

the request for an exemption, which 

may be made publicly available.311

FINRA states that it needs the 

exemptive authority to respond to the 

evolving SBS market and to particular 

circumstances that may arise in which 

applying specific FINRA rules to SBS 

activities or positions, not otherwise 

excepted by the proposed rule change, 

may not be appropriate or feasible.312

Proposed Rule 0180(i) would allow 

FINRA to exempt a person 

unconditionally or on specified terms 

from the application of individual 

FINRA rules beyond what is already 

proposed to be permitted under 

proposed Rule 0180.313 Notably, the 

proposed rule change would not permit 

any exemption from proposed Rule 

0180(a), which would provide that 

FINRA Rules shall apply to members’ 

activities and positions unless 

specifically excepted elsewhere in the 

rule.314 Thus, as proposed, FINRA could 

not use its authority under FINRA Rule 

0180(i) to grant an exemption from the 

general application of FINRA rules to 

SBS activities.315 Rather, FINRA would 

only be permitted to grant exemptions 

only on a rule-by-rule, member-bymember basis, consistent with the 

existing framework for granting 

exemptions for other FINRA rules as 

provided by Rule 9610.316 Furthermore, 

any exemption must consider ‘‘all 

relevant factors,’’ and FINRA may grant 

exemptions only if FINRA deems the 

exemption consistent with the 

protection of investors and the public 

interest.317

One commenter supported this 

proposed exemptive authority, noting 

that the exceptions described in the 

proposed rule change are tailored to the 

existing SBS market, and that this 

market may evolve in a manner that 

would justify further exceptions to 

FINRA rules.318 As an example, the 

commenter noted that FINRA rules 

applicable to quoting and trading ‘‘may 

become more relevant to SBS in the 

future if trading or execution of SBS on 

exchanges or SBS execution facilities 

becomes prevalent,’’ and that it may 

then be appropriate for FINRA to adopt 

additional exemptions ‘‘or otherwise 

clarify or tailor the application of those 

rules to SBS.’’ 319

The Commission finds that the 

proposed exemptive authority under 

Rule 0180(i) is designed to protect 

investors and the public interest. The 

rule change will allow FINRA members 

to avail themselves of an existing 

procedural vehicle—FINRA’s Rule 9600 

Series—to apply for exemptive relief 

from specific FINRA rules, on a case-bycase basis, to address unanticipated 

factual circumstances as market 

participants navigate the newlyregulated SBS market. As stated above, 

the Commission agrees with FINRA 

that, in light of Title VII’s amendment 

of the Exchange Act to specifically 

encompass SBS as securities, FINRA 

rules should generally apply to SBS in 

the same manner that such rules apply 

to securities generally, subject to the 

exceptions set forth elsewhere in 

proposed FINRA Rule 0180.320

However, the Commission also 

recognizes the evolving nature of the 

SBS market, and that unanticipated 

factual circumstances may give rise to a 

need for FINRA to consider member 

applications for additional exceptions to 

specific FINRA rules on a case-by-case 

basis. The Commission expects that 

FINRA will, as it previously stated, 

apply heightened scrutiny to such 

applications for exemptive relief from 

its members not otherwise registered as 

SBS Entities with the Commission.321

To the extent that FINRA grants a 

number of exemptions pursuant to the 

process in its Rule 9600 Series for 

similar factual circumstances and/or 

identical FINRA rules, FINRA should 

consider filing a proposed rule change 

with the Commission to address those 

circumstances on a member-wide basis. 

Proposed Rule 0180(i) provides an 

appropriate vehicle that relies on an 

existing process for FINRA to consider 

providing limited exceptions on a 

member-by-member, case-by-case basis 

as warranted by specific facts, and only 

where FINRA deems appropriate 

consistent with the protection of 

investors and the public interest. The 

proposed exemptive authority is 

reasonably designed to allow FINRA to 

consider unanticipated and novel 

factual scenarios that may warrant 

additional exceptions from its rules, but 

only where FINRA finds that such relief 

is in the public interest and would 

protect investors. Thus, the Commission 

finds that the proposed FINRA Rule 

0180(i) is designed to protect investors 

and the public interest. 

H. Financial Responsibility and 

Operational Requirements 

As discussed above in Section II.I., 

FINRA Rule 4120 (Regulatory 

Notification and Business Curtailment) 

sets forth certain early warning 

notification and business curtailment 

requirements if a member’s capital falls 

below certain thresholds. These 

thresholds are based on the minimum 

capital requirements applicable to a 

member broker-dealer under Exchange 

Act Rule 15c3–1. As discussed above in 

Section II.I., the proposed amendments 

to FINRA Rule 4120 would conform the 

rule to the new and increased minimum 

capital requirements for Non-ANC 

Firms that are also registered as SBSDs 

and for ANC Firms, adopted in the 

Capital, Margin, and Segregation 

Release. 

The proposed amendments to FINRA 

Rule 4120 will align FINRA’s historical 

early warning notification and business 

curtailment thresholds with the 

Commission’s amended capital 

requirements for Non-ANC Firms that 


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322See Notice at 26097. 

323See supra note 147. 

324See Notice at 26097. 

325See SIFMA Letter at 7–11. 

326 Id.; see also supra note 197 (defining 

‘‘Registered or Foreign SBS Dealer’’). 

327See SIFMA Letter at 8. 

328 Id. 

329 Id. 

330 Id. 

are also registered as SBSDs and for 

ANC Firms, adopted in the Capital, 

Margin, and Segregation Release. The 

modified early warning thresholds are 

appropriately calibrated to provide 

FINRA with sufficient early warning 

that a FINRA member’s capital levels 

may be deteriorating. The modified 

business curtailment thresholds also are 

appropriately calibrated to provide 

FINRA with the ability to require a 

FINRA member to reduce its business 

activities when its capital levels have 

deteriorated to a level that may 

jeopardize its ability to comply with 

regulatory capital requirements. 

In addition, as discussed above in 

Section II.I., proposed FINRA Rule 

0180(h) would provide that, for 

purposes of the FINRA Rule 4000 

Series, all requirements that apply to a 

member that clears or carries customer 

accounts must also apply to any 

member that acts as a principal 

counterparty to an SBS, clears or carries 

an SBS, guarantees an SBS or otherwise 

has financial exposure to an SBS. 

Applying these higher standards when a 

member enters into SBS transactions, or 

otherwise has exposure to SBS is 

appropriate given that SBS are complex 

transactions that will require detailed 

recordkeeping, margining, legal 

agreements, collateral management, 

reconciliation and risk management. 

I. Margin Requirements 

As discussed above in Section II.J., 

FINRA is proposing to adopt a new 

margin rule specifically applicable to 

SBS. Current FINRA Rule 4240 would 

be replaced by new FINRA Rule 4240 

that would prescribe margin 

requirements for SBS, including CDS. 

However, proposed FINRA Rule 4240 

would not apply to any FINRA member 

that is registered as an SBSD. FINRA 

members that are SBSDs are subject to 

the margin requirements of Exchange 

Act Rule 18a–3 discussed above in 

Section II.J. FINRA stated that by 

applying margin requirements in these 

circumstances, the proposed rule 

change would fill an important 

regulatory gap, protect FINRA members 

against counterparty credit risk, 

maintain a level playing field for 

members, and prevent regulatory 

arbitrage. As discussed above in Section 

II.J., the margin requirements under 

proposed FINRA Rule 4240 would be 

structurally aligned with the margin 

requirements that apply to SBSDs under 

Exchange Act Rule 18a–3, with certain 

modifications that FINRA believes are 

necessary because FINRA members that 

are not SBSDS will not be subject to the 

Commission’s comprehensive regulatory 

framework for SBSDs.322 Thus, subject 

to certain exceptions in the proposed 

rule discussed above in Section II.J., 

proposed FINRA Rule 4240 would 

require members that are not SBSDs to 

collect and deliver variation margin on 

a daily basis to cover the member’s 

current exposure to or from each SBS 

counterparty, and also to collect (but not 

deliver) initial margin from each SBS 

counterparty. FINRA members that are 

not SBSDs would also be required to 

monitor the risk of any Uncleared SBS 

Account and maintain a comprehensive 

risk analysis methodology for assessing 

the potential risk to the member’s 

capital. Finally, FINRA is also 

proposing to amend FINRA Rules 4210 

and 4220 to take into account members’ 

SBS activities.323

Applying the proposed margin 

requirements to FINRA members that 

are not registered as SBSDs will fill an 

important regulatory gap because it will 

prescribe margin requirements for 

uncleared SBS for FINRA members that 

are not SBSDs and not subject to 

Exchange Act Rule 18a–3. The margin 

requirements in the proposed rule 

change will protect FINRA members 

against counterparty credit risk with 

respect to transactions in uncleared 

SBS.324 In particular, the proposed 

margin requirements will address the 

risk of uncollateralized exposures in 

uncleared SBS for FINRA members that 

are not registered as SBSDs by 

prescribing variation and initial margin 

requirements, subject to certain 

exceptions, as well as requiring these 

firms to maintain a comprehensive 

written risk analysis methodology. In 

addition, adopting a stand-alone rule 

that applies margin requirements to 

uncleared SBS under proposed new 

FINRA Rule 4240 will reduce 

unnecessary and duplicative regulation 

for FINRA members regarding which 

FINRA margin requirements apply to 

uncleared SBS. 

A commenter stated that proposed 

FINRA Rule 4240 would differ in 

several material respects from Exchange 

Act Rule 18a–3.325 More specifically, 

the commenter stated that FINRA Rule 

4240 would (1) not permit a member to 

use an approved model to calculate 

initial margin, (2) require a member to 

collect initial margin from affiliates that 

are not financial market intermediaries 

or majority owners, (3) not permit a 

member to apply an initial margin 

threshold, (4) not permit a member to 

apply a minimum transfer amount, and 

(5) not permit an ANC Firm to apply 

credit risk charges under paragraph (c) 

to Exchange Act Rule 15c3–1e in lieu of 

collecting margin, except for SBS with 

a majority owner, or a registered or 

foreign SBS Dealer affiliate.326 The 

commenter stated that these differences 

would present material issues for 

members subject to proposed FINRA 

Rule 4240, particularly in connection 

with certain inter-affiliate SBS designed 

to promote centralized, group-wide risk 

management, as well as SBS entered 

into with unaffiliated financial market 

intermediaries for hedging purposes. 

The commenter provided examples 

where it believed that the differences 

between Exchange Act Rule 18a–3 and 

proposed FINRA Rule 4240 would 

present material issues, including: (1) 

When a foreign dealer affiliate of a U.S. 

broker-dealer hedges risks of SBS based 

on U.S. securities with their foreign 

customers via offsetting SBS with the 

U.S. broker-dealer, (2) when a brokerdealer forms an affiliated special 

purpose vehicle to issue a structured 

note that references a security, and (3) 

when a broker-dealer, in order to hedge 

the risk of its securities inventory, 

enters into one or more SBS with 

unaffiliated financial market 

intermediaries.327

The commenter recommended that 

FINRA permit a broker-dealer to comply 

with Exchange Act Rule 18a–3 rather 

than proposed FINRA Rule 4240 to 

address these issues.328 However, the 

commenter also stated that it 

appreciates FINRA’s concerns regarding 

a smaller broker-dealer entering into 

uncleared SBS with margin 

requirements that differ from the 

requirements that would apply under 

FINRA Rule 4210 to equivalent 

securities positions.329 To address this 

consideration, the commenter proposed 

that, in order for a FINRA member to 

apply Exchange Act Rule 18a–3 in lieu 

of proposed FINRA Rule 4240, the 

member must satisfy the higher capital 

requirements applicable to an SBSD in 

Exchange Act Rule 15c3–1(a)(10) (or the 

higher capital requirements applicable 

to an ANC Firm in Exchange Act Rule 

15c3–1(a)(7)). The commenter further 

proposed that for such a member to use 

a model to calculate initial margin, the 

Commission would need to approve the 

model for use by an affiliate of the 

member that is registered as an SBSD.330

The commenter also stated that if 


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331 Id. 

332 Id. 

333See FINRA Letter at 10. 

334 Id. 

335 Id. 

336 Id. 

337 Id. 

338 Id. 

339 Id. Specifically, the commenter proposed that 

FINRA: (1) Adopt an initial margin exception for all 

majority-owned affiliates; (2) permit an ANC Firm 

to calculate credit risk charges in accordance with 

Exchange Act Rule 15c3–1e(c) for exposures to all 

counterparty types; (3) permit use of SEC-approved 

initial margin models for non-equity SBS; (4) adopt 

a $50 million initial margin threshold, applicable 

on a group-wide basis; (5) adopt a $500,000 

minimum transfer amount; (6) align FINRA Rule 

4240’s collateral haircuts with Exchange Act Rule 

18a–3; and (7) extend the deadline for posting or 

collecting margin for counterparties in distant time 

zones. See SIFMA Letter at 9–11. 

340See Notice at 26107–09; see also FINRA Letter 

at 10. 

341FINRA Letter at 10. 

342 Id. 

343 Id. at 10–11. 

344 Id. at 11. 

345 Id. 

346 In this context, ‘‘T+1’’ and similar terms refer 

to the number of business days after the date on 

which the person was required to compute the 

margin requirement. Id. 

FINRA does not adopt these 

recommendations, then it should further 

modify proposed FINRA Rule 4240 to 

align more closely with Exchange Act 

Rule 18a–3.331 The commenter stated 

that FINRA previously declined to 

incorporate this suggested modification 

because broker-dealers subject to the 

proposed margin requirements for 

uncleared SBS would not be subject to 

the regulatory framework applicable to 

SBSDs, in particular higher capital 

requirements applicable to registered 

SBSDs.332

FINRA responded to the comments 

stating that FINRA acknowledges that 

proposed FINRA Rule 4240 would differ 

from Exchange Act Rule 18a–3 in some 

respects.333 While such differences may 

in some cases result in increased costs 

for members that are not registered 

SBSDs when entering into uncleared 

SBS transactions with certain 

counterparties, FINRA responded that 

the requirements of proposed FINRA 

Rule 4240 as set forth in the Notice are 

important to protect the financial 

condition of its members, given that 

members subject to the rule would not 

be subject to the comprehensive 

regulatory framework applicable to 

SBSDs.334 FINRA also stated that a 

member can ‘‘opt-in’’ to Exchange Act 

Rule 18a–3 by registering as an SBSD.335

FINRA further stated that SBSD 

registration is an important 

precondition to margining pursuant to 

Exchange Act Rule 18a-3, because SBSD 

registration assures that the entity is 

fully regulated as an SBSD, including 

the higher minimum capital 

requirements applicable to SBSDs.336

Therefore, FINRA believes it would not 

be appropriate to incorporate 

Commission margin rules by reference 

or allow non-SBSD members to ‘‘opt-in’’ 

to the Commission margin rules as an 

alternative to FINRA margin rules.337

Further, FINRA stated the specific 

requirements of proposed FINRA Rule 

4240 are appropriately calibrated to 

provide parity with both FINRA Rule 

4210 and Exchange Act Rule 18a–3, 

where possible, but also to provide 

greater protection to the financial 

condition of members not subject to the 

Commission’s comprehensive 

requirements for registered SBSDs.338

The Commission concludes that it 

would not be appropriate for a FINRA 

member that is not registered as an 

SBSD to ‘‘opt in’’ to compliance with 

Exchange Act Rule 18a–3 in lieu of 

complying with proposed FINRA Rule 

4240, including in cases where a 

member would comply with higher 

capital requirements. While the 

proposed margin requirements differ 

from Exchange Act Rule 18a–3 in some 

respects, FINRA proposed the 

amendments in part to reduce 

regulatory arbitrage between existing 

margin requirements under FINRA Rule 

4210 and the proposed requirements for 

uncleared SBS under FINRA Rule 4240. 

For example, the margin requirements 

in proposed FINRA Rule 4240 do not 

contain any thresholds that are 

prescribed in Exchange Act Rule 18a–3 

(such as the $50 million threshold 

below which initial margin need not be 

collected by an SBSD). Therefore, the 

proposed margin requirements should 

reduce the risk that a broker-dealer 

would be incentivized to restructure 

existing securities margin accounts as 

uncleared SBS, since existing FINRA 

Rule 4210 does not contain any margin 

thresholds for securities. In addition, 

while broker-dealers and SBSDs are 

subject to comprehensive financial 

responsibility requirements, FINRA 

member firms that are not SBSDs are not 

subject to the Commission’s specific 

regulatory framework for registered 

SBSDs under Title VII of the DoddFrank Act, and Exchange Act Rule 18a– 

3, in particular, only applies to SBSDs 

and MSBSPs. 

For those same reasons, FINRA 

declined to adopt a number of specific 

modifications suggested by a commenter 

to align proposed Rule 4240 more 

closely with Exchange Act Rule 18a–3 

in lieu of allowing members to comply 

with Exchange Act Rule 18a–3.339

FINRA stated that the commenter made 

a number of similar recommendations 

in its comments responding to the 

Concept Proposal.340 FINRA stated that 

it had responded previously to these 

recommendations, which included 

several modifications from the margin 

rule described in the Concept Proposal 

that were intended to address the 

comments and enhance competitive 

parity, while still providing appropriate 

protection for the financial condition of 

non-SBSD members entering into 

uncleared SBS.341 FINRA further stated 

that, as a general matter, proposed 

FINRA Rule 4240 is not intended to 

level the playing field between SBSDs 

and non-SBSD members entering into 

SBS, such as de minimis dealers.342

Rather, FINRA stated that the proposed 

rule is intended to adequately protect 

members from counterparty credit risk 

and prevent regulatory arbitrage, in 

particular by removing incentives for 

members to restructure their traditional 

extensions of credit (e.g., margin 

lending) subject to FINRA Rule 4210 as 

uncleared SBS.343

Further, with respect to a 

commenter’s request for FINRA to align 

proposed new FINRA Rule 4240’s 

collateral haircuts with Exchange Act 

Rule 18a–3, FINRA stated that it does 

not believe permitting the use of the 

haircuts applicable to SBS collateral 

under Exchange Act Rule 18a–3 would 

be appropriate.344 As FINRA previously 

stated, the proposed rule change is not 

intended to level the playing field 

between SBSDs and non-SBSD members 

entering into SBS, such as de minimis 

dealers, but rather to prevent regulatory 

arbitrage between members extending 

credit through SBS and members 

extending credit through traditional 

means.345

With respect to the request for FINRA 

to extend the deadline for posting or 

collecting margin for counterparties in 

distant time zones, FINRA stated that 

Exchange Act Rule 18a–3 requires that 

a member take an applicable capital 

charge on positions that do not meet the 

margin requirements generally within 

T+1, but extends that deadline to T+2 if 

the counterparty is located in another 

country and four time zones away.346

While proposed FINRA Rule 4240 

would similarly require a capital charge 

if required margin is not collected on 

T+1, FINRA stated that FINRA Rule 

4240 would not require liquidation of 

the position until T+3. FINRA stated 

that this timing follows the portfolio 

margin requirements under FINRA Rule 

4210, and stated it is appropriate to 

require a capital charge on T+1 because 

the location of the counterparty does not 

affect the counterparty credit risk to the 


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347 Id. 

348 Id. 

349See PML Letter at 7. 

350 Id. 

351See FINRA Letter at 11. 

352 Id. at 11–12. 

353 Id. at 12. 

354See Notice at 26097. 

355 Id. at 26101. 

356See PML Letter at 6. 

357 Id. at 7. 

358 Id. 

359See FINRA Letter at 12. 

360 Id. 

361 Id. 

member.347 However, FINRA believes 

that, generally, the additional time 

before liquidation is required should be 

sufficient to accommodate 

counterparties in distant time zones.348

The Commission concludes that it is 

appropriate for FINRA to decline to 

adopt commenters suggestions to 

modify proposed new FINRA Rule 4240 

to more closely align with the 

requirements of Exchange Act Rule 18a– 

3, including the rule’s collateral 

haircuts. Proposed FINRA Rule 4240 

will promote consistent margin 

requirements, including haircut 

requirements, between FINRA members 

extending credit through traditional 

means under FINRA Rule 4240 and 

FINRA members extending credit 

through SBS under FINRA Rule 4240. 

The requirements under new FINRA 

Rule 4240 will protect FINRA members 

from counterparty credit risk and 

prevent regulatory arbitrage by reducing 

incentives for members to restructure 

their traditional extensions of credit 

(e.g., margin lending) subject to FINRA 

Rule 4210 as uncleared SBS. Further, 

the proposed time period (T+3) with 

respect to required liquidations above 

should provide FINRA members that are 

not SBSDs the flexibility to 

accommodate counterparties in 

additional time zones. 

Another commenter raised concerns 

regarding the disparate treatment for 

SBSDs with respect to uncleared SBS. 

The commenter stated that proposed 

FINRA Rule 4240 and Exchange Act 

Rule 18a–3 impose different margin and 

collateral requirements, depending on 

whether an entity is designated as an 

SBSD or a FINRA broker-dealer.349 This 

commenter raised concerns that this 

difference could hinder the ability of a 

FINRA broker-dealer to compete with 

SBSDs or other SBS market participants 

on a level playing field. In particular, 

the commenter raised concerns that 

counterparties would potentially choose 

to transact with an SBSD rather than a 

similarly capitalized FINRA brokerdealer, in order to avoid the need for the 

daily collection of initial margin and 

variation margin, which could lead to 

reduced firm participation impacting 

overall costs and liquidity.350

In response, as discussed above in 

Section II.J., while proposed FINRA 

Rule 4240 would diverge from Exchange 

Act Rule 18a–3 in some respects, FINRA 

believes that proposed FINRA Rule 4240 

appropriately protects members from 

counterparty credit risk and prevents 

regulatory arbitrage between different 

methods of extending credit.351 FINRA 

does not believe that the potential for 

increased market liquidity if more 

members functioned as de minimis 

dealers justifies replacing the specific 

margin requirements set forth in 

proposed FINRA Rule 4240.352

Moreover, FINRA stated that a FINRA 

member seeking to establish parity with 

other SBSDs with respect to margin 

requirements may elect to register as an 

SBSD and become subject to the 

Commission’s comprehensive SBSD 

regulatory framework. FINRA stated that 

the intent of proposed Rule 4240 is not 

to level the playing field between SBSDs 

and members engaged in de minimis 

SBS activity, but rather to prevent 

regulatory arbitrage as between 

members extending credit through SBS 

and members extending credit in the 

traditional fashion.353

The proposed rule change will serve 

to promote consistent and transparent 

margin requirements for the uncleared 

SBS market and traditional securities 

markets for FINRA members that are not 

SBSDs. Further, proposed Rule 4240 

will require a FINRA member to collect 

initial margin, and collect or post 

variation margin, unless an exception 

applies.354 In structuring the proposed 

rule, FINRA has reasonably balanced 

the goal of reducing firm exposure to 

counterparty credit risk stemming from 

unsecured credit exposures in uncleared 

SBS transactions, with the potential 

costs and competitive impacts that may 

result from the proposed rule change. 

For example, FINRA has proposed a 

number of exceptions to the proposed 

margin requirements,355 which may 

lessen the competitive impacts and 

costs of the proposed margin 

requirements. 

A commenter further sought 

clarification regarding Non-Basic SBS, 

and more specifically uncleared TRS 

structures.356 The commenter stated that 

the SBS market is dynamic and that 

market developments, such as its 

proposed alternative trading system 

platform, may make commonplace 

transactions that today are limited. The 

commenter also stated that a key blocker 

to growth of this activity is potential 

ambiguity around timing and the openended nature of the approval process for 

margin requirements for Non-Basic 

SBS.357 Finally, this commenter stated 

that SBSDs would be placed at a 

significant advantage under the 

proposed margin framework, and 

supported a more clearly defined 

process for FINRA members that are not 

SBSDs to evaluate new products within 

existing or potentially expanded lines of 

business.358

In response, FINRA stated that under 

proposed FINRA Rule 4240(b)(2)(C), a 

member may apply to FINRA for the 

approval of an Initial Margin 

Requirement for a type of SBS other 

than Basic CDS and Basic SBS. FINRA 

further stated that the proposed rule 

change sets forth the requirements for 

any such application, and provides that 

no member shall become a party to an 

SBS other than a Basic CDS or Basic 

SBS unless FINRA has approved an 

Initial Margin Requirement for such 

member’s use with respect to that type 

of SBS.359 In addition, FINRA believes 

other types of SBS—including CDS and 

equity TRS with complex features—may 

not be easily accommodated under the 

frameworks applicable to Basic CDS and 

Basic SBS, and that the specific risks of 

such SBS may not be readily apparent 

or quantifiable to FINRA without 

additional information. Further, FINRA 

stated that SBS can be complex 

financial instruments that pose 

substantial risks to the financial 

condition of members, and margin 

serves as an important means of 

protecting member firms, and thereby 

their customers and investors, from 

such risks.360 FINRA also believes that 

the application process under proposed 

FINRA Rule 4240(b)(2)(C) permits 

appropriate flexibility so that FINRA 

and its member firms may analyze all 

relevant risks that may be associated 

with a new type of SBS product. FINRA 

also stated that proposed FINRA Rule 

4240 defers to registered clearing 

agencies with respect to the margin 

requirements for Cleared SBS. 

Therefore, FINRA believes that FINRA 

members that are not SBSDs may enter 

into Cleared SBS without seeking 

approval under Rule 4240(b)(2)(C); the 

application process would only be 

required before entering into new types 

of uncleared SBS.361

The proposed application process for 

margin requirements for SBS that are 

not Basic SBS or CDS provides specific 

detail with respect to the application’s 

requirements, while providing FINRA 

with the flexibility to determine if a 

proposed margin requirement 

adequately addresses the risks for a 


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Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices 1989 

362 15 U.S.C. 78s(b)(2). 363 17 CFR 200.30–3(a)(12). 

particular type of SBS, including 

through the ability to request additional 

information. These requirements will 

protect FINRA member firms from the 

risks associated with uncleared SBS 

with complex features by ensuring 

FINRA member firms that are not SBSDs 

set prudent margin levels for these 

instruments. 

In conclusion, the proposed changes 

to FINRA Rules 4210, 4420, and 4240 

will help to ensure that the risks to 

FINRA members that are not SBSDs 

with respect to their uncleared SBS 

exposures are adequately addressed 

through the collection of margin. In 

addition, the proposed rule changes will 

enhance risk management practices at 

FINRA members that are not SBSDs and 

that participate in the SBS markets. 

They also will prevent unnecessary 

regulatory duplication by applying the 

proposed margin requirements in 

proposed FINRA Rule 4240 to FINRA 

members that are not SBSDs, and will 

not be subject to the margin 

requirements of Rule 18a–3. 

IV. Conclusion 

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 362

that the proposed rule change (SR– 

FINRA–2021–008), as modified by 

Amendment No. 1, be, and hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.363

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–00376 Filed 1–11–22; 8:45 am] 

BILLING CODE 8011–01–P 


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