4076 Federal Register / Vol. 87, No. 17 / Wednesday, January 26, 2022 / Notices 

5 Id. 

6 17 CFR 200.30–3(a)(31). 

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

2 17 CFR 240.19b–4. 

3The full text of the proposed rule change and 

the exhibits filed by FINRA (collectively referred to 

as the ‘‘Proposal’’) are available at: https://

www.finra.org/sites/default/files/2021-05/sr-finra2021-010.pdf. 

4See Exchange Act Release No. 91937 (May 19, 

2021), 86 FR 28167 (‘‘Notice’’). 

5Comments received on the Notice are available 

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

010/srfinra2021010.htm. 

6See Extension No. 1, available at: https://

www.finra.org/sites/default/files/2021-06/SRFINRA-2021-010-extension1.pdf. 

7See Amendment No. 1 to the proposed rule 

change, dated August 9, 2021 (‘‘Amendment No. 

1’’). The full text of Amendment No. 1 is available 

on the Commission’s website at: https://

www.sec.gov/comments/sr-finra-2021-010/ 

srfinra2021010-9147461-247526.pdf. 

8See Notice of Filing of Amendment No. 1 and 

Order Instituting Proceedings to Determine Whether 

to Approve or Disapprove a Proposed Rule Change, 

as Modified by Amendment No. 1, to Amend the 

Requirements for Covered Agency Transactions 

under FINRA Rule 4210 (Margin Requirements) as 

Approved Pursuant to SR–FINRA–2015–036, 

Exchange Act Release No. 92713 (Aug. 20, 2021), 

86 FR 47655 (Aug. 26, 2021). 

9Comments received on the OIP are available on 

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

comments/sr-finra-2021-010/srfinra2021010.htm. 

10See Letter to Vanessa Countryman, Secretary, 

Commission, from Adam Arkel, Associate General 

Counsel, Office of General Counsel, FINRA (Sep. 

16, 2021) (‘‘FINRA Letter’’), available at: https://

www.sec.gov/comments/sr-finra-2021-010/ 

srfinra2021010-9244962-250787.pdf. 

11See Extension No. 2, available at https://

www.finra.org/sites/default/files/2021-10/sr-finra2021-010-extension2.pdf. 

12Covered Agency Transactions are: (1) To Be 

Announced (‘‘TBA’’) transactions, inclusive of 

adjustable rate mortgage (‘‘ARM’’) transactions; (2) 

Specified Pool Transactions; and (3) transactions in 

Collateralized Mortgage Obligations (‘‘CMOs’’), 

issued in conformity with a program of an agency 

or Government-Sponsored Enterprise (‘‘GSE’’), with 

forward settlement dates transactions’’). The 

proposed rule change would re-designate the 

current definition of Covered Agency Transactions, 

as set forth in paragraph (e)(2)(H)(i)c., as paragraph 

(e)(2)(H)(i)b., without any change. See Exhibit 5 to 

the Proposal. See also Notice, 86 FR 28161–62. 

13See Exchange Act Release No. 78081 (June 15, 

2016), 81 FR 40364 (June 21, 2016) (Notice of Filing 

of Amendment No. 3 and Order Granting 

Accelerated Approval to a Proposed Rule Change to 

Amend FINRA Rule 4210 (Margin Requirements) to 

Establish Margin Requirements for the TBA Market, 

as Modified by Amendment Nos. 1, 2, and 3; File 

No. SR–FINRA–2015–036) (approving SR–FINRA– 

2015–036, referred to as the ‘‘2016 Approval 

Order’’). The rule text as approved in the 2016 

Approval Order is referred to in this order as the 

‘‘current rule’’ or ‘‘original rulemaking.’’ The 

proposed rule change, as described in Section II.A. 

and B., is excerpted, in part, from the Notice, which 

was substantially prepared by FINRA. 

14The term ‘‘exempt account’’ is defined under 

FINRA Rule 4210(a)(13). Broadly, an exempt 

account means a FINRA member, non-FINRA 

member registered broker-dealer, account that is a 

‘‘designated account’’ under FINRA Rule 4210(a)(4) 

(specifically, a bank as defined under Exchange Act 

Section 3(a)(6), a savings association as defined 

under Section 3(b) of the Federal Deposit Insurance 

Act, the deposits of which are insured by the 

Federal Deposit Insurance Corporation, an 

insurance company as defined under Section 

2(a)(17) of the Investment Company Act, an 

investment company registered with the 

Commission under the Investment Company Act, a 

state or political subdivision thereof, or a pension 

plan or profit sharing plan subject to the Employee 

Retirement Income Security Act or of an agency of 

the United States or of a state or political 

subdivision thereof), and any person that has a net 

worth of at least $45 million and financial assets of 

at least $40 million for purposes of paragraphs 

(e)(2)(F), (e)(2)(G) and (e)(2)(H) of the rule, as set 

forth under paragraph (a)(13)(B)(i) of FINRA Rule 

4210, and meets specified conditions as set forth 

under paragraph (a)(13)(B)(ii). See Notice, 86 FR 

28163, n.18. 

to 90 days as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding, or as to which the 

self-regulatory organization consents, 

the Commission will either approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether the 

proposed rule change should be 

disapproved. The 45th day after 

publication of the notice for this 

proposed rule change is January 21, 

2022. The Commission is extending this 

45-day time period. 

The Commission finds it appropriate 

to designate a longer period within 

which to take action on the proposed 

rule change so that it has sufficient time 

to consider the proposed rule change. 

Accordingly, the Commission, pursuant 

to Section 19(b)(2) of the Act,5

designates March 7, 2022 as the date by 

which the Commission shall either 

approve or disapprove, or institute 

proceedings to determine whether to 

disapprove, the proposed rule change 

(File No. SR-CboeBZX–2021–078). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.6

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–01458 Filed 1–25–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94013; File No. SR–FINRA– 

2021–010] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Granting 

Approval of a Proposed Rule Change, 

as Modified by Amendment No. 1, To 

Amend the Requirements for Covered 

Agency Transactions Under FINRA 

Rule 4210 (Margin Requirements) as 

Approved Pursuant to SR–FINRA– 

2015–036 

January 20, 2022. 

I. Introduction 

On May 7, 2021, the Financial 

Industry Regulatory Authority, Inc. 

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

Exchange Commission (‘‘Commission’’ 

or ‘‘SEC’’), pursuant to Section 19(b)(1) 

of the Securities Exchange Act of 1934 

(‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend the requirements for 

covered agency transactions under 

FINRA Rule 4210.3 The proposed rule 

change was published for comment in 

the Federal Register on May 25, 2021.4

The Commission received comments in 

response to the Notice.5 On June 30, 

2021, FINRA extended 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 23, 2021.6 On 

August 9, 2021, FINRA responded to the 

comments and submitted Amendment 

No. 1 to the proposed rule change.7 The 

Commission subsequently issued an 

Order Instituting Proceedings (‘‘OIP’’) to 

determine whether to approve or 

disapprove the proposed rule change, as 

modified by Amendment No. 1.8 The 

Commission received additional 

comment letters in response to the OIP.9

On September 16, 2021, FINRA 

responded to these additional comment 

letters.10 On October 26, 2021, FINRA 

extended the time period in which the 

Commission must approve or 

disapprove the proposed rule change to 

January 20, 2022.11 This order approves 

the proposed rule change, as modified 

by Amendment No. 1. 

II. Description of the Proposed Rule 

Change 

A. Summary of Proposed Amendments 

FINRA has proposed revisions to the 

Covered Agency Transaction 12

requirements as approved pursuant to 

SR–FINRA–2015–036.13 Broadly, 

FINRA has proposed: 

• To eliminate the two percent 

maintenance margin requirement that 

applies to non-exempt 14 accounts 

pursuant to paragraph (e)(2)(H)(ii)e. 

under FINRA Rule 4210. This would 

eliminate the need for members to 

distinguish exempt account customers 

from other customers (‘‘non-exempt 

accounts’’) for purposes of Covered 

Agency Transaction margin. As such, 

without regard to a counterparty’s 

exempt or non-exempt account status, 

members would collect margin for each 

counterparty’s excess mark to market 

loss, as discussed in further detail 


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15See Notice, 86 FR 28163. 

16See Notice, 86 FR 28163. Subject to specified 

conditions, the current rule provides for an 

aggregate $250,000 de minimis transfer amount 

with a single counterparty, so that if the aggregate 

required but uncollected maintenance margin or 

mark to market loss does not exceed that amount, 

the margin need not be collected or charged to net 

capital. See 2016 Approval Order, 81 FR 40367; see 

also paragraph (e)(2)(H)(ii)f. of the current rule in 

Exhibit 5 to the Proposal. 

17The current rule provides that the margin 

requirements for Covered Agency Transactions do 

not apply to a counterparty that has gross open 

positions in Covered Agency Transactions with the 

member amounting to $10 million or less if the 

counterparty regularly settles its Covered Agency 

Transactions on a Delivery Versus Payment 

(‘‘DVP’’) basis or for cash and meets other specified 

conditions. See paragraph (e)(2)(H)(ii)c. of the 

current rule in Exhibit 5 to the Proposal. 

18See Notice, 86 FR 28163. 

19Section II.B. describes the proposed rule 

change prior to the proposed amendments in 

Amendment No. 1, which are summarized in 

Section II.C. below. 

20See 2016 Approval Order, 81 FR 40367; see 

also paragraph (e)(2)(H)(ii)e. of the current rule in 

Exhibit 5. The rule further sets forth specified 

requirements for net capital deductions and the 

liquidation of positions in the event the uncollected 

maintenance margin and mark to market loss 

(defined together under paragraph (e)(2)(H)(i)d. of 

the current rule as the ‘‘deficiency’’) is not satisfied. 

In short, the rule provides that if the deficiency is 

not satisfied by the close of business on the next 

business day after the business day on which the 

deficiency arises, the member shall be required to 

deduct the amount of the deficiency from net 

capital as provided in Exchange Act Rule 15c3–1 

until such time the deficiency is satisfied; under the 

rule, if such deficiency is not satisfied within five 

business days from the date the deficiency was 

created, the member must promptly liquidate 

positions to satisfy the deficiency, unless FINRA 

has specifically granted the member additional 

time. As discussed in further detail below, the 

proposed rule change would eliminate current 

paragraph (e)(2)(H)(ii)e. in its entirety. 

21See 2016 Approval Order, 81 FR 40367; see 

also paragraph (e)(2)(H)(ii)d. of the current rule in 

Exhibit 5 to the Proposal. Similar to paragraph 

(e)(2)(H)(ii)e., the current rule provides that if the 

mark to market loss is not satisfied by the close of 

business on the next business day after the business 

day on which the mark to market loss arises, the 

member is required to deduct the amount of the 

mark to market loss from net capital as provided in 

Exchange Act Rule 15c3–1 until such time the mark 

to market loss is satisfied; if such mark to market 

loss is not satisfied within five business days from 

the date the loss was created, the member must 

promptly liquidate positions to satisfy the mark to 

market loss, unless FINRA has specifically granted 

the member additional time. Again, as discussed in 

further detail below, the proposed rule change 

would eliminate current paragraph (e)(2)(H)(ii)d. in 

its entirety. 

22See Notice, 86 FR 28163. Further, members 

expressed concern that some asset manager 

counterparties face constraints with regard to 

custody of assets at broker-dealers and that, because 

of these constraints, some members need to enter 

into separate custodial agreements with third party 

banks to hold the maintenance margin that they 

collect from these asset managers. Members 

expressed concern that this imposes operational 

burdens both on themselves and their client 

counterparties, who may, as a consequence, choose 

to limit their dealings with smaller broker-dealers. 

Id., at n.23. 

23See Notice, 86 FR 28163. 

24 Id. 

25 Id. 

26Current paragraph (e)(2)(H)(i)b. defines the 

term ‘‘counterparty’’ to mean any person that enters 

into a Covered Agency Transaction with a member 

and includes a ‘‘customer’’ as defined in paragraph 

(a)(3) under FINRA Rule 4210. The proposed rule 

change would redesignate the definition of 

counterparty as paragraph (e)(2)(H)(i)a. under the 

rule and revise the definition to provide that the 

term ‘‘counterparty’’ means any person, including 

any ‘‘customer’’ as defined in paragraph (a)(3) of the 

rule, that is a party to a Covered Agency 

Transaction with, or guaranteed by, a member. 

FINRA believes that including transactions 

guaranteed by a member is a useful clarifying 

change in the context of Covered Agency 

Transactions. In connection with this change, 

FINRA proposes to add new Supplemental Material 

.02, which would provide that, for purposes of 

paragraph (e)(2)(H), a member is deemed to have 

‘‘guaranteed’’ a transaction if the member has 

become liable for the performance of either party’s 

obligations under the transaction. See proposed 

new Supplemental Material .02 in Exhibit 5 to the 

Proposal. Accordingly, if a clearing broker were to 

guarantee to an introduced customer an introducing 

broker’s obligations under a Covered Agency 

Transaction between that introducing firm and 

customer, the introducing broker would be 

considered a ‘‘counterparty’’ of the clearing broker 

for purposes of paragraph (e)(2)(H). See also Notice, 

86 FR 28163–64, n.25. 

27FINRA proposes to delete the current definition 

of ‘‘mark to market loss’’ under paragraph 

(e)(2)(H)(i)g. as adopted pursuant to the 2016 

Approval Order and to replace it with a definition 

of ‘‘net mark to market loss’’ under proposed new 

Continued 

below, unless otherwise provided by the 

rule; 

• Subject to specified conditions and 

limitations, to permit members to take a 

capital charge in lieu of collecting 

margin for excess net mark to market 

losses on Covered Agency Transactions. 

FINRA has designed these conditions 

and limitations to help protect the 

financial stability of members that opt to 

take capital charges while restricting the 

ability of the larger members to use their 

capital in lieu of collecting margin to 

compete unfairly with smaller 

members; 15 and 

• To make revisions designed to 

streamline, consolidate and clarify the 

Covered Agency Transaction rule 

language. FINRA believes these 

revisions will preserve and clarify key 

exceptions to the requirements, 

including for example the $250,000 de 

minimis transfer exception 16 and the 

$10 million gross open position 

exception 17 established pursuant to SR– 

FINRA–2015–036.18

The proposed amendments are 

discussed in detail below.19

B. Detailed Discussion of Proposed 

Amendments 

1. Elimination of Maintenance Margin 

Requirement; Application of Mark to 

Market Loss to Both Exempt and NonExempt Accounts 

Paragraph (e)(2)(H)(ii)e. of current 

FINRA Rule 4210 addresses Covered 

Agency Transactions with 

counterparties that are non-exempt 

accounts and broadly provides that 

maintenance margin, defined under the 

current rule to mean margin equal to 

two percent of the contract value of the 

net long or net short position, by CUSIP, 

with the counterparty, plus any net 

mark to market loss on such 

transactions, shall be required margin, 

subject to specified exceptions under 

the rule.20 By contrast, paragraph 

(e)(2)(H)(ii)d. of the current rule broadly 

provides that on transactions with 

counterparties that are exempt accounts 

no maintenance margin shall be 

required. Such transactions must be 

marked to the market daily and the 

member must collect any net mark to 

market loss, subject to specified 

exceptions under the current rule.21

According to FINRA, member firms 

expressed concern that the two-track 

treatment of exempt versus non-exempt 

accounts is burdensome because 

members are obliged under the current 

rule to obtain and assess the financial 

information needed to determine which 

counterparties must be treated as nonexempt accounts.22 Further, based on 

feedback from members since the 

approval date and additional 

observation of market conditions, 

FINRA believes that the potential risk 

that the maintenance margin 

requirement was intended to address 

when originally proposed is not 

significant enough to warrant the 

burdens and competitive disadvantage 

that the requirement imposes.23

According to FINRA, members pointed 

out that, in practice, the maintenance 

margin requirement would apply to 

relatively few accounts that participate 

in the Covered Agency Transaction 

market. Yet, FINRA believes that 

monitoring and collecting maintenance 

margin for such accounts is 

operationally burdensome and out of 

proportion with the number and size of 

the affected accounts.24 Further, 

according to FINRA, bank dealers are 

not subject to the requirement to collect 

maintenance margin from their 

customers, which would significantly 

disadvantage FINRA members in 

competition with bank dealers.25 To 

address these concerns, FINRA is 

proposing to eliminate paragraph 

(e)(2)(H)(ii)d. and paragraph 

(e)(2)(H)(ii)e. of FINRA Rule 4210 as 

established pursuant to the 2016 

Approval Order, and to adopt in lieu 

new paragraph (e)(2)(H)(ii)c., which 

provides that members shall collect 

margin for each counterparty’s 26 excess 

net mark to market loss,27 unless 


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paragraph (e)(2)(H)(i)d. Under the new definition, a 

counterparty’s ‘‘net mark to market loss’’ means (1) 

the sum of such counterparty’s losses, if any, 

resulting from marking to market the counterparty’s 

Covered Agency Transactions with the member, or 

guaranteed to a third party by the member, reduced 

to the extent of the member’s legally enforceable 

right of offset or security by (2) the sum of such 

counterparty’s gains, if any, resulting from: (a) 

marking to market the counterparty’s Covered 

Agency Transactions with the member, guaranteed 

to the counterparty by the member, cleared by the 

member through a registered clearing agency, or in 

which the member has a first-priority perfected 

security interest; and (b) any ‘‘in the money,’’ as 

defined in paragraph (f)(2)(E)(iii) of FINRA Rule 

4210, amounts of the counterparty’s long standby 

transactions written by the member, guaranteed to 

the counterparty by the member, cleared by the 

member through a registered clearing agency, or in 

which the member has a first-priority perfected 

security interest. Under proposed new paragraph 

(e)(2)(H)(i)c., a counterparty’s ‘‘excess’’ net mark to 

market loss is defined to mean such counterparty’s 

net mark to market loss to the extent it exceeds 

$250,000. As such, by specifying excess net mark 

to market loss, FINRA stated that the proposed rule 

preserves the $250,000 de minimis transfer 

exception set forth under paragraph (e)(2)(H)(ii)f. as 

adopted pursuant to the 2016 Approval Order. 

Further, FINRA stated that, in the interest of clarity, 

proposed new paragraph (e)(2)(H)(ii)c. expressly 

provides that members would not be required to 

collect margin, or take capital charges, for 

counterparties’ mark to market losses on Covered 

Agency Transactions other than excess net mark to 

market losses. Last, as discussed further below, the 

proposed rule change would delete paragraph 

(e)(2)(H)(ii)f. in the interest of consolidating the rule 

language. See Notice, 86 FR 28164, n.26. 

28Current paragraph (e)(2)(H)(ii)d. of the rule 

contains provisions designed to permit members to 

treat mortgage bankers, as defined pursuant to 

current paragraph (e)(2)(H)(i)h. of the rule, as 

exempt accounts under specified conditions. 

Because the proposed rule change eliminates the 

distinction between exempt and non-exempt 

accounts for purposes of Covered Agency 

Transactions, FINRA believes this language is no 

longer needed and will be deleted. See Notice, 86 

FR 28164, n.27. 

29See Notice, 86 FR 28164. 

30See Notice, 86 FR 28164. 

31See Notice, 86 FR 28164. 

32Proposed new paragraph (e)(2)(H)(i)e. defines a 

counterparty as a ‘‘non-margin counterparty’’ if the 

member: (1) Does not have a right under a written 

agreement or otherwise to collect margin for such 

counterparty’s excess net mark to market loss and 

to liquidate such counterparty’s Covered Agency 

Transactions if any such excess net mark to market 

loss is not margined or eliminated within five 

business days from the date it arises; or (2) does not 

regularly collect margin for such counterparty’s 

excess net mark to market loss. See Amendment No. 

1 discussed in Section II.C. below for discussions 

of modification to proposed definition of nonmargin counterparty. 

33See proposed paragraph (e)(2)(H)(ii)d.1. in 

Exhibit 5 to the Proposal. 

34Current paragraph (e)(2)(I) sets forth specified 

concentration thresholds. As discussed further 

below, the rule change would make conforming 

revisions to the rule. 

35See proposed paragraph (e)(2)(H)(ii)d.2. in 

Exhibit 5 to the Proposal. 

36See proposed paragraph (e)(2)(H)(ii)d.3. in 

Exhibit 5 to the Proposal. 

37See Notice, 86 FR 28164. See also proposed 

paragraph (e)(2)(H)(ii)d.4. in Exhibit 5 to the 

Proposal. 

otherwise provided under proposed 

new paragraph (e)(2)(H)(ii)d. of the rule, 

as discussed further below. As such, 

both exempt and non-exempt accounts 

would receive the same margin 

treatment for purposes of Covered 

Agency Transactions under paragraph 

(e)(2)(H).28

2. Option for Capital Charge in Lieu of 

Mark to Market Margin 

Proposed new paragraph 

(e)(2)(H)(ii)d. of the rule is designed, 

subject to specified conditions and 

limitations, to permit members the 

option to take a capital charge in lieu of 

collecting margin for a counterparty’s 

excess net mark to market loss (that is, 

as discussed above, the net mark to 

market loss to the extent it exceeds 

$250,000). Informed by FINRA’s 

engagement with members, FINRA 

believes this approach is appropriate 

because it would help alleviate the 

competitive disadvantage of smaller 

firms vis-a`-vis larger firms.29 According 

to FINRA, smaller firms expressed 

concern that larger firms can leverage 

their greater size and scale in obtaining 

margining agreements with their 

counterparties, and that counterparties 

would prefer to transact with larger 

firms with which margining agreements 

can more readily be obtained, or with 

banks that are not subject to margin 

requirements under FINRA Rule 4210. 

Smaller firms told FINRA that having 

the option to take a capital charge, in 

lieu of collecting margin, would help 

alleviate the competitive disadvantage 

of needing to obtain margining 

agreements with such counterparties 

because there would be an alternative to 

collecting margin.30 To this end, as 

stated above, the proposed rule change 

includes conditions and limitations that 

FINRA believes are designed to help 

protect the financial stability of 

members that opt to take capital charges 

while restricting the ability of the larger 

members to use their capital to compete 

unfairly with smaller members.31

Specifically, the proposed new 

paragraph provides that a member need 

not collect margin for a counterparty’s 

excess net mark to market loss under 

paragraph (e)(2)(H)(ii)c. of the rule, 

provided that: 

• The member must deduct the 

amount of the counterparty’s 

unmargined excess net mark to market 

loss from the member’s net capital 

computed as provided in Exchange Act 

Rule 15c3–1, if the counterparty is a 

non-margin counterparty 32 or if the 

excess net mark to market loss has not 

been margined or eliminated by the 

close of business on the next business 

day after the business day on which 

such excess net mark to market loss 

arises; 33

• If the member has any non-margin 

counterparties, the member must 

establish and enforce risk management 

procedures reasonably designed to 

ensure that the member would not 

exceed either of the limits specified in 

paragraph (e)(2)(I)(i) of the rule, as 

proposed to be revised pursuant to this 

rule change,34 and that the member’s net 

capital deductions under proposed 

paragraph (e)(2)(H)(ii)d.1. of the rule for 

all accounts combined will not exceed 

$25 million; 35

• If the member’s net capital 

deductions under paragraph 

(e)(2)(H)(ii)d.1. of the rule for all 

accounts combined exceed $25 million 

for five consecutive business days, the 

member must give prompt written 

notice to FINRA. If the member’s net 

capital deductions under paragraph 

(e)(2)(H)(ii)d.1. of the rule for all 

accounts combined exceed the lesser of 

$30 million or 25% of the member’s 

tentative net capital, as such term is 

defined in Exchange Act Rule 15c3–1, 

for five consecutive business days, the 

member may not enter into any new 

Covered Agency Transactions with any 

non-margin counterparty other than 

risk-reducing transactions, and must 

also, to the extent of its rights, promptly 

collect margin for each counterparty’s 

excess net mark to market loss and 

promptly liquidate the Covered Agency 

transactions of any counterparty whose 

excess net mark to market loss is not 

margined or eliminated within five 

business days from the date it arises, 

unless FINRA has specifically granted 

the member additional time; 36 and 

• The member must submit to FINRA 

such information regarding its 

unmargined net mark to market losses, 

non-margin counterparties and related 

capital charges, in such form and 

manner, as FINRA shall prescribe by 

Regulatory Notice or similar 

communication.37

3. Streamlining and Consolidation of 

Rule Language; Conforming Revisions 

In support of the amendments 

discussed above, FINRA has proposed 

several amendments to the current rule 

designed to streamline and consolidate 

the rule language and otherwise make 

conforming revisions: 

• The rule change consolidates 

language related to the $250,000 de 

minimis transfer exception and the $10 

million gross open position exception 

while, as discussed above, preserving 

these exceptions in substance. The 

$250,000 de minimis transfer exception 

is preserved because paragraph 

(e)(2)(H)(ii)c. under the revised rule 


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38See Notice, 86 FR 28165. 

39See proposed paragraph (e)(2)(H)(i)h.1. in 

Exhibit 5 to the Proposal. 

40See proposed paragraph (e)(2)(H)(i)h.2. in 

Exhibit 5 to the Proposal. 

41See proposed paragraph (e)(2)(H)(i)h.3. in 

Exhibit 5 to the Proposal. 

42The term ‘‘round robin’’ is defined under 

current paragraph (e)(2)(H)(i)i. of the rule and, 

pursuant to the rule change, would be redesignated 

as paragraph (e)(2)(H)(i)g., without any change. 

43See proposed paragraph (e)(2)(H)(i)h.4. in 

Exhibit 5 to the Proposal. 

44See Notice, 86 FR 28165. 

45See Notice, 86 FR 28165. 

46See Notice, 86 FR 28165. 

47The proposed new term ‘‘small cash 

counterparty’’ is discussed above. The proposed 

language in the paragraph reflects FINRA’s 

proposed establishment of the option to take a net 

capital charge in lieu of collecting margin. Further, 

FINRA stated that, for clarity, the proposed rule 

change adds registered clearing agencies to the 

types of counterparties that are within the 

exception pursuant to paragraph (e)(2)(H)(ii)a. as 

revised. FINRA believes that this preserves the 

treatment of registered clearing agencies under the 

rule in light of the proposed deletion of current 

paragraph (e)(2)(H)(ii)c. In this regard, also in the 

interest of clarity, FINRA proposes to add new 

paragraph (e)(2)(H)(i)f. by way of defining the term 

‘‘registered clearing agency.’’ See Notice, 86 FR 

28165, n.39. 

48Under current paragraph (e)(2)(H)(ii)a.2., a 

member is not required to apply the margin 

requirements of paragraph (e)(2)(H) to Covered 

Agency Transactions with a counterparty in 

multifamily housing securities or project loan 

program securities, provided the securities meet the 

specified conditions under the rule and the member 

makes and enforces the written risk limit 

determinations as specified under the rule. FINRA 

stated that the proposed rule change does not 

change the treatment of multifamily housing 

securities or project loan program securities under 

the current rule other than to clarify, in express 

terms, that a member is not required to include a 

counterparty’s Covered Agency Transactions in 

multifamily housing securities or project loan 

program securities in the computation of such 

counterparty’s net mark to market loss. See Notice, 

86 FR 28165, n.40. 

49See proposed paragraph (e)(2)(H)(ii)a. in 

Exhibit 5 to the Proposal. 

specifies that the members shall collect 

margin for each counterparty’s excess 

net mark to margin loss, unless 

otherwise provided under paragraph 

(e)(2)(H)(ii)d. of the rule (that is, as 

discussed above, the provisions under 

the proposed rule change that permit a 

member to take a capital charge in lieu 

of collecting margin, subject to specified 

conditions).38 The proposed rule change 

deletes paragraph (e)(2)(H)(ii)f., which 

currently addresses the de minimis 

exception and would be rendered 

redundant. With respect to the current 

$10 million gross open position 

exception, FINRA proposes to revise 

paragraph (e)(2)(H)(ii)a. of the rule, 

which specifies counterparties that are 

excepted from the rule’s margin 

requirements, to include a ‘‘small cash 

counterparty’’ among the enumerated 

entities included in the exception. 

Proposed new paragraph (e)(2)(H)(i)h. 

would provide that a counterparty is a 

‘‘small cash counterparty’’ if: 

Æ The absolute dollar value of all of 

such counterparty’s open Covered 

Agency Transactions with, or 

guaranteed by, the member is $10 

million or less in the aggregate, when 

computed net of any settled position of 

the counterparty held at the member 

that is deliverable under such open 

Covered Agency Transactions and 

which the counterparty intends to 

deliver; 39

Æ The original contractual settlement 

date for all such open Covered Agency 

Transactions is in the month of the trade 

date for such transactions or in the 

month succeeding the trade date for 

such transactions; 40

Æ The counterparty regularly settles 

its Covered Agency Transactions on a 

DVP basis or for cash; 41 and 

Æ The counterparty does not, in 

connection with its Covered Agency 

Transactions with, or guaranteed by, the 

member, engage in dollar rolls, as 

defined in Rule 6710(z), or round robin 

trades,42 or use other financing 

techniques.43

The above elements, according to 

FINRA, are substantially similar to the 

elements that are currently associated 

with the exception as set forth under 

current paragraph (e)(2)(H)(ii)c.2., 

which would be deleted, along with the 

definition of ‘‘gross open position’’ 

under paragraph (e)(2)(H)(i)e., which 

would be rendered redundant.44 The 

new proposed language reflects that the 

scope of transactions addressed by the 

rule include Covered Agency 

Transactions with a counterparty that 

are guaranteed by the member. 

• FINRA proposes to delete the 

definition of ‘‘bilateral transaction’’ set 

forth in current paragraph (e)(2)(H)(i)a. 

The definition is in connection with the 

provisions under the current rule 

relating to margin treatment for exempt 

accounts under paragraph (e)(2)(H)(ii)d. 

and for non-exempt accounts under 

paragraph (e)(2)(H)(ii)e., both of which 

paragraphs, as discussed above, FINRA 

proposes to delete pursuant to the rule 

change. Further, FINRA notes that the 

term ‘‘bilateral transaction’’ is unduly 

narrow given that the proposed revised 

definition of ‘‘counterparty,’’ as 

discussed above, would have the effect 

of clarifying that the rule’s scope 

includes transactions guaranteed by the 

member.45

• FINRA proposes to delete the 

definition of the term ‘‘deficiency’’ set 

forth in current paragraph (e)(2)(H)(i)d. 

Under the current rule, the term is 

designed in part to reference required 

but uncollected maintenance margin for 

Covered Agency Transactions. Because 

the rule change proposes to eliminate 

such maintenance margin, FINRA 

believes that the term is not needed.46

• Current paragraph (e)(2)(H)(ii)a. 

addresses the scope of paragraph 

(e)(2)(H) and certain types of 

counterparties that are excepted from 

the rule, provided the member makes 

and enforces written risk limits 

pursuant to paragraph (e)(2)(H)(ii)b. 

Current paragraph (e)(2)(H)(ii)b. 

contains the core language under the 

rule relating to risk limits. FINRA is 

proposing to revise both paragraphs so 

as to conform with the rule change and 

to consolidate the language relating to 

written risk limits in these paragraphs 

within paragraph (e)(2)(H)(ii)b. 

Paragraph (e)(2)(H)(ii)a.1. would be 

revised to read: ‘‘1. a member is not 

required to collect margin, or to take 

capital charges in lieu of collecting such 

margin, for a counterparty’s excess net 

mark to market loss if such counterparty 

is a small cash counterparty, registered 

clearing agency, Federal banking 

agency, as defined in 12 U.S.C. 1813(z), 

central bank, multinational central 

bank, foreign sovereign, multilateral 

development bank, or the Bank for 

International Settlements; and . . .’’ 47

Paragraph (e)(2)(H)(ii)a.2. would be 

revised to read: ‘‘2. a member is not 

required to include a counterparty’s 

Covered Agency Transactions in 

multifamily housing securities or 

project loan program securities in the 

computation of such counterparty’s net 

mark to market loss, provided . . .’’ 48

Paragraph (e)(2)(H)(ii)a.2.A. would not 

be changed, other than to be 

redesignated as part of part of 

(e)(2)(H)(ii)a.2. Paragraph 

(e)(2)(H)(ii)a.2.B. would be eliminated 

as redundant 49 because, 

correspondingly, paragraph 

(e)(2)(H)(ii)b. would be revised to read: 

‘‘A member that engages in Covered 

Agency Transactions with any 

counterparty shall make a determination 

in writing of a risk limit for each such 

counterparty, including any 

counterparty specified in paragraph 

(e)(2)(H)(ii)a.1. of this Rule, that the 

member shall enforce. The risk limit for 

a counterparty shall cover all of the 

counterparty’s Covered Agency 

Transactions with the member or 

guaranteed to a third party by the 

member, including Covered Agency 

Transactions specified in paragraph 

(e)(2)(H)(ii)a.2. of this Rule. The risk 

limit determination shall be made by a 

designated credit risk officer or credit 

risk committee in accordance with the 


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50See proposed paragraph (e)(2)(H)(ii)b. in 

Exhibit 5 to the Proposal. 

51See proposed paragraph (e)(2)(I) in Exhibit 5 to 

the Proposal. 

52See Notice, 86 FR 28166. 

53See Notice, 86 FR 28166. 

54See Supplemental Material provisions in 

Exhibit 5 to the Proposal. 

55See discussion of Amendment No. 1 in 

Sections II.C. and III.B.12. below for discussion of 

the proposed adjustment of the implementation 

date. See also Amendment No. 1 at 20. FINRA 

stated that the proposed rule change would not 

impact members that are funding portals or that 

have elected to be treated as capital acquisition 

brokers (‘‘CABs’’), given that such members are not 

subject to FINRA Rule 4210. See Notice, 86 FR 

28166, n.45. 

56Amendment No. 1 also contains several 

conforming changes to paragraph numbering to 

accommodate the proposed modifications to the 

rule text. See Exhibit 4 to Amendment No. 1. 

57See Amendment No. 1. See also OIP, 86 FR 

47665. 

58 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). See, e.g., Section III.A. (discussing 

competitive concerns raised by commenters 

regarding smaller firms exiting the market resulting 

in a concentration of larger firms, and 

enhancements in efficiency in streamlining and 

consolidating the rule text). 

59 15 U.S.C. 78o–3(b)(6). 

member’s written risk policies and 

procedures.’’ 50

• Paragraph (e)(2)(I) under FINRA 

Rule 4210 addresses concentration 

thresholds. FINRA is proposing to make 

revisions to align the paragraph with the 

proposed new language as to paragraph 

(e)(2)(H), in particular the elimination of 

the maintenance margin requirement 

and the introduction of the proposed 

new term ‘‘small cash counterparty.’’ 

Specifically, FINRA proposes to revise 

the opening sentence of the paragraph to 

read: ‘‘In the event that (i) the net 

capital deductions taken by a member as 

a result of marked to the market losses 

incurred under paragraphs (e)(2)(F), 

(e)(2)(G) (exclusive of the percentage 

requirements established thereunder), or 

(e)(2)(H)(ii)d.1. of this Rule, plus any 

unmargined net mark to market losses 

below $250,000 or of small cash 

counterparties exceed . . .’’ 51 Current 

paragraph (e)(2)(I)(i)c. would be 

redesignated as (e)(2)(I)(ii) and would 

read: ‘‘(ii) such excess as calculated in 

paragraph (e)(2)(I)(i) of this Rule 

continues to exist on the fifth business 

day after it was incurred . . .’’ The final 

clause of the paragraph would be 

revised to read: ‘‘ . . . the member shall 

give prompt written notice to FINRA 

and shall not enter into any new 

transaction(s) subject to the provisions 

of paragraphs (e)(2)(F), (e)(2)(G) or 

(e)(2)(H) of this Rule that would result 

in an increase in the amount of such 

excess.’’ 

• Paragraph (f)(6) under FINRA Rule 

4210 addresses the time within which 

margin or ‘‘mark to market’’ must be 

obtained. FINRA proposes to delete the 

phrase ‘‘other than that required under 

paragraph (e)(2)(H) of this Rule,’’ so the 

rule, as revised, would read: ‘‘The 

amount of margin or ‘mark to market’ 

required by any provision of this Rule 

shall be obtained as promptly as 

possible and in any event within 15 

business days from the date such 

deficiency occurred, unless FINRA has 

specifically granted the member 

additional time.’’ FINRA believes this is 

appropriate given the proposed 

elimination of current paragraph 

(e)(2)(H)(ii)d. and paragraph 

(e)(2)(H)(ii)e. of the rule, both of which 

set forth, among other things, specified 

time frames for collection of mark to 

market losses or deficiencies, as 

appropriate, and liquidation of positions 

that are specific to Covered Agency 

Transactions.52

• Current Supplemental Material .02 

addresses the requirement for 

monitoring procedures with respect to 

mortgage bankers, for purposes of 

treating them as exempt accounts 

pursuant to current paragraph 

(e)(2)(H)(ii)d. Current Supplemental 

Material .03 addresses how the cure of 

mark to market loss or deficiency, as 

defined under the current rule, may 

cure the need to liquidate positions. 

Current Supplemental Material .04 

addresses determining whether an 

account qualifies as an exempt account. 

The proposed rule change would render 

each of these provisions unnecessary, 

given that the rule change eliminates the 

need to distinguish exempt versus nonexempt accounts, including, as 

discussed above, the language targeted 

toward mortgage bankers, and 

eliminates the liquidation provisions 

under current paragraph (e)(2)(H)(ii)d. 

and paragraph (e)(2)(H)(ii)e. of the 

rule.53 FINRA proposes to redesignate 

current Supplemental Material .05 as 

Supplemental Material .03.54

Subject to Commission approval of 

the proposed rule change, FINRA 

proposed it would announce the 

effective date of the proposed rule 

change in a Regulatory Notice to be 

published no later than 60 days 

following Commission approval. FINRA 

states that the effective date will be no 

later than 120 days following 

publication of the Regulatory Notice 

announcing Commission approval.55

C. Summary of Amendment No. 1 

In Amendment No. 1, FINRA 

proposed the following modifications to 

the proposed rule change: (1) Modify 

the definition of ‘‘non-margin 

counterparty’’ to exclude small cash 

counterparties and other exempted 

counterparties; and (2) define a FINRA 

member’s ‘‘specified net capital 

deductions’’ as the net capital 

deductions required by paragraph 

(e)(2)(H)(ii)d.1. of FINRA Rule 4210 

with respect to all unmargined excess 

net mark to market losses of its 

counterparties, except to the extent that 

the member, in good faith, expects such 

excess net mark to market losses to be 

margined by the close of business on the 

fifth business day after they arose.56 In 

addition, Amendment No. 1 states that, 

if the Commission approves the 

proposed rule change, as modified by 

Amendment No. 1, FINRA will 

announce the effective date of the 

proposed rule change, as modified by 

Amendment No. 1, in a Regulatory 

Notice to be published no later than 60 

days following Commission approval. 

The effective date would be between 

nine and ten months following the 

Commission’s approval.57

III. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, as modified by Amendment 

No. 1, 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 

applicable to a national securities 

association.58 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,59 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. Elimination of Maintenance Margin 

Requirement; Capital in Lieu of Margin 

Charges; and Streamlining of Rule Text 

As discussed above in Section II, 

FINRA has proposed: (1) To eliminate 

the two percent maintenance margin 

requirement that would apply to nonexempt accounts under current FINRA 

Rule 4210; (2) subject to specified 

conditions and limitations, to permit 

FINRA members to take a capital charge 

in lieu of collecting margin for excess 

net mark to market losses on Covered 


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60See Letter from Chris Melton, to Commission 

(Aug. 2, 2021) (‘‘Melton Letter’’). 

61See Letter from Christopher B. Killian, 

Managing Director, Securitization, Corporate Credit, 

Libor, Securities Industry and Financial Markets 

Association, to J. Matthew DeLesDernier, Assistant 

Secretary, Commission (June 15, 2021) (‘‘SIFMA 

Letter’’) at 1. 

62See Letter from Christopher B. Killian, 

Managing Director, Securitization, Corporate Credit, 

Libor, Asset Management Group of SIFMA, to 

Secretary, Commission (June 15, 2021) (‘‘SIFMA 

AMG Letter’’) at 1. 

63See SIFMA Letter at 2–3; Letter from Michael 

Decker, Senior Vice President, Public Policy, Bond 

Dealers of America, to Vanessa Countryman, 

Secretary, Commission (June 15, 2021) (‘‘BDA 

Letter’’) at 2–5; Letter from Thomas J. Fleming & 

Adrienne M. Ward, Olshan, on behalf of Brean 

Capital, LLC, to Vanessa Countryman, Secretary, 

Commission (June 15, 2021) (‘‘Brean Capital 

Letter’’) at 10–21. See also Letter from Kirk R. 

Malmberg, President and Chief Executive Officer, 

Federal Home Loan Bank of Atlanta, to Vanessa 

Countryman, Secretary, Commission at 1–2 (Jan. 18, 

2022); Letter from Senator John Boozman, Senator 

Thom Tillis, and Senator Cynthia M. Lummis, to 

Gary Gensler, Chairman, Commission (Jan. 10, 

2022) (‘‘Boozman et al Letter’’) at 1–2. 

64 Id. See also Melton Letter at 1 (stating Specified 

Pools do not represent systemic risk in and among 

themselves and should not be included in the 

definition of ‘‘Covered Agency Transaction’’). 

65See Letter from Thomas J. Fleming and 

Adrienne M. Ward, Olshan, and David H. 

Thompson and Harold Reeves, Cooper & Kirk, PLLC 

on behalf of Brean Capital, LLC, and the Bond 

Dealers of America, Inc. to Vanessa Countryman, 

Secretary, Commission (Sep. 10, 2021) (‘‘BDA and 

Brean Capital Letter’’) at 20–42. The BDA and Brean 

Capital Letter appears twice in the comment file. 

66See Exchange Act Release No. 76148 (Oct. 14, 

2015), 80 FR 63603 (Oct. 20, 2015) (Notice of Filing 

of a Proposed Rule Change to Amend FINRA Rule 

4210 (Margin Requirements) to Establish Margin 

Requirements for the TBA Market; File No. SR– 

FINRA–2015–036) (‘‘2015 Notice’’); see also 

Regulatory Notice 14–02 (Jan. 2014). Even before 

the publication of these materials, as discussed in 

SR–FINRA–2015–036, FINRA highlighted that it 

had engaged in extensive outreach and consultation 

with market participants and staff of the Federal 

Reserve Bank of New York and the Commission 

staff. See 2015 Notice, 80 FR, at 63604–05. In Partial 

Amendment No. 3 to SR–FINRA–2015–036, FINRA 

stated that up to that point there had been four 

opportunities for public comment on the original 

rulemaking, beginning with Regulatory Notice 14– 

02, available at: https://www.finra.org/rulesguidance/rule-filings/sr-finra-2015-036. See also 

Amendment No. 1 at 4. 

67See, e.g., 2015 Notice, 80 FR 63615–16. See 

also Amendment No. 1 at 4–5. 

68See 2016 Approval Order, 81 FR 40371. 

69See Partial Amendment No. 3 to SR–FINRA– 

2015–036, available at: https://www.finra.org/rulesguidance/rule-filings/sr-finra-2015-036. 

70See 2015 Notice, 80 FR 63608. 

71See Partial Amendment No. 1 to SR–FINRA– 

2015–036, available at: https://www.finra.org/rulesguidance/rule-filings/sr-finra-2015-036. 

72See 2016 Approval Order, 81 FR 40368. See 

also Amendment No. 1 at 5–6. 

73See Partial Amendment No. 3 to SR–FINRA– 

2015–036. See also Amendment No. 1 at 6. 

Agency Transactions; and (3) to make 

revisions designed to streamline, 

consolidate and clarify the Covered 

Agency Transaction rule language. 

Some commenters stated that they 

appreciated the efforts that FINRA made 

to modify the Covered Agency 

Transaction margin requirements,60 and 

acknowledged the substantial efforts 

FINRA made to engage with industry 

participants and to adjust the Covered 

Agency Transaction margin 

requirements to address concerns about 

competitive equality, cost, and the 

impact on the market for mortgage 

securities.61 One commenter expressed 

support for the proposed change 

eliminating the maintenance margin 

requirement.62

Some commenters, however, raised 

concerns or objected to the proposed 

rule change on the grounds that 

imposing margin requirements with 

regard to Covered Agency Transactions 

would cause smaller and mid-sized 

firms to exit the Covered Agency 

Transaction market, thereby causing 

greater concentration among fewer 

market participants, reducing access to 

the Covered Agency Transaction market 

or negatively affecting market 

liquidity.63 These commenters 

expressed concerns that customers 

would not be inclined to transact with 

smaller and mid-sized broker-dealers 

and would prefer to transact with banks 

that are not subject to margin 

requirements, that many customers 

would be unwilling to enter into margin 

agreements, that the costs of engaging in 

Covered Agency Transactions would 

increase significantly and excessive 

margin requirements and capital charges 

would be involved, or that the proposed 

requirements, either in whole or in part, 

are not suitable for Specified Pool 

Transactions and CMOs.64 Further, in 

response to the OIP, one commenter 

reiterated its position that the 

amendments that are the subject of the 

proposed rule change are unnecessary 

and an abuse of discretion in that they 

are unworkable, increase systemic risk, 

and will have a catastrophic effect on 

regional broker-dealers, and that the 

proposed rule change will impose 

burdens on competition that are neither 

necessary nor appropriate.65

In response to the comments to the 

Notice, FINRA stated that it has engaged 

with industry participants extensively 

on these concerns, and has addressed 

them on multiple occasions, since the 

process of soliciting comment on 

requirements for Covered Agency 

Transactions began in January 2014 

with the publication of Regulatory 

Notice 14–02 and in 2015 with FINRA’s 

original rulemaking for Covered Agency 

Transactions.66 FINRA also stated that it 

believes that the rulemaking is 

necessary because of the risks posed by 

unsecured credit exposures in the 

Covered Agency Transactions market.67

FINRA also stated that it has addressed, 

on multiple occasions, the need to 

include Specified Pool Transactions and 

CMOs within the scope of the 

requirements,68 and stated that it made 

key revisions in finalizing the original 

rulemaking expressly to mitigate any 

potential impact on smaller firms and 

on activity in the Covered Agency 

Transaction market, including the 

following: 

• FINRA initially proposed an 

exception in the original rulemaking 

pursuant to which the new margin 

requirements would not apply to a 

counterparty if its gross open positions 

in Covered Agency Transactions with a 

FINRA member is $2.5 million or less, 

subject to specified conditions. In 

response to commenters on the original 

rulemaking, and to ensure that a greater 

number of smaller firms and 

counterparties would benefit from the 

exception, FINRA increased the amount 

from $2.5 million to $10 million; 69

• FINRA modified the two percent 

maintenance margin requirement, as 

adopted pursuant to the original 

rulemaking, to create an exception for 

cash investors that otherwise, by virtue 

of not being ‘‘exempt accounts’’ as 

defined under FINRA’s margin rules, 

would have been subject to the 

requirement.70 FINRA also made an 

exception from the maintenance margin 

requirements available to mortgage 

bankers in the original rulemaking; 

• FINRA excepted multifamily 

housing securities and project loan 

program securities from the new margin 

requirements; 71

• FINRA established a $250,000 de 

minimis transfer amount, for a single 

counterparty, subject to specified 

conditions, up to which members would 

not need to collect margin or take a 

charge to their net capital.72

Additionally, FINRA stated that the 

2016 Approval Order was issued for the 

original rulemaking on June 15, 2016, 

and FINRA stated that, upon the 

Commission’s approval (of the original 

rulemaking), FINRA would monitor the 

impact of the new requirements and, if 

the requirements prove overly onerous 

or otherwise are shown to negatively 

impact the market, would consider 

revisiting such requirements as may be 

necessary to mitigate the rule’s 

impact.73 Industry participants 

requested that FINRA reconsider the 

potential impact of the requirements 

pursuant to SR–FINRA–2015–036 on 

smaller and mid-sized firms, and that 

FINRA extend the implementation date 

of the requirements pending such 

reconsideration. In response to the 


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74See Amendment No. 1 at 6. 75See Notice, 86 FR 28162. See also Amendment 

No. 1 at 6. 76See Notice, 86 FR 28162–63. See also 

Amendment No. 1 at 6. 

77See Amendment No. 1 at 6–7. 

78See Amendment No. 1 at 7. 

79See FINRA Letter at 3. 

80See FINRA Letter at 4–7. 

81See FINRA Letter at 5. 

82See FINRA Letter at 5–6. 

83See FINRA Letter at 6. 

84See 2016 Approval Order, 81 FR 40375. 

85See, e.g., 2016 Approval Order, 81 FR 40375– 

76 (‘‘[E]xcluding additional products from the rule 

or modifying the settlement dates in the definition 

of Covered Agency Transactions potentially may 

‘‘undermine the effectiveness of the proposal’’ if 

counterparties are permitted to maintain unsecured 

credit exposures on these positions’’). 

86See 2016 Approval Order. 

concerns of industry participants, 

FINRA engaged in extensive dialogue, 

both with industry participants and 

other regulators, including staff of 

Commission and the Federal Reserve 

System, for the purpose of reconsidering 

the requirements.74 Further, FINRA has 

extended the implementation date of the 

margin collection requirements 

pursuant to SR–FINRA–2015–036 on 

multiple occasions.75

FINRA stated that it developed the 

proposed rule change in direct response 

to the concerns of industry participants, 

and in citing the risks posed by 

unsecured credit exposures that exist in 

the Covered Agency Transaction market, 

stated that it has proposed two key 

revisions designed to afford relief to 

industry participants.76 Specifically, 

FINRA proposed to eliminate the two 

percent maintenance margin 

requirement with respect to non-exempt 

accounts for purposes of their Covered 

Agency Transactions and, subject to 

specified conditions and limits, to 

permit members to take a capital charge 

in lieu of collecting margin for each 

counterparty’s excess mark to market 

loss.77 FINRA believes that, over the 

course of prolonged engagement with 

industry participants, and in light of the 

multiple rounds of responding to 

concerns already expressed, and 

answered, in connection with the 

original rulemaking, and as further 

addressed in the proposed rule change, 

it does not serve the public interest to 

further delay the proposed rule change. 

FINRA believes the revisions to the 

original rulemaking as set forth more 

fully in the proposed rule change, with 

the additional clarifications provided to 

commenters, afford industry 

participants appropriate relief and 

clarity, and that the rulemaking should 

proceed.78

Further, in response to the additional 

comments received in response to the 

OIP, FINRA stated that commenters 

have expressed these same points 

repeatedly, including during the 

original rulemaking. FINRA further 

stated these concerns have repeatedly 

been addressed.79 FINRA also stated 

that the rulemaking is necessary because 

of the risk posed by unsecured credit 

exposures in the Covered Agency 

Transaction market, and that FINRA has 

addressed concerns of industry 

participants in finalizing the original 

rulemaking, as well as through this 

proposed rule change.80 FINRA also 

stated that events in connection with 

market volatility and other stress 

stemming from the COVID–19 pandemic 

have once again illustrated the 

importance of risk and exposure 

limits.81 FINRA stated that the recent 

default of Archegos Capital 

Management, and related multi-billion 

dollar losses incurred by Credit Suisse, 

is yet another case in point. FINRA 

stated that these events reinforce that 

FINRA’s attention to unsecured 

exposures in the Covered Agency 

Transaction market, in view of its 

significance to the U.S. mortgage market 

and financial system generally, is 

rationally founded. FINRA stated that 

the Covered Agency Transaction market 

today is substantial. As of the second 

quarter of 2021, FINRA stated that total 

average daily dollar trading volume for 

these types of products as reflected in 

FINRA Trade Reporting and Compliance 

Engine (‘‘TRACE’’) data was 

approximately $300 billion.82 FINRA 

stated that the regulatory need for 

attention to this area is no less than 

when FINRA initiated the original 

rulemaking.83

In the proposed rule change, FINRA 

has reasonably balanced the goal of 

reducing firm exposure to counterparty 

credit risk stemming from unsecured 

credit exposures in the Covered Agency 

Transaction market, with the potential 

competitive impacts and costs on 

smaller and medium-sized brokerdealers. The risks posed by unsecured 

credit exposures in the Covered Agency 

Transaction market justify the 

imposition of margin requirements on 

Covered Agency Transactions. Further, 

as highlighted by FINRA above, the 

current rule, as approved in the 2016 

Approval Order, already incorporates a 

number of exceptions designed to 

alleviate the impact of the Covered 

Agency Margin requirements on smaller 

firms and counterparties, including the 

small cash counterparty exception.84

These exceptions remain in the rule as 

modified by the proposed rule change. 

Moreover, while the proposed rule 

change will not fully resolve the 

disparity that results from being subject 

to FINRA Rule 4210, when non-FINRA 

member banks are not, the proposed 

rule change to eliminate the 

maintenance margin requirement and 

the option to take a capital charge in 

lieu of margin should help to alleviate 

this disparity. The continued 

requirement to collect mark to market 

losses or take a capital charge in lieu of 

collecting margin will mitigate the risk 

that FINRA members will compete by 

implementing lower margin levels for 

Covered Agency Transactions and will 

help ensure that margin levels are set at 

sufficiently prudent levels across FINRA 

members. 

The Commission agrees with FINRA 

that some comments have been 

previously addressed in the original 

rulemaking, including whether to 

impose any margin requirements on 

Covered Agency Transactions or 

exclude certain products from the scope 

of the rule, such as Specified Pools and 

CMOs.85 These commenters provided 

comments about the rules that the 

Commission has previously approved, 

but those rules are not before the 

Commission in this filing.86 As 

described above, the only amendments 

to the current rule before the 

Commission under the proposed rule 

change are to eliminate the maintenance 

margin requirement, permit capital in 

lieu of margin charges subject to a cap, 

and to reorganize and streamline the 

rule text. Because the margin 

requirements set forth in the original 

rulemaking were approved in the 2016 

Approval Order, without this proposed 

rule change, the margin collection 

requirements in the original rule would 

become effective in 2022. 

Further, the Commission agrees with 

FINRA that the regulatory need for 

attention to this area is no less than 

when FINRA initiated the original 

rulemaking. Recent events have 

reinforced the need to address 

unsecured exposures in the Covered 

Agency Transaction market, in view of 

its significance to the U.S. mortgage 

market and the financial system, more 

generally. Moreover, permitting 

counterparties to participate in the 

Covered Agency Transaction market 

without posting variation margin could 

facilitate increased leverage by 

customers, thereby posing a risk to the 

broker-dealer engaging in an unsecured 

transaction with a counterparty, and to 

the marketplace as a whole. The 

imposition of margin requirements on 

Covered Agency Transactions also is 

consistent with other regulatory efforts 

that have sought to address the risk of 

uncollateralized exposures arising from 


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87See, e.g., Exchange Act Rule 18a–3 (imposing 

margin requirements on non-cleared security-based 

swap transactions for security-based swap dealers 

and major security-based swap participants). 

88See Treasury Market Practices Group 

(‘‘TMPG’’), Margining in Agency MBS Trading 

(Nov. 2012), available at https://

www.newyorkfed.org/medialibrary/microsites/ 

tmpg/files/margining_tmpg_11142012.pdf (‘‘TMPG 

Report’’). The TMPG report recommends the 

exchange of variation margin for dealer banks. The 

TMPG is a group of market professionals that 

participate in the Covered Agency Transaction 

market and is sponsored by the Federal Reserve 

Bank of New York. 

89See BDA Letter at 2–4; Brean Capital Letter at 

15–18. 

90See Amendment No. 1 at 7. 

91See Amendment No. 1 at 7–8. 

92See Amendment No. 1 at 8. 

93See Amendment No. 1 at 8. 

different types of bilateral transactions 

with counterparties.87

Eliminating the two percent 

maintenance margin requirement will 

reduce operational burdens on FINRA 

member firms by eliminating the need 

to obtain and assess information 

regarding a counterparty’s exempt or 

non-exempt status. Further, FINRA 

member firms will continue to be 

required to collect variation margin 

under the proposed rule change from a 

counterparty or take a capital charge, 

subject to a cap. This requirement will 

further the goal of reducing firm 

exposure to counterparty credit risk 

stemming from unsecured credit 

exposures in the Covered Agency 

Transaction market. The elimination of 

the two percent maintenance margin 

charge also reduces potential 

competitive disparities between FINRA 

broker-dealers and large bank dealers 

that are not subject to a maintenance 

margin requirement.88

The proposed rule change to permit 

FINRA members to take a capital charge 

in lieu of collecting margin, subject to 

a cap, will provide an alternative for 

firms that are concerned, due to their 

size, about facing competitive 

disadvantages. For example, to the 

extent smaller broker-dealers face 

difficulties obtaining margin agreements 

with counterparties, the capital charge 

provides an alternative. The capital in 

lieu of margin charges under the 

proposed rule change will require a 

broker-dealer to set aside net capital to 

address the risk of unsecured exposures 

in the Covered Agency Transaction 

market that can otherwise be mitigated 

through the collection of variation 

margin. The set aside of net capital will 

serve as an alternative to obtaining 

margin collateral for this purpose. 

Additionally, the proposed caps and 

concentration limits on the proposed 

capital in lieu of margin charges will 

permit smaller broker-dealers to utilize 

the capital charge alternative, while 

limiting the amount of capital charges 

that large firms would be able to take 

under the proposed rule change. This 

will prohibit larger broker-dealers from 

using their size advantage (and larger 

capital base) to compete with smaller 

firms by using the capital charge in lieu 

of margin charge. Moreover, by 

providing the choice of either the 

collection of variation margin or a 

capital charge for the amount of the 

variation margin, the proposed rule 

change provides alternatives to brokerdealers with respect to their 

counterparties, while also protecting 

FINRA members from risks of 

unsecured credit exposures to Covered 

Agency Transactions. 

Some commenters stated that a 

member with a Covered Agency 

Transaction position that is hedged from 

a market risk perspective, but is 

unhedged from a credit risk perspective, 

would have significantly higher capital 

charges or margin requirements under 

the proposed rule change than they 

would otherwise have absent the rule. 

The commenters described scenarios to 

illustrate this result.89 FINRA stated that 

some of the scenarios involve firms that 

are fully hedged from a market risk 

perspective, like a firm that purchases a 

TBA, Specified Pool, or CMO from one 

party and enters into an offsetting sale 

transaction with another party, with the 

same settlement date. Commenters 

described these transactions as 

‘‘riskless,’’ but FINRA stated that it 

disagrees with such characterization. 

FINRA stated that such a firm is 

exposed to the credit risk of both the 

buyer and seller, and the offsetting 

transactions provide no protection 

against those risks. FINRA stated that 

paragraph (e)(2)(H) of FINRA Rule 4210 

requires members to protect themselves 

against that counterparty credit risk by 

collecting margin for their 

counterparties’ excess net mark to 

market losses or taking capital charges 

in lieu of such collection.90

According to FINRA, in some of these 

scenarios, commenters attributed the 

higher margin or capital requirements to 

the fact that the transactions (termed 

‘‘non-netting’’ by one commenter and 

‘‘non-nettable’’ by another) will not net 

under the proposed rule change. Under 

the proposed rule change, however, 

FINRA stated there is no category of 

transactions that cannot be netted in the 

determination of a counterparty’s ‘‘net 

mark to market loss.’’ According to 

FINRA, the only requirement is that the 

member have a legal right to offset 

losses on one transaction against gains 

on the other (or a security interest that 

would allow it to apply gains on one 

transaction to the counterparty’s losses 

on the other).91

FINRA stated that the ‘‘non-netting’’ 

or ‘‘non-nettable’’ transactions, as 

referenced by the commenters, appear to 

be transactions that are not eligible to be 

cleared by the Mortgage-Backed 

Securities Division of the Fixed Income 

Clearing Corporation (‘‘MBSD’’). 

However, FINRA stated that when an 

eligible transaction is submitted to the 

MBSD for clearing, that transaction is 

novated to the MBSD, so that instead of 

a transaction between the original buyer 

and seller, there are two mirror 

transactions: One in which the original 

buyer is buying from the MBSD; and 

one in which the original seller is 

selling to the MBSD. Accordingly, 

FINRA stated that when a firm executes 

with a single counterparty an MBSDeligible transaction and a transaction 

that is not MBSD-eligible, and the 

eligible transaction is submitted for 

clearing (but the non-eligible transaction 

is not), the firm ends up with two 

transactions with two separate 

counterparties. These transactions 

cannot be netted against each other, 

according to FINRA, because they are 

with separate counterparties, rather than 

because of FINRA’s proposed rule 

change, which in fact would allow gains 

and losses on the transactions to be 

netted to the extent of a perfected, first 

priority, security interest in the 

transaction with the gain.92

Further, according to FINRA, the 

current rule, as approved under the 

2016 Approval Order, would, subject to 

specified exceptions, require members 

to collect margin whenever their 

counterparties’ mark to market losses 

(and two percent maintenance margin 

deficiency, where applicable) exceeds 

$250,000, and would require them to 

take a capital charge to the extent such 

margin is not collected by the close of 

business on the business day after such 

mark to market loss (or maintenance 

margin deficiency) arose.93 FINRA 

stated that the proposed rule change 

preserves all of the exceptions in the 

current rule, eliminates the two percent 

maintenance margin requirement, 

provides an option, subject to specified 

conditions, to take capital charges in 

lieu of collecting margin for net mark to 

market losses in excess of $250,000, and 

requires a capital charge to the extent 

margin for excess net mark to mark 

losses has not been collected by the 

close of business on the business day 

after such mark to market losses arose. 

Because the proposed rule change 


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94See Amendment No. 1 at 8. 

95According to FINRA, under the current rule 

and the proposed rule change, members are not 

required to collect margin, or take capital charges 

in lieu of collecting margin, to cover the net mark 

to market losses of small cash counterparties, 

registered clearing agencies, Federal banking 

agencies (as defined in 12 U.S.C. 1813(z)), central 

banks, multinational central banks, foreign 

sovereigns, multilateral development banks, or the 

Bank for International Settlements. FINRA stated 

that these exceptions mean that some members 

engaging in Covered Agency Transactions with 

these counterparties may have lower margin and 

capital requirements under the current rule and the 

proposed rule change than they would under the 

commenter’s suggestion. See Amendment No. 1 at 

9. 

96See Amendment No. 1 at 9. 

97See Amendment No. 1 at 8–9. 

98See Brean Capital Letter at 21–23; Melton 

Letter; BDA and Brean Capital Letter at 20–25. See 

also Boozman et al Letter at 2. 

99See Brean Capital Letter at 22–23; Melton 

Letter. 

100See Brean Capital Letter at 22. 

101See Melton Letter; BDA and Brean Capital 

Letter at 21–22. 

102See 2016 Approval Order, 81 FR 40373. 

103See Amendment No. 1 at 7. 

104See 12 CFR 220.1(b)(2) (‘‘This [Regulation T] 

. . . does not preclude any exchange, national 

securities association, or creditor from imposing 

additional requirements or taking action for its own 

protection.’’); See also 2016 Approval Order, 81 FR 

40374 (‘‘The stated goals of the proposal are 

consistent with the purposes of the Exchange Act 

and with FINRA’s authority to impose margin 

requirements on its members.’’); paragraphs 

(e)(2)(A), (B), and (F) of FINRA Rule 4210 (imposing 

maintenance margin requirements on exempted 

securities, and requirements on transactions with 

exempt accounts involving certain good faith 

securities); and Federal Reserve Board Ruling (June 

28, 1972), FRRS 5–622 (‘‘Although the Board does 

not have authority to set margin requirements on 

exempted securities (FNMA stock is an exempted 

security), brokers and national securities exchanges 

can establish margin requirements more restrictive 

than those of the Board.’’). 

eliminates the two percent maintenance 

margin requirement (and as such 

eliminates the related capital charges for 

uncollected maintenance margin), 

FINRA stated that the margin 

requirements and capital charges under 

the proposed rule change are less than 

the requirements under the current 

rule.94

The Commission agrees with FINRA’s 

analysis. The proposed rule change will 

reduce the current rule’s requirements 

by permitting capital charges in lieu of 

margin and eliminating the two percent 

maintenance margin requirement. In 

addition, all of the exceptions in the 

current rule are preserved in the 

proposed rule change. Further, the 

proposed rule change allows a FINRA 

member to offset transactions where the 

member has a legal right to offset losses 

on one transaction against gains on the 

other. This permits a member the 

flexibility to net certain transactions, 

while protecting broker-dealers against 

counterparty credit risk by requiring 

them to collect margin for each 

counterparty’s excess net mark to 

market losses or taking capital charges 

in lieu of such collection when 

transactions cannot be netted. Where 

transactions cannot be legally netted, 

the broker-dealer would be exposed to 

counterparty credit risk and, 

consequently, should collect variation 

margin from its counterparty or take a 

capital charge in lieu of collecting 

margin, unless an exception applies. 

FINRA acknowledged that the margin 

requirements and capital charges under 

both the proposed rule change and the 

current rule are higher in certain 

scenarios (and lower in others) than 

they would be under a commenter’s 

suggestion that (1) there should be no 

margin requirements applicable to 

Covered Agency Transactions (up to the 

second monthly SIFMA settlement 

date), and (2) members should be 

required to take capital charges for only 

ten percent of their counterparties’ 

unmargined mark to market losses.95

FINRA stated that it believes that this 

suggestion would significantly undercut 

the objective of the rule.96 FINRA also 

stated that a proposed alternative 

approach a commenter suggested that 

would not require margin to be posted 

until the next two ‘‘SIFMA good day 

settlements’’ and apply capital charges 

for 10 percent of the mark to market 

loss, instead of the 100 percent of the 

mark to market loss set forth in the 

proposed rule change, would 

significantly undercut the objective of 

the Covered Agency Transaction margin 

requirements.97

The Commission agrees with FINRA’s 

analysis regarding the proposed capital 

charges or margin requirements. 

Reducing the proposed capital charges 

or margin requirements, or extending 

the time under which margin would not 

need to be collected until the next two 

good settlement dates would undermine 

the purposes of the rule to reduce the 

risk of unsecured exposures from 

Covered Agency Transactions. The 

proposed rule change will require a 

broker-dealer to collect variation margin 

from a customer or take a dollar-fordollar capital charge for variation 

margin that is not collected from a 

counterparty, unless an exception 

applies. This requirement addresses the 

risk of a broker-dealer’s unsecured 

exposures in the Covered Agency 

Transaction market that can be 

mitigated through the collection of 

variation margin or the set aside of net 

capital. 

Some commenters raised concerns 

that FINRA and the Commission lack 

the authority to prescribe margin 

requirements for Covered Agency 

Transactions.98 The commenters argued 

that Section 7 of the Exchange Act 

identifies the Board of Governors of the 

Federal Reserve System (‘‘Federal 

Reserve Board’’) as the entity 

responsible for regulating margin, and 

that Congress never intended the 

Commission to administer margin 

regimes.99 Further, one commenter 

stated that Section 3(a)(12) of the 

Exchange Act defines Covered Agency 

Transactions as ‘‘exempted securities’’ 

and, therefore, not subject to the 

authority of the Federal Reserve Board 

or the Commission.100 Another 

commenter stated that Senate Report in 

connection with the adoption of the 

Secondary Mortgage Market 

Enhancement Act of 1984 (including 

Section 7(g) of the Exchange Act) 

supports the view that the Federal 

Reserve Board has sole authority, and 

that Congress did not intend to grant 

FINRA authority to require margin for 

trades in exempt securities.101

FINRA addressed this assertion in the 

original rulemaking, and stated that the 

requirements are consistent with the 

provisions of Section 15A(b)(6) of the 

Securities Exchange Act.102 FINRA 

stated that Section 7 of Securities 

Exchange Act sets forth the parameters 

of the margin setting authority of the 

Federal Reserve Board and does not bar 

action by FINRA.103 The Commission 

agrees with FINRA that it is within 

FINRA’s authority to impose margin 

requirements on its members.104

The Commission agrees with FINRA 

that the proposed rule change relating to 

streamlining and reorganizing the 

current rule enhances the transparency 

of the Covered Agency Transaction 

margin requirements. The consolidation 

of the rule text and deletion of 

unnecessary language may reduce costs 

and enhance efficiencies for brokerdealers, while preserving the exceptions 

in the current rule, such as the 

exception from collecting variation 

margin for net mark to market losses 

below $250,000 and the small cash 

counterparty exception. For example, 

the proposed rule change streamlines 

the language regarding the $250,000 

exception making it easier to determine 

the applicable margin, which in turn, 

may reduce costs associated with 

calculating margin requirements when 

establishing trading relationships. 

B. Other Comments, Clarifications; 

Technical Revisions to the Proposed 

Rule Change 

In response to the Notice and the OIP, 

commenters raised additional issues 

regarding other aspects of the proposed 


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105See Brean Capital Letter at 12–13, 20; SIFMA 

Letter at 3. 

106See Amendment No. 1 at 9. 

107As discussed in more detail in Section II.C. 

above, FINRA stated that it is modifying the 

proposed rule change so that capital charges for a 

counterparty’s unmargined excess net mark to 

market loss do not count toward this threshold to 

the extent that the member, in good faith, expects 

such excess net mark to market loss to be margined 

by the close of business on the fifth business day 

after it arose. See Amendment No. 1 at 10. 

108Collectively referred to as the ‘‘25% TNC/ 

$30MM Threshold’’. 

109See Amendment No. 1 at 10. 

110FINRA stated that a member is not required to 

have a right to liquidate a counterparty’s Covered 

Agency Transactions. However, if the member does 

not have that right, the counterparty would be a 

‘‘non-margin counterparty,’’ and paragraph 

(e)(2)(H)(ii)d.1. under the proposed rule change 

would require the member to establish and enforce 

risk management procedures reasonably designed to 

ensure that the member would not exceed either of 

the limits specified in paragraph (e)(2)(I)(i) of the 

rule as amended by the proposed rule change and 

that the member’s capital charges in lieu of margin 

on Covered Agency Transactions for all accounts 

combined will not exceed $25 million. These 

procedures would likely involve limitations on the 

extent of the member’s business with such nonmargin counterparties. FINRA stated that when the 

firm’s risk management procedures function as they 

are required to be designed, the member will rarely 

cross the 25% TNC/$30MM Threshold, much less 

exceed it for five consecutive business days. See 

Amendment No. 1 at 10. 

111See Amendment No. 1 at 10. 112See Amendment No. 1 at 10–11. 

rule change or requested clarifications 

or technical revisions to the proposed 

rule change. These comments are 

discussed in the following sections 

below. 

1. Concerns Regarding Liquidation 

Commenters expressed concern about 

requirements to liquidate Covered 

Agency Transactions stating that market 

participants often engage in long 

‘‘chains’’ of Specified Pool or CMO 

transactions, where the initial seller 

contracts to sell a Specified Pool or 

CMO to the initial buyer, the initial 

buyer contracts to sell the Specified 

Pool or CMO to a second buyer, who 

contracts to sell it to a third buyer, who 

contracts to sell it to a fourth buyer, 

etc.105 The commenters stated that if 

any party in the chain (except for the 

last buyer) terminates its purchase or 

sale transaction, the buyer in the 

terminated transaction is unlikely to be 

able to buy the Specified Pool or CMO 

elsewhere, and therefore will be unable 

to perform on its sale transaction—and 

so will every subsequent buyer and 

seller in the chain. These commenters 

stated that FINRA should eliminate or 

suspend the liquidation requirement 

under the proposed rule change to avoid 

the prospect of a ‘‘daisy chain’’ of fails. 

FINRA responded that, under the 

current rule, if a counterparty’s 

unmargined mark to market loss (and 

two percent maintenance margin 

deficiency, where applicable) exceeds 

$250,000 and is not margined or 

eliminated within five business days 

from the date it arises, the member is 

required to liquidate the counterparty’s 

positions to satisfy the mark to market 

loss (and two percent maintenance 

margin deficiency where applicable), 

unless FINRA specifically grants 

additional time. FINRA also stated that 

the proposed rule change has eliminated 

this liquidation requirement.106

In addition, FINRA stated that, under 

the proposed rule change, a member can 

opt to take a capital charge in lieu of 

collecting margin to cover a 

counterparty’s excess net mark to 

market loss. FINRA stated that if these 

capital charges 107 exceed the lesser of 

25 percent of the member’s tentative net 

capital or $30 million 108 for five 

consecutive business days, then the 

member: 

• May not enter into new Covered 

Agency Transactions with non-margin 

counterparties other than risk reducing 

transactions; 

• Must, to the extent of its rights, 

promptly collect margin for each 

counterparty’s excess net mark to 

market loss; and 

• Must, to the extent of its rights, 

promptly liquidate the Covered Agency 

Transactions of any counterparty whose 

excess net mark to market loss is not 

margined or eliminated within five 

business days from the date it arises, 

unless FINRA has specifically granted 

the member additional time.109

Moreover, FINRA stated that if the 

member does not have the right to 

liquidate a counterparty’s Covered 

Agency Transactions, the proposed rule 

change does not require the member to 

liquidate those transactions, even after 

the member has exceeded the threshold 

for five business days.110 However, 

according to FINRA, if the member has 

exceeded the threshold for five business 

days and the member does have a right 

to liquidate a counterparty’s Covered 

Agency Transactions and the 

counterparty’s excess mark to market 

loss has not been margined or 

eliminated within five business days, 

only then would a member be required 

to enforce its liquidation right or obtain 

an extension from FINRA.111

The Commission agrees with FINRA 

that the changes described above 

provide for greater flexibility with 

respect to the liquidation requirement, 

and also provide an appropriate amount 

of time, via the ability take a capital 

charge in lieu of margin and to obtain 

an extension from FINRA, to permit 

firms to adequately address unmargined 

positions without requiring an 

immediate liquidation of positions. The 

proposed rule change eliminates the 

liquidation requirement under the 

current rule and replaces it with a 

requirement to liquidate a 

counterparty’s Covered Agency 

Transactions in limited circumstances 

(e.g., only if the broker-dealer has a right 

to liquidate the transaction and only if 

certain conditions are met, including 

exceeding the specified cap on net 

capital deductions). 

FINRA has also stated that this 

limited liquidation obligation should 

not lead to a daisy chain of fails, except 

possibly in circumstances where a 

counterparty’s unwillingness or 

inability to perform its undisputed 

obligations makes it equally likely that 

a daisy chain or fails will occur whether 

or not the member liquidates a 

transaction with the counterparty.112

According to FINRA, there are four 

categories of reasons why a counterparty 

would fail to margin its excess net mark 

to market loss by the fifth business day 

after it arises, and FINRA stated that it 

believes only one of them has any 

prospect of leading to a liquidation 

requirement under the proposed rule 

change: 

• First Category—The counterparty 

may not have an obligation, under an 

agreement or otherwise, to margin its 

excess net mark to market losses within 

five business days after they arise. In 

this case, the member would not have 

a right to liquidate the counterparty’s 

Covered Agency Transactions when 

excess net mark to market losses are not 

margined or eliminated within five 

business days after they arise, and so 

would have no obligation under the 

proposed rule change to liquidate the 

counterparty’s Covered Agency 

Transactions. 

• Second Category—An operational 

issue may cause the counterparty to fail 

to satisfy its obligation to margin its 

excess net mark to market losses. FINRA 

believes that five business days should 

be more than enough time to resolve any 

operational issue. However, in the event 

an extended operational issue, or series 

of operational issues, prevents a 

counterparty from providing margin for 

its excess net mark to market loss within 

five business days after it arises, a 14- 

day extension can be obtained from 

FINRA if the member has exceeded the 

25% TNC/$30MM Threshold for five 

consecutive business days and would 

otherwise be under an obligation to 

enforce a right to liquidate the 

counterparty’s Covered Agency 


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113See Amendment No. 1 at 11. 

114FINRA stated, by way of example, the current 

Credit Support Annex to the ISDA Master 

Agreement contains a provision under which the 

parties generally agree to resolve disputes over the 

valuation of over-the-counter derivatives for margin 

purposes by seeking four actual quotations at midmarket from third parties and taking the average of 

those obtained. FINRA stated that the OTC 

derivatives documented under ISDA Master 

Agreements can be much more difficult to value 

than any Specified Pool or CMO transaction. See 

Amendment No. 1 at 11–12. 

115See Amendment No. 1 at 12. 

116FINRA stated that although an initial 14-day 

extension will be granted upon application citing 

the applicable circumstances, any application for a 

lengthy extension, or series of extensions, must 

describe the reason for the request and the 

member’s plans for protecting itself (now and in the 

future) against the risk posed by a counterparty that 

has demonstrated itself to be unwilling or unable 

to perform its undisputed obligations. See 

Amendment No. 1 at 12. 

117See Amendment No. 1 at 12–13. 

118See SIFMA Letter at 4; SIFMA AMG Letter at 

4. 

119See Amendment No. 1 at 13. 

Transactions. FINRA expects that an 

operational issue should not continue 

long enough to prevent a counterparty 

from satisfying its margin obligation 

past the expiration of a 14-day 

extension.113

• Third Category—There may be a 

disagreement over the amount of the 

counterparty’s excess mark to market 

loss, leading the counterparty to believe 

that it has satisfied its obligation to 

provide margin but the firm to believe 

that it has not. Commenters suggested 

that relatively unique assets, like 

Specified Pools and CMOs, are more 

likely to be the subject of valuation 

disputes. FINRA stated that five 

business days should be more than 

enough time to resolve any valuation 

dispute. Firms whose business involves 

a significant volume of transactions that 

are prone to operational disputes should 

analyze whether their risk management 

procedures should require their 

contracts for such transactions to 

include or incorporate a procedure for 

the prompt resolution of valuation 

disputes.114 FINRA stated that if an 

extended valuation dispute leads a 

counterparty to fail to provide margin 

for its excess net mark to market loss 

within five business days after it arises, 

a 14-day extension can be obtained from 

FINRA if the member has exceeded the 

25% TNC/$30MM Threshold for five 

consecutive business days and would 

otherwise be under an obligation to 

enforce a right to liquidate the 

counterparty’s Covered Agency 

Transactions. FINRA stated that a 

margin valuation dispute should not 

continue past the expiration of a 14-day 

extension. 

• Fourth Category—The counterparty 

may be unwilling or unable to satisfy an 

undisputed obligation to margin its 

excess net mark to market loss. FINRA 

believes that, when a counterparty is 

unwilling or unable to satisfy its 

undisputed margin obligations, there is 

also reason for significant doubt that the 

counterparty would be willing and able 

to satisfy its obligations to pay or deliver 

on the settlement date of the 

transaction. When facing such an 

unreliable counterparty, FINRA stated 

that it believes it is possible the daisy 

chain of fails may occur even if the 

member does not liquidate. FINRA 

further stated that this could be just as 

easily triggered by the counterparty’s 

unwillingness or inability to perform its 

obligations as by the member’s 

liquidation of its transaction.115

According to FINRA, with regard to 

this fourth category, to the extent 

feasible, members should terminate 

transactions with such counterparties in 

order to protect themselves against 

further exposure. However, FINRA 

stated that if a member believes that it 

would not be feasible to terminate a 

transaction with such a counterparty, or 

that such termination would be unduly 

disruptive to the member’s business or 

the market, extensions may be available 

from FINRA if the member has exceeded 

the 25% TNC/$30MM Threshold for 

five consecutive business days and 

would otherwise be under an obligation 

to enforce a right to liquidate the 

counterparty’s Covered Agency 

Transactions.116

According to FINRA, as described 

above, in the first category, members 

have no liquidation obligation under the 

proposed rule change. In the second and 

third categories, FINRA believes that the 

reason why the counterparty has not 

margined its excess net mark to market 

loss should be eliminated before the five 

business day period has ended, and 

generally before the expiration of a 14- 

day extension from FINRA. FINRA 

stated that only in the fourth category, 

where the counterparty is demonstrably 

unwilling or unable to perform its 

obligations to the member, should 

liquidation of counterparty’s Covered 

Agency Transactions be required under 

the proposed rule change, provided that 

the member has exceeded the 25% 

TNC/$30MM Threshold for five 

consecutive business days—and, even 

in that case, extensions may be available 

if liquidation is infeasible or would 

unduly disrupt the member’s business 

or the market.117

The Commission agrees that the 

responses provided by FINRA 

appropriately address the concerns 

raised by commenters concerning the 

potential for daisy chain fails. As 

described above, the requirement to 

liquidate a counterparty’s position is 

limited under the proposed rule change 

to instances where the member has the 

right to liquidate a counterparty’s 

Covered Agency Transactions. 

Otherwise, the proposed rule change 

does not require the member to 

liquidate those transactions where the 

member does not have a right to 

liquidate, even after the member has 

exceeded the 25% TNC/$30MM 

Threshold for five consecutive business 

days. Further, FINRA members may 

apply to FINRA to receive an extension 

of time beyond the five business day 

period. The ability to receive extensions 

of time beyond the five business day 

period will help to protect brokerdealers where liquidation is infeasible 

or would unduly disrupt the FINRA 

member’s business or the market. 

Finally, in cases where a counterparty is 

unlikely or unwilling to satisfy a 

variation margin requirement, the 

broker-dealer’s counterparty credit risk 

to its counterparty may increase, as well 

as the risk that the counterparty may be 

unable or unwilling to settle the 

transaction. In such cases, the 

likelihood of counterparty default may 

occur even if the broker-dealer does not 

liquidate the Covered Agency position 

or if it is not part of a chain of 

transactions. 

2. Definition of ‘‘Excess Net Mark to 

Market Loss’’ 

Some commenters requested 

confirmation that, under the proposed 

rule change, members would only be 

required to collect margin (or take 

capital charges for uncollected margin) 

to cover the amount by which a 

counterparty’s net mark to market loss 

exceeds the $250,000 threshold.118

In response, FINRA stated that this is 

correct. According to FINRA, under the 

proposed rule change, paragraph 

(e)(2)(H)(ii)c. of FINRA Rule 4210 states 

that members are not required by the 

rule ‘‘to collect margin, or take capital 

charges, for counterparties’ mark to 

market losses on Covered Agency 

Transactions other than excess net mark 

to market losses’’ and a counterparty’s 

‘‘excess net mark to market losses’’ are 

defined in paragraph (e)(2)(H)(i)c. as 

‘‘such counterparty’s net mark to market 

loss to the extent it exceeds 

$250,000.’’ 119 FINRA stated that, for 

example, if a member’s counterparty has 

a net mark to market loss of $300,000, 

its excess net mark to market loss is 

$50,000, which would be the amount of 

margin the proposed rule change would 

require the member to collect, or take a 


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120See Amendment No. 1 at 13–14. 

121See SIFMA Letter at 4. 

122See Amendment No. 1 at 14. Similarly, FINRA 

stated that it also declines a commenter’s request 

to confirm that an MSFTA with a cure period (or 

similar provision after the expiration of which 

liquidating action may be taken) of less than or 

equal to five business days would provide the rights 

described in the definition of ‘‘non-margin 

counterparty’’ under paragraph (e)(2)(H)(i)e. under 

the proposed rule change. See Amendment No. 1 

at 14 and SIFMA AMG Letter at 4. 

123See SIFMA Letter at 4. 

124See Amendment No. 1 at 14. 

125See Amendment No. 1 at 14. In response to 

a commenter, FINRA stated that the phrase ‘‘firstpriority perfected security interest’’ in paragraph 

(e)(2)(H)(i)d.2. under the proposed rule change only 

applies to pledges of a counterparty’s rights under 

Covered Agency Transactions with third parties. 

See Amendment No. 1 at 14–15 and SIFMA Letter 

at 4. 

126 In response to a commenter, FINRA stated that 

if a member has a right under a written agreement 

to collect margin for a counterparty’s entire net 

mark to market loss whenever the amount of that 

loss exceeds $250,000. FINRA stated that, for 

purposes of the proposed rule change, it would 

view this as a right under a written agreement to 

collect margin for such counterparty’s excess net 

mark to market loss, since the counterparty’s excess 

net mark to market loss is $250,000 less than the 

counterparty’s entire net mark to market loss (or 

zero if the net mark to market loss does not exceed 

$250,000). See Amendment No. 1 at 15 and SIFMA 

AMG Letter at 4. 

127See SIFMA Letter at 4. 

128See Amendment No. 1 at 15. 

129See infra note 143. 

capital charge in lieu of collecting 

(unless there is an applicable 

exemption). FINRA stated that the 

counterparty’s excess net mark to 

market loss is the minimum amount of 

margin that (subject to the exceptions 

set forth in the proposed rule change) 

the member must collect (or take a 

capital charge in lieu of collecting). 

According to FINRA, the proposed rule 

change does not prevent members and 

their counterparties from agreeing that 

the counterparty will transfer additional 

margin. For example, FINRA stated that 

a member and its counterparty could 

agree that, when the counterparty’s net 

mark to market loss exceeds $250,000, 

the counterparty will transfer to the 

member margin that covers the 

counterparty’s entire mark to market 

loss, rather than only enough to cover 

its excess net mark to market loss. 

Similarly, FINRA stated that a member 

may exclude a counterparty’s in the 

money amounts on long standby 

positions from its computation of net 

mark to market.120

FINRA’s response appropriately 

responds to the commenters’ request for 

confirmation by specifically confirming 

that under the proposed rule change 

members would only be required to 

collect margin to cover the amount by 

which a counterparty’s net mark to 

market loss exceeds the $250,000. Also, 

FINRA’s response is consistent with the 

definition of the term excess net mark 

to market losses under the proposed 

rule change. 

3. Definition of ‘‘Net Mark to Market 

Loss’’ 

A commenter requested confirmation 

that the definition of ‘‘net mark to 

market loss’’ would include the 

calculations used under the form of 

Master Securities Forward Transaction 

Agreement (‘‘MSFTA’’) published by 

SIFMA.121 In response, FINRA stated 

that it does not require or endorse any 

particular form of agreement for 

margining Covered Agency 

Transactions, and as such declines to 

provide the requested confirmation, as 

this relates to what is a commercial 

matter among the parties.122

A commenter also suggested that 

FINRA should remove the phrase 

‘‘legally enforceable right of offset or 

security’’ from the definition of ‘‘net 

mark to market loss.’’ 123 In response, 

FINRA stated that this phrase is 

necessary.124 According to FINRA, if the 

phrase is removed, then the amount of 

the counterparty’s mark to market losses 

which are subject to margining would 

be reduced by the counterparty’s mark 

to market gains on other transactions, 

without regard to whether the member 

has any legally enforceable right to 

apply those gains to cover the 

counterparty’s losses. FINRA stated, for 

example, that if a counterparty defaults 

when it has a mark to market loss of $10 

million on one transaction and a mark 

to market gain of $10 million on another 

transaction, having a legally enforceable 

right of offset would allow the member 

to apply the counterparty’s gains to 

cover its losses. In the absence of a 

legally enforceable right of offset or 

security, however, FINRA stated that the 

member could face the prospect of 

having an obligation to pay the 

counterparty $10 million for its gains, 

without any guaranty of collecting the 

full amount of the counterparty’s $10 

million loss. According to FINRA, if the 

counterparty enters insolvency 

proceedings, the lack of a legally 

enforceable right of offset or security 

could result in the member being 

obliged to pay the full $10 million of the 

defaulted counterparty’s gains and being 

only able to collect cents on the dollar 

for the counterparty’s losses.125

The Commission agrees that FINRA’s 

response to the commenter’s request for 

confirmation regarding the MSFTA as 

the proposed rule change does not 

require any particular form of agreement 

or contract. Further, the Commission 

agrees with FINRA that including the 

phrase ‘‘legally enforceable right of 

offset or security’’ in the definition of 

net mark to market loss is appropriate 

because it will allow a FINRA member 

to apply the counterparty’s gains to 

cover its losses, which will reduce a 

broker-dealer’s financial exposure to a 

counterparty in the event the 

counterparty enters insolvency. 

4. Definition of ‘‘Non-Margin 

Counterparty’’ 

With respect to the five business day 

period, paragraph (e)(2)(h)(i)e.1. under 

FINRA Rule 4210 under the proposed 

rule change provides in part that a 

counterparty is a non-margin 

counterparty if the member ‘‘does not 

have a right under a written agreement 

or otherwise to collect margin for such 

counterparty’s excess net mark to 

market loss and to liquidate such 

counterparty’s Covered Agency 

Transactions if any such excess net 

mark to market loss is not margined or 

eliminated within five business days 

from the date it arises.’’ 126 A 

commenter stated that this effectively 

requires imposing a margin collection 

timing which is stricter than required 

under other rules or the standard under 

FINRA Rule 4210(f)(6).127

In response, FINRA stated that it 

disagrees for several reasons. First, 

FINRA stated that current rule requires 

members to liquidate positions 

whenever a mark to market loss (or 

maintenance deficiency) on Covered 

Agency Transactions is not margined or 

otherwise eliminated within five 

business days (and no extension has 

been obtained). According to FINRA, 

the proposed rule change uses a five 

business day period but, as discussed 

above, applies it more flexibly than the 

current rule.128 FINRA stated that if the 

member lacks a right to liquidate a 

counterparty’s Covered Agency 

Transactions if the counterparty’s excess 

net mark to market loss is not margined 

or eliminated within five business days, 

that counterparty is a ‘‘non-margin 

counterparty.’’ As consequence, the 

member would become subject to the 

risk management requirements under 

paragraph (e)(2)(H)(ii)d.2. of the rule as 

modified by the proposed rule change 

(if not already subject to that 

requirement); and if the member’s 

specified net capital deductions 129

exceed the 25% TNC/$30MM Threshold 

for five consecutive business days, 

FINRA stated that the member would 

not be able to enter into transactions 

with the non- margin counterparty, 

other than risk reducing transactions, 

while those net capital deductions 

continue to exceed the 25% TNC/ 


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130See Amendment No. 1 at 16. 

131See Amendment No. 1 at 16. In response to 

a commenter, FINRA stated that classification of a 

counterparty as a non-margin counterparty depends 

on (a) whether the member has the right to collect 

margin for the counterparty’s excess net mark to 

market loss, (b) whether the member regularly 

collects margin for the counterparty’s excess net 

mark to market loss, and (c) whether the member 

has the right to liquidate such counterparty’s 

Covered Agency Transactions if the counterparty’s 

excess net mark to market loss is not margined or 

eliminated within five business days from the date 

it arises. According to FINRA, classification of a 

counterparty as a margin counterparty (that is, as 

not a non-margin counterparty) does not require the 

member to exercise the right to liquidate whenever 

that counterparty’s excess net mark to market loss 

is not margined or eliminate within five business 

days. However, FINRA stated that the counterparty 

would need to be reclassified as a non-margin 

counterparty if the member does not regularly 

collect margin for the counterparty’s excess net 

mark to market loss. FINRA stated that the exercise 

of the right to liquidate is only required by the 

proposed rule change if the member’s capital 

charges have exceeded the 25% TNC/$30MM 

Threshold for five consecutive business days (and 

the member has not obtained an extension from 

FINRA). See Amendment No. 1 at 16 and SIFMA 

Letter at 4–5. 

132See Amendment No. 1 at 16–17. 

133See SIFMA Letter at 5. 

134See Amendment No. 1 at 17 and Exhibit 4 to 

Amendment No. 1. 

135See SIFMA Letter at 6. 

136See Amendment No. 1 at 17. 

137See also 2016 Approval Order, 81 FR 40375– 

76 (discussion scope of exemptions under the 

current rule). 

138See SIFMA Letter at 5. 

139See Amendment No. 1 at 17. 

140See Amendment No. 1 at 17. 

$30MM Threshold.130 According to 

FINRA, if the member has a right to 

liquidate a counterparty’s Covered 

Agency Transactions if the 

counterparty’s excess net mark to 

market loss is not margined or 

eliminated within five business days, 

the member is not required to enforce 

that right (that is, not required to 

liquidate the counterparty’s Covered 

Agency Transactions if the 

counterparty’s excess net mark to 

market loss has not been margined or 

eliminated within five business days), 

unless and until the member’s specified 

net capital deductions exceed the 25% 

TNC/$30MM Threshold for five 

consecutive business days (and the 

member has not obtained an extension 

from FINRA).131

Second, FINRA also stated that even 

if members were required to have a 

contractual right to liquidate when 

margin is not collected within five 

business days, that would not, in the 

commenter’s terms, ‘‘impos[e] a margin 

collection timing that is stricter than 

that which is required under the rules 

(or other aspects of FINRA Rule 4210 

generally).’’ Further, FINRA stated that 

FINRA Rule 4210(f)(6) requires margin 

to be collected ‘‘as promptly as 

possible,’’ and the rule as approved 

pursuant to the original rulemaking (as 

stated above) requires liquidation when 

a mark to market or maintenance 

deficiency has not been margined or 

eliminated within five business days 

(unless an extension has been 

obtained).132

The Commission agrees with FINRA’s 

response to a comment that the 

reference to a five business day 

requirement in the definition of nonmargin counterparty effectively imposes 

a margin collection timing requirement 

that is stricter than under current rules. 

A counterparty is a non-margin 

counterparty under the proposed rule 

change if the broker-dealer does not 

have a right under a written agreement 

or otherwise to collect margin for such 

counterparty’s excess net mark to 

market loss and to liquidate such 

counterparty’s Covered Agency 

Transactions if any such excess net 

mark to market loss is not margined or 

eliminated within five business days 

from the date it arises. The five business 

day reference in the definition of nonmargin counterparty is used to classify 

counterparties as non-margin 

counterparties and does not impose a 

five-day margin collection requirement. 

Further, the current rule contains a 

liquidation requirement if a mark to 

market loss (or maintenance deficiency) 

on Covered Agency Transactions is not 

margined or otherwise eliminated 

within five business days (and no 

extension has been obtained). The 

proposed rule eliminates this 

requirement and provides for more 

flexibility with respect to whether a 

broker-dealer must liquidate a 

counterparty’s positions if it has a right 

to do so, (i.e., only after certain 

conditions occur and only if no 

extensions of time have been granted). 

Therefore, the proposed rule changes 

does not effectively impose a margin 

collection or liquidation requirement 

whenever that counterparty’s excess net 

mark to market loss is not margined or 

eliminated within five business days. 

5. Exempted Counterparties 

A commenter suggested that FINRA 

should explicitly exclude small cash 

counterparties and other counterparties 

covered by paragraph (e)(2)(H)(ii)a.1. 

under the proposed rule change from 

the definition of ‘‘non- margin 

counterparty.’’ 133 FINRA stated that this 

request is consistent with the purpose of 

paragraph (e)(2)(H)(ii)a.1. and has 

modified the definition of ‘‘non-margin 

counterparty’’ to implement the 

requested exclusion.134

Modifying the definition of ‘‘nonmargin counterparty’’ is appropriate as 

it enhances transparency of the scope of 

the term to specifically exclude small 

cash counterparties. 

6. Exemption for Certain Counterparties 

A commenter suggested that the 

exceptions in paragraph (e)(2)(H)(ii)a.1. 

be expanded to encompass the U.S. 

Federal Home Loan Banks.135 FINRA 

responded that it does not propose to 

make the suggested modification 

because it would undermine the rule’s 

purpose of reducing risk.136 The 

Commission agrees with FINRA’s 

response regarding the expansion of the 

exceptions in paragraph (e)(2)(H)(ii)a.1., 

as including U.S. Federal Home Loan 

Banks in the exceptions would 

undermine the effectiveness of the 

proposed rule change, and would not be 

consistent with the purpose of the 

proposed rule change of reducing risk of 

unsecured exposures to Covered Agency 

Transactions.137

7. The 25% TNC/$30 MM Threshold 

Regarding small cash counterparties, a 

commenter requested confirmation that 

margin not collected from small cash 

counterparties does not count toward 

the 25% TNC/$30MM Threshold.138 In 

response, FINRA stated that margin not 

collected from small cash counterparties 

does not count toward the 25% TNC/ 

$30MM Threshold.139 Further FINRA 

stated that paragraph (e)(2)(H)(ii)d.3. 

only counts capital charges under 

paragraph (e)(2)(H)(ii)d.1. toward the 

25% TNC/$30MM Threshold. And, 

pursuant to paragraph (e)(2)(H)(ii)a.1., 

FINRA stated that members are not 

required under the proposed rule 

change ‘‘to collect margin, or to take 

capital charges in lieu of collecting such 

margin, for a counterparty’s excess net 

mark to market loss if such counterparty 

is a small cash counterparty, registered 

clearing agency, Federal banking 

agency, as defined in 12 U.S.C. 1813(z), 

central bank, multinational central 

bank, foreign sovereign, multilateral 

development bank, or the Bank for 

International Settlements.’’ FINRA 

stated that because the proposed rule 

change does not require members to 

take capital charges for these 

counterparties’ unmargined excess net 

mark to market losses, they do not count 

toward the 25% TNC/$30MM 

Threshold.140

The Commission agrees with FINRA’s 

response to the commenter’s request for 

confirmation regarding whether margin 

not collected from small cash 


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141See Section II.B. above (discussing paragraph 

(e)(2)(I) of FINRA Rule 4210 under the proposed 

rule change). 

142See SIFMA Letter at 5–6. 

143See Amendment No. 1 at 18. More 

specifically, FINRA has revised paragraph 

(e)(2)(H)(ii)d.3. of FINRA Rule 4210 to refer to a 

member’s ‘‘specified net capital deductions’’ (rather 

than to all net capital deductions under paragraph 

(e)(2)(H)(ii)d.1.) and inserted the following 

definition into paragraph (e)(2)(H)(i): i. A member’s 

‘‘specified net capital deductions’’ are the net 

capital deductions required by paragraph 

(e)(2)(H)(ii)d.1. of this Rule with respect to all 

unmargined excess net mark to market losses of its 

counterparties, except to the extent that the 

member, in good faith, expects such excess net 

mark to market losses to be margined by the close 

of business on the fifth business day after they 

arose. Id. 

144See Amendment No. 1 at 18. 

145See supra note 143. 

146See SIFMA Letter at 5–6. 

147See Amendment No. 1 at 19. FINRA also 

stated that a member, so long as it acts promptly 

to bring itself below the 25% TNC/$30MM 

Threshold, may choose the manner and order in 

which it enforces its rights to collect margin or 

liquidate Covered Agency Transactions, and may 

halt those actions once its specified net capital 

deductions fall below the 25% TNC/$30MM 

Threshold. Id. 

148See SIFMA Letter at 6. 

149See Amendment No. 1 at 19. 

counterparties counts toward the 25% 

TNC/$30MM Threshold. FINRA’s 

response appropriately addresses the 

commenter’s concerns and is consistent 

with the purposes of the proposed rule 

change, because the proposed rule 

change also prescribes overall 

concentration thresholds under 

paragraph (e)(2)(I) of FINRA Rule 

4210.141

With respect to counterparties yet to 

post margin, a commenter suggested 

that the proposed rule change be 

modified so that any capital charge 

under paragraph (e)(2)(H)(ii)d.1. of 

FINRA Rule 4210 not count toward the 

25% TNC/$30MM Threshold until the 

fifth business day after the relevant 

excess net mark to market loss arose. 

The capital charge is required whenever 

a counterparty’s excess net mark to 

market loss is not margined or 

eliminated by the close of business on 

the business day after the business day 

on which it arises. The commenter 

stated that many counterparties that are 

regularly margined are unable to post 

margin on a consistent T+1 basis due, 

for example, to those counterparties 

being in an overseas jurisdiction or to 

operational or custodial issues. 

Moreover, the commenter stated good 

faith disputes over the amount of 

margin to be posted may mean that a 

counterparty does not post margin by 

T+1 even when the counterparty is 

ready, willing, and able to post margin 

promptly after the proper amount is 

determined. Finally, the commenter 

stated that, without the grace period the 

commenter is requesting, members may 

be continuously over the 25% TNC/ 

$30MM Threshold solely based on 

ordinary course levels of margin not yet 

collected from counterparties who are 

expected to post required margin.142

In response, FINRA stated that it 

agrees that the purpose of the proposed 

rule change does not require counting 

toward the 25% TNC/$30MM Threshold 

capital charges taken for excess net 

mark to market losses that the member 

in good faith expects to be margined by 

the fifth business day after they arise. 

Accordingly, FINRA revised paragraph 

(e)(2)(H)(ii)d.3. so that capital charges 

under paragraph (e)(2)(H)(ii)d.1. with 

respect to a counterparty’s unmargined 

excess net mark to market loss do not 

count towards the thresholds in 

paragraph (e)(2)(H)(ii)d.3. to the extent 

that the member, in good faith, expects 

such unmargined excess net mark to 

market losses to be margined within five 

business days.143 According to FINRA, 

members would still be required to 

protect themselves by taking net capital 

deductions while the excess net mark to 

market losses are unmargined, but, 

under the proposed rule change, as 

modified by Amendment No.1, will 

have more flexibility to address 

operational issues and valuation 

disputes before they impact the 25% 

TNC/$30MM Threshold.144

The proposed change related to the 

25% TNC/$30 MM Threshold is 

appropriate as it provides additional 

time and flexibility for member firms to 

address operational and related issues 

related to the collection of margin, 

thereby avoiding unnecessary 

disruptions to the Covered Agency 

Transaction market. The proposed 

change related to the 25% TNC/$30 MM 

Threshold also enhances transparency 

with respect to the scope of transactions 

which count toward such threshold. 

8. Requirement To Enforce Rights To 

Collect Margin and Liquidate Covered 

Agency Transactions 

A commenter requested clarification 

with respect to the scope of the 

requirement under paragraph 

(e)(2)(H)(ii)d.3. of the proposed rule 

change, which provides that a member 

whose specified net capital 

deductions 145 exceed the 25% TNC/ 

$30MM Threshold for five consecutive 

business days ‘‘shall also, to the extent 

of its rights, promptly collect margin for 

each counterparty’s excess net mark to 

market loss and promptly liquidate the 

Covered Agency Transactions of any 

counterparty whose excess net mark to 

market loss is not margined or 

eliminated within five business days 

from the date it arises, unless FINRA 

has specifically granted the member 

additional time.’’ 146

According to FINRA, these 

requirements begin to apply once the 

member’s specified net capital 

deductions exceed the 25% TNC/ 

$30MM Threshold for five consecutive 

business days and cease to apply as 

soon as those capital charges fall below 

that threshold. Accordingly, FINRA 

stated, once the member’s specified net 

capital deductions fall below that 

threshold (for example, because of 

market movements, or because the 

member collects enough margin from 

some, but not all, of its counterparties), 

the member is under no further 

obligation to enforce its contractual 

rights to collect margin or liquidate 

Covered Agency Transactions (and 

could, if it chooses, rescind outstanding 

margin calls and halt any liquidations of 

its counterparties’ Covered Agency 

Transactions).147

FINRA’s clarification relating to 

requirement to enforce rights to collect 

margin and liquidate Covered Agency 

Transactions appropriately addresses 

the commenter’s request for clarification 

and enhances transparency with respect 

to the application of the proposed rule 

change as to when a FINRA member is 

under no further obligation to enforce 

its contractual rights to collect margin or 

liquidate positions. 

9. Reporting by Members With NonMargin Counterparties 

FINRA stated that, pursuant to 

paragraph (e)(2)(H)(ii)d.4. under the 

proposed rule change, members with 

non-margin counterparties would be 

required to ‘‘submit to FINRA such 

information regarding its unmargined 

net mark to market losses, non-margin 

counterparties and related capital 

charges, in such form and manner, as 

FINRA shall prescribe by Regulatory 

Notice or similar communication.’’ A 

commenter stated that the building of 

systems and information tracking is a 

significant build for many firms and 

requested FINRA to clarify in advance 

what information may be required.148

FINRA stated that it is considering what 

information will be required to be 

submitted and expects to engage 

members and industry participants in 

developing appropriately tailored 

reporting pursuant to this provision.149

The Commission believes that 

FINRA’s response is appropriate. FINRA 

is currently considering what 

information will be required and FINRA 

expects to engage with member firms 

and industry participants in developing 


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150See Brean Capital Letter at 13. 

151See SIFMA Letter at 3. 

152See Amendment No. 1 at 20. 

153 Id. 

154After the original rulemaking was approved, 

FINRA made available a set of FAQs and guidance 

clarify certain of the requirements, available at: 

www.finra.org. 

155See SIFMA Letter at 6–7. 

156See Amendment No. 1 at 20. 

157See SIFMA AMG letter at 1–3; SIFMA Letter 

at 2; BDA Letter at 5. 

158See Amendment No. 1 at 20. 

159See Letter from Chris Killian, Managing 

Director, Securitization, Corporate Credit, Libor, 

Securities Industry and Financial Markets 

Association, to Secretary, Commission (Sep. 10, 

2021). The comment letter was submitted jointly by 

SIFMA and SIFMA AMG. 

160See FINRA Letter at 7–8. 

161 15 U.S.C. 78s(b)(2). 

162 17 CFR 200.30–3(a)(12). 

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

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

tailored reporting requirements. This 

engagement will provide industry 

participants the opportunity to provide 

input into the reporting requirements. 

10. Introducing and Clearing Firm 

Issues 

A commenter stated said that the 

proposed rule change does not address 

the role of the clearing broker or reflect 

that FINRA has considered the actual 

way in which introducing brokers clear 

trades.150 Another commenter suggested 

that FINRA should continue to facilitate 

dialogue among introducing and 

clearing firms to facilitate the 

implementation of the proposed rule 

change.151

FINRA responded by stating that it 

has conducted extensive dialogue with 

introducing and clearing firms regarding 

the requirements of the current rule and 

the proposed rule change in the context 

of introducing and clearing 

arrangements, and several of the 

proposed rule change’s clarifying 

changes to the original rulemaking were 

informed by such dialogue.152 Further, 

FINRA stated that it intends to continue 

to discuss the proposed rule change and 

its implementation with clearing and 

introducing firms, and to facilitate 

dialogue among them as the Covered 

Agency Transaction margin 

requirements are implemented.153

FINRA’s response regarding issues 

involving clearing and introducing firms 

appropriately addresses the 

commenters’ concerns. Specifically, 

FINRA has engaged in extensive 

dialogue with introducing and clearing 

firms regarding the requirements of the 

original rulemaking and with respect to 

the proposed rule change. Further, 

FINRA has indicated it will continue to 

facilitate dialogue with introducing and 

clearing firms as the margin 

requirements for Covered Agency 

Transactions are implemented. 

11. Status of Published Frequently 

Asked Questions (‘‘FAQs’’) 

A commenter requested confirmation 

as to whether the FAQs regarding 

Covered Agency Transactions, 

maintained on FINRA’s website,154 will 

apply in the event the proposed rule 

change is approved.155 FINRA stated 

that if the Commission approves the 

proposed rule change, FINRA will 

revisit the FAQs with Commission staff, 

members, and industry participants as 

appropriate.156 The Commission agrees 

that FINRA’s response to the status of 

the FAQs appropriately addresses the 

commenter’s request for confirmation 

with respect to the application of the 

FAQs under the proposed rule change. 

12. Implementation Period 

In response to the proposed rule 

change, several commenters requested 

that FINRA provide an implementation 

period of at least 18 months after 

publication of a final rule text before 

compliance is required, stating that a 

constrained time period for 

implementation could present market 

access risk, and citing the need to build 

operations and technology and to 

negotiate necessary documentation.157

FINRA responded to these concerns as 

part of Amendment No. 1 by stating 

while it believes that the subject matter 

is well understood by member firms and 

industry participants, FINRA would 

announce the effective date no later 

than 60 days following approval, if the 

Commission approves the proposed rule 

change, and would provide an effective 

date between nine and ten months 

following such approval.158

In response to Amendment No. 1, a 

commenter reiterated its previous 

comments regarding the implementation 

date, again requesting that FINRA 

provide an implementation period of 18 

months, or in the alternative an 

implementation timeframe of at least 

one year.159 FINRA responded to the 

comment stating that in connection with 

Amendment No. 1, it provided a longer 

implementation timeframe than 

originally proposed as part of the 

proposed rule change. FINRA stated that 

Covered Agency Transactions have been 

under discussion for a considerable 

time, both prior to and since approval 

of the original rulemaking in 2016, and 

that this subject matter is well 

understood by members and industry 

participants. As a result FINRA believes 

that the public interest would not be 

served by continuing delay and that the 

timeframe set forth in Amendment No. 

1 is appropriate.160

FINRA’s proposed implementation 

schedule is appropriate and consistent 

with the requirements of the Exchange 

Act. The Covered Agency Transaction 

margin requirements were approved in 

2016 under the 2016 Approval Order. 

FINRA member firms and industry 

participants are aware of the 

requirements of the Covered Agency 

Transaction margin rule and have had 

time to work toward implementation. 

Consequently, the proposed 

implementation timeframe of nine to ten 

months from the approval date as 

described in Amendment No. 1 should 

provide sufficient time for FINRA firms 

to comply with the rule’s requirements. 

IV. Conclusion 

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 161

that the proposed rule change (SR– 

FINRA–2021–010), 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.162

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–01471 Filed 1–25–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94015; No. SR–NYSEArca– 

2022–02] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change To Amend the NYSE Arca 

Options Fee Schedule 

January 20, 2022. 

Pursuant to Section 19(b)(1) 1 of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) 2 and Rule 19b–4 thereunder,3

notice is hereby given that, on January 

12, 2022, NYSE Arca, Inc. (‘‘NYSE 

Arca’’ or the ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(the ‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the self-regulatory 

organization. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 


khammond on DSKJM1Z7X2PROD with NOTICES