Document ID: SEC-2016-0240-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-02-16T05:00Z

[Federal Register Volume 81, Number 30 (Tuesday, February 16, 2016)]
[Notices]
[Pages 7865-7867]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02990]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77098; File No. SR-FINRA-2015-059]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend the 
Derivatives and Other Off-Balance Sheet Items Schedule Pursuant to 
FINRA Rule 4524 (Supplemental FOCUS Information)

February 9, 2016.

I. Introduction

    On December 23, 2015, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the instructions to the 
Derivatives and Other Off-Balance Sheet Items Schedule (``OBS'') 
pursuant to FINRA Rule 4524 (Supplemental FOCUS Information) to expand 
the application of the OBS to certain non-carrying/non-clearing firms 
that have a certain amount of off-balance sheet obligations. The 
proposed rule change was published for comment in the Federal Register 
on January 7, 2016.\3\ The Commission did not receive written comments 
in response to the proposed rule change. This order approves the 
proposed rule change.
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    \1\ See 15 U.S.C. 78s(b)(1).
    \2\ See 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 76813 (Dec. 31, 2015), 81 FR 
844 (Jan. 7, 2016).
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II. Description of Proposed Rule Change

    FINRA Rule 4524 requires each firm, as FINRA shall designate, to 
file such additional financial or operational schedules or reports as 
FINRA may deem necessary or appropriate for the protection of investors 
or in the public interest as a supplement to the FOCUS Report.\4\ In 
February 2013, the SEC approved FINRA's adoption, pursuant to FINRA 
Rule 4524, of the OBS as a supplement to the FOCUS report.\5\ The OBS 
captures important information that is not otherwise reported on firms' 
balance sheets and requires all firms that carry customer accounts or 
self-clear or clear transactions for others (referred to, collectively, 
as ``carrying or clearing firms'') to file with FINRA the OBS within 22 
business days of the end of each calendar quarter, unless a carrying or 
clearing firm meets the de minimis exception set forth in the 
instructions to the OBS.\6\
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    \4\ See Securities Exchange Act Release No. 66364 (Feb. 9, 
2012), 77 FR 8938 (Feb. 15, 2012) (Order Approving File No. SR-
FINRA-2011-064). FINRA Rule 4524 also provides that FINRA will 
specify the content of additional schedules or reports, their 
format, and the timing and the frequency of such supplemental 
filings in a Regulatory Notice (or similar communication), the 
content of which FINRA will file with the Commission pursuant to 
Section 19(b) of the Exchange Act.
    \5\ See Securities Exchange Act Release No. 68832 (Feb. 5, 
2013), 78 FR 9754 (Feb. 11, 2013) (Order Approving File No. SR-
FINRA-2012-050). Carrying or clearing firms were required to file 
with FINRA their initial OBS on or before July 31, 2013, to disclose 
off-balance sheet information as of June 30, 2013. See Regulatory 
Notice 13-10 (March 2013) (Supplemental FOCUS Information).
    \6\ The de minimis exception relieves a carrying or clearing 
firm from filing the OBS for the reporting period if the aggregate 
of all gross amounts of off-balance sheet items is less than 10 
percent of the firm's excess net capital on the last day of the 
reporting period. For purposes of the OBS, as well as the proposed 
amendments to the OBS, the term ``excess net capital'' means net 
capital reduced by the greater of the minimum dollar net capital 
requirement or two percent of combined aggregate debit items as 
shown in the Formula for Reserve Requirements pursuant to Exchange 
Act Rule 15c3-3. See Securities Exchange Act Release No. 68832 (Feb. 
5, 2013), 78 FR 9754, 9755 (Feb. 11, 2013) (Order Approving File No. 
SR-FINRA-2012-050).
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    Pursuant to FINRA Rule 4524, FINRA proposed to amend the 
instructions to the OBS to expand its application beyond carrying or 
clearing firms to include firms that neither carry customer accounts 
nor clear transactions (referred to, collectively, as ``non-clearing 
firms'') that have,

[[Page 7866]]

pursuant to Exchange Act Rule 15c3-1,\7\ a minimum dollar net capital 
requirement equal to or greater than $100,000, and at least $10 million 
in reportable items pursuant to the OBS. The proposed rule change does 
not otherwise change the OBS or its instructions, including the de 
minimis exception. Accordingly, consistent with the current OBS, any 
firm (i.e., either a carrying or clearing firm or a non-clearing firm) 
that meets the de minimis exception need not file the OBS for the 
reporting period.\8\ Further, under the proposed rule change, as well 
as under the current OBS, any firm that is required to file the OBS 
must do so as of the last day of a reporting period within 22 business 
days of the end of each calendar quarter.
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    \7\ See 17 CFR 240.15c3-1 (Net Capital Requirements for Brokers 
or Dealers). Exchange Act Rule 15c3-1(a)(2)(iii) requires a 
``dealer'' (as defined in Exchange Act Rule 15c3-1(a)(2)(iii)) to 
maintain net capital of not less than $100,000.
    \8\ However, a firm that claims the de minimis exception must 
affirmatively indicate through the eFOCUS system that no filing is 
required for the reporting period. See Regulatory Notice 13-10 
(March 2013) (Supplemental FOCUS Information).
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    When FINRA proposed the OBS, FINRA noted the need, in the aftermath 
of the financial crisis, to obtain more comprehensive and consistent 
information regarding carrying or clearing firms' off-balance sheet 
assets, liabilities and other commitments.\9\ By requiring carrying or 
clearing firms to report their gross exposures in financing 
transactions (e.g., reverse repos, repos and other transactions that 
are otherwise netted under generally accepted accounting principles, 
reverse repos and repos to maturity and collateral swap transactions), 
interests in and exposure to variable interest entities, non-regular 
way settlement transactions (including to-be-announced or TBA \10\ 
securities and delayed delivery/settlement transactions), underwriting 
and other financing commitments, and gross notional amounts in 
centrally cleared and non-centrally cleared derivative transactions on 
the OBS, FINRA states that it has been able to more effectively monitor 
on an ongoing basis the potential impact that such off-balance sheet 
activities may have on carrying or clearing firms' net capital, 
leverage and liquidity, and their ability to fulfill their customer 
protection obligations.
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    \9\ See Securities Exchange Act Release No. 68270 (Nov. 20, 
2012), 77 FR 70860 (Nov. 27, 2012) (Notice of Filing File No. SR-
FINRA-2012-050).
    \10\ FINRA Rule 6710(u) defines ``TBA'' to mean a transaction in 
an Agency Pass-Through Mortgage-Backed Security (``MBS'') or a Small 
Business Administration (``SBA'')-Backed Asset-Backed Security 
(``ABS'') where the parties agree that the seller will deliver to 
the buyer a pool or pools of a specified face amount and meeting 
certain other criteria but the specific pool or pools to be 
delivered at settlement is not specified at the Time of Execution, 
and includes TBA transactions for good delivery and TBA transactions 
not for good delivery. Agency Pass-Through MBS and SBA-Backed ABS 
are defined under FINRA Rule 6710(v) and FINRA Rule 6710(bb), 
respectively. The term ``Time of Execution'' is defined under FINRA 
Rule 6710(d).
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    Since the OBS became effective, however, FINRA has observed 
considerable principal trading activities of some non-clearing firms. 
In particular, through its efforts to establish margin requirements for 
the TBA market \11\ and subsequent examinations of firms' margining 
practices related to all securities transactions with extended 
settlement dates, FINRA has become aware of non-clearing firms with 
both material TBA transactions as well as other types of securities 
transactions with extended settlement dates. In the case of TBA 
transactions, non-clearing firms may have entered into a Master 
Securities Forward Transaction Agreement (``MSFTA'') \12\ with their 
clients and are principal to the TBA transactions. In the case of other 
transactions with extended settlement dates cleared through a clearing 
firm, non-clearing firms are principal to the trades and financially 
responsible to the clearing firms for any losses that may result from 
clients' failures to complete the transactions on the date of 
settlement. Therefore, these transactions may present significant 
financial exposure for non-clearing firms, and FINRA is concerned about 
firms appropriately monitoring their financial exposure and applying 
capital charges for these transactions as required for compliance with 
Exchange Act Rule 15c3-1.\13\ Further, such transactions are not 
reported on non-clearing firms' balance sheets, making it difficult to 
monitor their compliance with capital requirements.
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    \11\ See Securities Exchange Act Release No. 76148 (Oct. 14, 
2015), 80 FR 63603 (Oct. 20, 2015) (Notice of Filing File No. SR-
FINRA-2015-036).
    \12\ The Securities Industry and Financial Markets Association 
(``SIFMA'') developed, and subsequently updated, in coordination 
with the Treasury Market Practices Group (``TMPG''), the MSFTA as a 
standard industry template for forward and other delayed delivery 
transactions involving mortgage-backed and asset-backed securities. 
See, e.g., SIFMA Guidance Notes to the Master Securities Forward 
Transaction Agreement (December 2012), available at: http://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/.
    \13\ See 17 CFR 240.15c3-1.
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    As a result of these concerns, and to ensure that all firms with 
significant derivative and off-balance sheet positions report these 
positions to FINRA on a consistent and regular basis, FINRA proposed to 
expand the reporting requirements of the OBS to non-clearing firms that 
have a minimum dollar net capital requirement equal to or greater than 
$100,000, and at least $10 million in reportable items pursuant to the 
OBS. The current de minimis exception would remain available to any 
firm that conducts limited off-balance sheet activity.\14\
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    \14\ See supra note 5.
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    FINRA stated that it will announce the proposed rule change's 
implementation date (i.e., the first quarterly reporting period for 
newly affected firms \15\) in a Regulatory Notice to be published no 
later than 60 days following Commission approval of the rule change, 
and that the implementation date will be no later than 210 days 
following Commission approval of the rule change.
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    \15\ Carrying or clearing firms that are currently subject to 
the OBS's reporting requirements would not be impacted by the 
proposed rule change and shall continue to file on a quarterly 
basis, as required, without interruption.
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III. Discussion and Commission Findings

    After careful consideration of the proposed rule change, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act, and the rules and regulations 
thereunder that are applicable to a national securities 
association.\16\ In particular, the Commission finds that the proposal 
is consistent with the provisions of Section 15A(b)(6) of the Exchange 
Act,\17\ which requires, among other things, that rules of a national 
securities association be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \17\ See 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change is consistent 
with the Exchange Act because expanding the reporting requirements of 
the OBS to the proposed non-clearing firms should permit FINRA to 
assess effectively on an ongoing basis the potential impact off-balance 
sheet activities may have on these firms' net capital, leverage and 
liquidity, and ability to fulfill obligations to other members and 
counterparties. In addition, impacted non-clearing firms, as well as 
their correspondent clearing firms, may benefit from increased 
awareness of their open trade exposures, which may

[[Page 7867]]

reduce their potential for losses, encourage better counterparty risk 
management and promote firms' financial stability.
    The Commission does not believe that the proposed rule change will 
result in burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The Commission 
believes FINRA has carefully crafted the proposed rule change to 
achieve its intended and necessary regulatory purpose while minimizing 
the burden on firms. Although the proposed rule change expands the 
number of firms required to file the OBS, the expansion is limited to 
non-clearing firms that have a minimum dollar net capital requirement 
equal to or greater than $100,000, and at least $10 million in 
reportable items pursuant to the OBS. In addition, the current de 
minimis exception continues to remain available to any firm that 
conducts off-balance sheet activity that is limited relative to its 
excess net capital.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\18\ that the proposed rule change (SR-FINRA-2015-059) be 
and hereby is approved.
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    \18\ See 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ See 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-02990 Filed 2-12-16; 8:45 am]
 BILLING CODE 8011-01-P