Document ID: SEC-2015-1696-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-10-20T04:00Z

[Federal Register Volume 80, Number 202 (Tuesday, October 20, 2015)]
[Notices]
[Pages 63603-63620]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26518]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76148; File No. SR-FINRA-2015-036]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 4210 (Margin Requirements) To Establish Margin Requirements 
for the TBA Market

October 14, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 6, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 4210 (Margin Requirements) 
to establish margin requirements for (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, as further defined herein 
(collectively, ``Covered Agency Transactions,'' also referred to, for 
purposes of this filing, as the ``TBA market''). The proposed rule 
change redesignates current paragraph (e)(2)(H) of FINRA Rule 4210 as 
new paragraph (e)(2)(I), adds new paragraph (e)(2)(H), makes conforming 
revisions to paragraphs (a)(13)(B)(i), (e)(2)(F), (e)(2)(G), (e)(2)(I), 
as redesignated by the rule change, and (f)(6), and adds to the rule 
new Supplementary Materials .02 through .05.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

[[Page 63604]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing amendments to FINRA Rule 4210 (Margin 
Requirements) to establish requirements for (1) TBA transactions,\3\ 
inclusive of ARM transactions, (2) Specified Pool Transactions,\4\ and 
(3) transactions in CMOs,\5\ issued in conformity with a program of an 
agency \6\ or GSE,\7\ with forward settlement dates, as further defined 
herein \8\ (collectively, ``Covered Agency Transactions,'' also 
referred to, for purposes of this filing, as the ``TBA market'').
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    \3\ 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).
    \4\ FINRA Rule 6710(x) defines Specified Pool Transaction to 
mean a transaction in an Agency Pass-Through MBS or an SBA-Backed 
ABS requiring the delivery at settlement of a pool or pools that is 
identified by a unique pool identification number at the time of 
execution.
    \5\ FINRA Rule 6710(dd) defines CMO to mean a type of 
Securitized Product backed by Agency Pass-Through MBS, mortgage 
loans, certificates backed by project loans or construction loans, 
other types of MBS or assets derivative of MBS, structured in 
multiple classes or tranches with each class or tranche entitled to 
receive distributions of principal or interest according to the 
requirements adopted for the specific class or tranche, and includes 
a real estate mortgage investment conduit (``REMIC'').
    \6\ FINRA Rule 6710(k) defines ``agency'' to mean a United 
States executive agency as defined in 5 U.S.C. 105 that is 
authorized to issue debt directly or through a related entity, such 
as a government corporation, or to guarantee the repayment of 
principal or interest of a debt security issued by another entity. 
The term excludes the U.S. Department of the Treasury in the 
exercise of its authority to issue U.S. Treasury Securities as 
defined under FINRA Rule 6710(p). Under 5 U.S.C. 105, the term 
``executive agency'' is defined to mean an ``Executive department, a 
Government corporation, and an independent establishment.''
    \7\ FINRA Rule 6710(n) defines GSE to have the meaning set forth 
in 2 U.S.C. 622(8). Under 2 U.S.C. 622(8), a GSE is defined, in 
part, to mean a corporate entity created by a law of the United 
States that has a Federal charter authorized by law, is privately 
owned, is under the direction of a board of directors, a majority of 
which is elected by private owners, and, among other things, is a 
financial institution with power to make loans or loan guarantees 
for limited purposes such as to provide credit for specific 
borrowers or one sector and raise funds by borrowing (which does not 
carry the full faith and credit of the Federal Government) or to 
guarantee the debt of others in unlimited amounts.
    \8\ See Item II.A.1(A)(1) infra.
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    Most trading of agency and GSE MBS takes place in the TBA market, 
which is characterized by transactions with forward settlements as long 
as several months past the trade date.\9\ The agency and GSE MBS market 
is one of the largest fixed income markets, with approximately $5 
trillion of securities outstanding and approximately $750 billion to 
$1.5 trillion in gross unsettled and unmargined dealer to customer 
transactions.\10\
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    \9\ See, e.g., James Vickery & Joshua Wright, TBA Trading and 
Liquidity in the Agency MBS Market, Federal Reserve Bank of New York 
(``FRBNY'') Economic Policy Review, May 2013, available at: <http://www.newyorkfed.org/research/epr/2013/1212vick.pdf>; see also SEC's 
Staff Report, Enhancing Disclosure in the Mortgage-Backed Securities 
Markets, January 2003, available at: <http://www.sec.gov/news/studies/mortgagebacked.htm#footbody_36>.
    \10\ See Treasury Market Practices Group (``TMPG''), Margining 
in Agency MBS Trading, November 2012, available at: <http://www.newyorkfed.org/tmpg/margining_tmpg_11142012.pdf> (the ``TMPG 
Report''). The TMPG is a group of market professionals that 
participate in the TBA market and is sponsored by the FRBNY.
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    Historically, the TBA market is one of the few markets where a 
significant portion of activity is unmargined, thereby creating a 
potential risk arising from counterparty exposure. Futures markets, for 
example, require the posting of initial margin for new positions and, 
for open positions, maintenance and mark to market (also referred to as 
``variation'') margin on all exchange cleared contracts. Market 
convention has been to exchange margin in the repo and securities 
lending markets, even when the collateral consists of exempt 
securities. With a view to this gap between the TBA market versus other 
markets, the TMPG recommended standards (the ``TMPG best practices'') 
regarding the margining of forward-settling agency MBS 
transactions.\11\ The TMPG Report noted that, to the extent uncleared 
transactions in the TBA market remain unmargined, these transactions 
``can pose significant counterparty risk to individual market 
participants'' and that ``the market's sheer size . . . raises systemic 
concerns.'' \12\ The TMPG Report cautioned that defaults in this market 
``could transmit losses and risks to a broad array of other 
participants. While the transmission of these risks may be mitigated by 
the netting, margining, and settlement guarantees provided by a 
[central clearing counterparty], losses could nonetheless be costly and 
destabilizing. Furthermore, the asymmetry that exists between 
participants that margin and those that do not could have a negative 
effect on liquidity, especially in times of market stress.'' \13\
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    \11\ See TMPG, Best Practices for Treasury, Agency, Debt, and 
Agency Mortgage-Backed Securities Markets, revised April 4, 2014, 
available at: <http://www.newyorkfed.org/tmpg/bestpractices_040414.pdf>.
    \12\ See TMPG Report.
    \13\ See note 12 supra.
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    The TMPG best practices are recommendations and as such currently 
are not rule requirements.\14\ Unsecured credit exposures that exist in 
the TBA market today can lead to financial losses by dealers. 
Permitting counterparties to participate in the TBA market without 
posting margin can facilitate increased leverage by customers, thereby 
potentially posing a risk to the dealer extending credit and to the 
marketplace as a whole. Further, FINRA's present requirements do not 
address the TBA market generally.\15\ In view of the growth in volume 
in the TBA market, the number of participants and the credit concerns 
that have been raised in recent years, FINRA believes there is a need 
to establish FINRA rule requirements for the TBA market generally that 
will extend responsible practices to members that participate in this 
market.
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    \14\ Absent the establishment of a rule requirement, member 
participants have made progress in adopting the TMPG best practices. 
However, full adoption will take time and in the interim would leave 
firms at risk.
    \15\ See Interpretations/01 through/08 of FINRA Rule 
4210(e)(2)(F), available at: <http://www.finra.org/web/groups/industry/@ip/@reg/@rules/documents/industry/p122203.pdf>. Such 
guidance references TBAs largely in the context of Government 
National Mortgage Association (``GNMA'') securities. The modern TBA 
market is much broader than GNMA securities.
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    Accordingly, to establish margin requirements for Covered Agency 
Transactions, FINRA is proposing to redesignate current paragraph 
(e)(2)(H) of Rule 4210 as new paragraph (e)(2)(I), to add new paragraph 
(e)(2)(H) to Rule 4210, to make conforming revisions to paragraphs 
(a)(13)(B)(i), (e)(2)(F), (e)(2)(G), (e)(2)(I), as redesignated by the 
rule change, and (f)(6),\16\ and to add to

[[Page 63605]]

the rule new Supplementary Materials .02 through .05. The proposed rule 
change is informed by the TMPG best practices. Further, the products 
the proposed amendments cover are intended to be congruent with those 
covered by the TMPG best practices and related updates that the TMPG 
has released.\17\ FINRA sought comment on the proposal in a Regulatory 
Notice (the ``Notice'').\18\ As discussed further in Item II.C of this 
filing, commenters expressed concerns that the proposal would 
unnecessarily impede accustomed patterns of business activity in the 
TBA market, especially for smaller customers. In considering the 
comments, FINRA has engaged in discussions with industry participants 
and other regulators, including staff of the SEC and the FRBNY. In 
addition, as discussed in Item II.B, FINRA has engaged in analysis of 
the potential economic impact of the proposal. As a result, FINRA has 
revised the proposal as published in the Notice to ameliorate its 
impact on business activity and to address the concerns of smaller 
customers that do not pose material risk to the market as a whole, in 
particular those engaging in non-margined, cash account business. These 
revisions include among other things the establishment of an exception 
from the proposed margin requirements for any counterparty with gross 
open positions amounting to $2.5 million or less, subject to specified 
conditions, as well as specified exceptions to the maintenance margin 
requirement and modifications to the de minimis transfer provisions.
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    \16\ Paragraph (e)(2) of Rule 4210, broadly, addresses margin 
requirements as to exempted securities, non-equity securities and 
baskets. As discussed further below, paragraphs (e)(2)(F) and 
(e)(2)(G), in combination, address specified transactions involving 
exempted securities, mortgage related securities, specified foreign 
sovereign debt securities, and investment grade debt securities. 
Redesignated paragraph (e)(2)(I) of the rule sets forth specified 
limits on net capital deductions. Paragraph (f)(6) addresses the 
time within which margin or mark to market must be obtained. 
Paragraph (a)(13)(B)(i) addresses the net worth and financial assets 
requirements of persons that are exempt accounts for purposes of 
Rule 4210.
    \17\ See, e.g., TMPG, Frequently Asked Questions: Margining 
Agency MBS Transactions, June 13, 2014, available at: <http://www.newyorkfed.org/tmpg/marginingfaq06132014.pdf >; TMPG Releases 
Updates to Agency MBS Margining Recommendation, March 27, 2013, 
available at: <http://www.newyorkfed.org/tmpg/Agency%20MBS%20margining%20public%20announcement%2003-27-2013.pdf.
    \18\ Regulatory Notice 14-02 (January 2014) (Margin 
Requirements: FINRA Requests Comment on Proposed Amendments to FINRA 
Rule 4210 for Transactions in the TBA Market).
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    The proposed rule change, as revised in response to comment on the 
Notice, is set forth in further detail below.
(A) Proposed FINRA Rule 4210(e)(2)(H) (Covered Agency Transactions)
    The proposed rule change is intended to reach members engaging in 
Covered Agency Transactions with specified counterparties. The core 
requirements of the proposed rule change are set forth in new paragraph 
(e)(2)(H).
(1) Definition of Covered Agency Transactions (Proposed FINRA Rule 
4210(e)(2)(H)(i)c
    Proposed paragraph (e)(2)(H)(i)c. of the rule defines Covered 
Agency Transactions to mean:
     TBA transactions, as defined in FINRA Rule 6710(u),\19\ 
inclusive of ARM transactions, for which the difference between the 
trade date and contractual settlement date is greater than one business 
day; \20\
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    \19\ See note 3 supra.
    \20\ See proposed FINRA Rule 4210(e)(2)(H)(i)c.1. in Exhibit 5.
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     Specified Pool Transactions, as defined in FINRA Rule 
6710(x),\21\ for which the difference between the trade date and 
contractual settlement date is greater than one business day; \22\ and
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    \21\ See note 4 supra.
    \22\ See proposed FINRA Rule 4210(e)(2)(H)(i)c.2. in Exhibit 5.
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     CMOs, as defined in FINRA Rule 6710(dd),\23\ issued in 
conformity with a program of an agency, as defined in FINRA Rule 
6710(k),\24\ or a GSE, as defined in FINRA Rule 6710(n),\25\ for which 
the difference between the trade date and contractual settlement date 
is greater than three business days.\26\
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    \23\ See note 5 supra.
    \24\ See note 6 supra.
    \25\ See note 7 supra.
    \26\ See proposed FINRA Rule 4210(e)(2)(H)(i)c.3. in Exhibit 5.
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    The proposed definition of Covered Agency Transactions is largely 
as published in the Notice and, as discussed above, is intended to be 
congruent with the scope of products addressed by the TMPG best 
practices and related updates.\27\ As further discussed in Item II.C.1, 
FINRA has been advised by the FRBNY staff that ensuring such congruence 
is necessary to prevent a mismatch between FINRA standards and the TMPG 
best practices that could result in perverse incentives in favor of 
non-margined products and thereby lead to distortions in trading 
behavior. Further, FINRA believes that congruence of product coverage 
helps stabilize the market by ensuring regulatory consistency.
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    \27\ For example, the TMPG has noted that agency multifamily and 
project loan securities such as Freddie Mac K Certificates, Fannie 
Mae Delegated Underwriting and Servicing bonds, Ginnie Mae 
Construction Loan/Project Loan Certificates, are all within the 
scope of the margining practice recommendation. See note 17 supra. 
The proposed definition of Covered Agency Transactions would cover 
these types of products as they are commonly understood to the 
industry.
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(2) Other Key Definitions Established by the Proposed Rule Change 
(Proposed FINRA Rule 4210(e)(2)(H)(i))
    In addition to Covered Agency Transactions, the proposed rule 
change establishes the following key definitions for purposes of new 
paragraph (e)(2)(H) of Rule 4210:
     The term ``bilateral transaction'' means a Covered Agency 
Transaction that is not cleared through a registered clearing agency as 
defined in paragraph (f)(2)(A)(xxviii) of Rule 4210; \28\
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    \28\ See proposed FINRA Rule 4210(e)(2)(H)(i)a. in Exhibit 5. 
FINRA Rule 4210(f)(2)(A)(xxviii) defines registered clearing agency 
to mean a clearing agency as defined in SEA Section 3(a)(23) that is 
registered with the SEC pursuant to SEA Section 17A(b)(2).
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     The term ``counterparty'' means any person that enters 
into a Covered Agency Transaction with a member and includes a 
``customer'' as defined in paragraph (a)(3) of Rule 4210; \29\
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    \29\ See proposed FINRA Rule 4210(e)(2)(H)(i)b. in Exhibit 5.
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     The term ``deficiency'' means the amount of any required 
but uncollected maintenance margin and any required but uncollected 
mark to market loss; \30\
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    \30\ See proposed FINRA Rule 4210(e)(2)(H)(i)d. in Exhibit 5.
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     The term ``gross open position'' means, with respect to 
Covered Agency Transactions, the amount of the absolute dollar value of 
all contracts entered into by a counterparty, in all CUSIPs; provided, 
however, that such amount shall be computed net of any settled position 
of the counterparty held at the member and deliverable under one or 
more of the counterparty's contracts with the member and which the 
counterparty intends to deliver; \31\
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    \31\ See proposed FINRA Rule 4210(e)(2)(H)(i)e. in Exhibit 5.
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     The term ``maintenance margin'' means margin equal to two 
percent of the contract value of the net long or net short position, by 
CUSIP, with the counterparty; \32\
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    \32\ See proposed FINRA Rule 4210(e)(2)(H)(i)f. in Exhibit 5.
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     The term ``mark to market loss'' means the counterparty's 
loss resulting from marking a Covered Agency Transaction to the market; 
\33\
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    \33\ See proposed FINRA Rule 4210(e)(2)(H)(i)g. in Exhibit 5.
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     The term ``mortgage banker'' means an entity, however 
organized, that engages in the business of providing real estate 
financing collateralized by liens on such real estate; \34\
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    \34\ See proposed FINRA Rule 4210(e)(2)(H)(i)h. in Exhibit 5.
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     The term ``round robin'' trade means any transaction or 
transactions

[[Page 63606]]

resulting in equal and offsetting positions by one customer with two 
separate dealers for the purpose of eliminating a turnaround delivery 
obligation by the customer; \35\ and
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    \35\ See proposed FINRA Rule 4210(e)(2)(H)(i)i. in Exhibit 5.
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     The term ``standby'' means contracts that are put options 
that trade OTC, as defined in paragraph (f)(2)(A)(xxvii) of Rule 4210, 
with initial and final confirmation procedures similar to those on 
forward transactions.\36\
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    \36\ See proposed FINRA Rule 4210(e)(2)(H)(i)j. in Exhibit 5. 
FINRA Rule 4210(f)(2)(A)(xxvii) defines the term ``OTC'' as used 
with reference to a call or put option contract to mean an over-the-
counter option contract that is not traded on a national securities 
exchange and is issued and guaranteed by the carrying broker-dealer. 
The term does not include an Options Clearing Corporation (``OCC'') 
Cleared OTC Option as defined in FINRA Rule 2360 (Options).
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(3) Requirements for Covered Agency Transactions (Proposed FINRA Rule 
4210(e)(2)(H)(ii))
    The specific requirements that would apply to Covered Agency 
Transactions are set forth in paragraph (e)(2)(H)(ii). These 
requirements address the types of counterparties that are subject to 
the rule, risk limit determinations, specified exceptions from the 
proposed margin requirements, transactions with exempt accounts,\37\ 
transactions with non-exempt accounts, the handling of de minimis 
transfer amounts, and the treatment of standbys.
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    \37\ The 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 SEA 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) and (e)(2)(G) of the rule, as set forth under 
paragraph (a)(13)(B)(i) of Rule 4210, and meets specified conditions 
as set forth under paragraph (a)(13)(B)(ii). FINRA is proposing a 
conforming revision to paragraph (a)(13)(B)(i) so that the phrase 
``for purposes of paragraphs (e)(2)(F) and (e)(2)(G)'' would read 
``for purposes of paragraphs (e)(2)(F), (e)(2)(G) and (e)(2)(H).'' 
See proposed FINRA Rule 4210(a)(13)(B)(i) in Exhibit 5.
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     Counterparties Subject to the Rule.
    Paragraph (e)(2)(H)(ii)a. of the rule provides that all Covered 
Agency Transactions with any counterparty, regardless of the type of 
account to which booked, are subject to the provisions of paragraph 
(e)(2)(H) of the rule. However, paragraph (e)(2)(H)(ii)a.1. of the rule 
provides that with respect to Covered Agency Transactions with any 
counterparty that is a Federal banking agency, as defined in 12 U.S.C. 
1813(z) under the Federal Deposit Insurance Act,\38\ central bank, 
multinational central bank, foreign sovereign, multilateral development 
bank, or the Bank for International Settlements, a member may elect not 
to apply the margin requirements specified in paragraph (e)(2)(H) 
provided the member makes a written risk limit determination for each 
such counterparty that the member shall enforce pursuant to paragraph 
(e)(2)(H)(ii)b., as discussed below.\39\
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    \38\ 12 U.S.C. 1813(z) defines ``Federal banking agency'' to 
mean the Comptroller of the Currency, the Board of Governors of the 
Federal Reserve System, or the Federal Deposit Insurance 
Corporation.
    \39\ See proposed FINRA Rule 4210(e)(2)(H)(ii)a.1. in Exhibit 5. 
As proposed in the Notice, central banks and other similar 
instrumentalities of sovereign governments would be excluded from 
the proposed rule's application. FINRA believes that revising the 
proposal so members may elect not to apply the margin requirements 
to such entities, provided members make and enforce the specified 
risk limit determinations, should help provide members flexibility 
to manage their risk vis-[agrave]-vis the various central banks and 
similar entities that participate in the market. Further, FINRA 
believes the rule language, as revised, is more clear as to the 
types of entities with respect to which such election would be 
available. For further discussion, see Item II.C.7 infra.
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     Risk Limits.
    Paragraph (e)(2)(H)(ii)b. of the rule provides that members that 
engage in Covered Agency Transactions with any counterparty shall make 
a determination in writing of a risk limit for each such counterparty 
that the member shall enforce.\40\ The rule provides that the risk 
limit determination shall be made by a designated credit risk officer 
or credit risk committee in accordance with the member's written risk 
policies and procedures. Further, in connection with risk limit 
determinations, the proposed rule establishes new Supplementary 
Material .05, which, in response to comment, FINRA has revised vis-
[agrave]-vis the version published in the Notice.\41\ The new 
Supplementary Material provides that, for purposes of any risk limit 
determination pursuant to paragraphs (e)(2)(F), (e)(2)(G) \42\ or 
(e)(2)(H) of the rule:
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    \40\ FINRA has made minor revisions to the language vis-
[agrave]-vis the version as published in the Notice to clarify that 
the member must make, and enforce, a written risk limit 
determination for each counterparty with which the member engages in 
Covered Agency Transactions.
    \41\ FINRA believes the proposed requirement is necessary 
because risk limit determinations help to ensure that the member is 
properly monitoring its risk. FINRA believes the Supplementary 
Material, as revised, responds to commenter concerns by, among other 
things, permitting members flexibility to make the required risk 
limit determinations without imposing burdens at the sub-account 
level. For further discussion of Supplementary Material .05, as 
revised vis-[agrave]-vis the version published in the Notice, see 
Item II.C.4 infra.
    \42\ As discussed further below, FINRA is proposing as part of 
this rule change revisions to paragraphs (e)(2)(F) and (e)(2)(G) of 
Rule 4210 to align those paragraphs with new paragraph (e)(2)(H) and 
otherwise make clarifying changes in light of the rule change.
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    [cir] If a member engages in transactions with advisory clients of 
a registered investment adviser, the member may elect to make the risk 
limit determination at the investment adviser level, except with 
respect to any account or group of commonly controlled accounts whose 
assets managed by that investment adviser constitute more than 10 
percent of the investment adviser's regulatory assets under management 
as reported on the investment adviser's most recent Form ADV; \43\
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    \43\ See proposed FINRA Rule 4210.05(a)(1) in Exhibit 5.
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    [cir] Members of limited size and resources that do not have a 
credit risk officer or credit risk committee may designate an 
appropriately registered principal to make the risk limit 
determinations; \44\
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    \44\ See proposed FINRA Rule 4210.05(a)(2) in Exhibit 5.
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    [cir] The member may base the risk limit determination on 
consideration of all products involved in the member's business with 
the counterparty, provided the member makes a daily record of the 
counterparty's risk limit usage; \45\ and
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    \45\ See proposed FINRA Rule 4210.05(a)(3) in Exhibit 5.
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    [cir] A member shall consider whether the margin required pursuant 
to the rule is adequate with respect to a particular counterparty 
account or all its counterparty accounts and, where appropriate, 
increase such requirements.\46\
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    \46\ See proposed FINRA Rule 4210.05(a)(4) in Exhibit 5.
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     Exceptions from the Proposed Margin Requirements: (1) 
Registered Clearing Agencies; (2) Gross Open Positions of $2.5 Million 
or Less in Aggregate.
    Paragraph (e)(2)(H)(ii)c. provides that the margin requirements 
specified in paragraph (e)(2)(H) of the rule shall not apply to:
    [cir] Covered Agency Transactions that are cleared through a 
registered clearing agency, as defined in FINRA Rule 
4210(f)(2)(A)(xxviii),\47\ and are subject

[[Page 63607]]

to the margin requirements of that clearing agency; and
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    \47\ See note 28 supra.
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    [cir] any counterparty that has gross open positions in Covered 
Agency Transactions with the member amounting to $2.5 million or less 
in aggregate, if the original contractual settlement for all such 
transactions is in the month of the trade date for such transactions or 
in the month succeeding the trade date for such transactions and the 
counterparty regularly settles its Covered Agency Transactions on a 
Delivery Versus Payment (``DVP'') basis or for cash; provided, however, 
that such exception from the margin requirements shall not apply to a 
counterparty that, in its transactions with the member, engages in 
dollar rolls, as defined in FINRA Rule 6710(z),\48\ or round robin 
trades, or that uses other financing techniques for its Covered Agency 
Transactions.
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    \48\ FINRA Rule 6710(z) defines ``dollar roll'' to mean a 
simultaneous sale and purchase of an Agency Pass-Through MBS for 
different settlement dates, where the initial seller agrees to take 
delivery, upon settlement of the re-purchase transaction, of the 
same or substantially similar securities.
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    As discussed further in Items II.B and II.C of this filing, FINRA 
is establishing the $2.5 million per counterparty exception to address 
commenter concern that the scope of Covered Agency Transactions subject 
to the proposed margin requirements would unnecessarily constrain non-
risky business activity of market participants or otherwise 
unnecessarily alter participants' trading decisions. FINRA believes 
that transactions that fall within the proposed amount and that meet 
the specified conditions do not pose systemic risk. Further, many of 
such transactions involve smaller counterparties that do not give rise 
to risk to the firm. Accordingly, FINRA believes it is appropriate to 
establish the exception.\49\
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    \49\ FINRA notes, however, that it is revising the provisions 
with respect to limits on net capital deductions as set forth in 
redesignated paragraph (e)(2)(I) so that amounts excepted pursuant 
to the $2.5 million exclusion must be included toward the 
concentration thresholds as set forth under new paragraph (e)(2)(I). 
See Item II.A.1(C) infra. FINRA believes that this is appropriate in 
the interest of limiting excessive risk. Further, FINRA notes that 
the proposed exceptions under paragraph (e)(2)(H)(ii)c. are 
exceptions to the margin requirements under paragraph (e)(2)(H). The 
requirement to determine a risk limit pursuant to paragraph 
(e)(2)(H)(ii)b. would apply.
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     Transactions with Exempt Accounts.
    Paragraph (e)(2)(H)(ii)d. of the rule provides that, on any net 
long or net short position, by CUSIP, resulting from bilateral 
transactions with a counterparty that is an exempt account, no 
maintenance margin shall be required.\50\ However, the rule provides 
that such transactions must be marked to the market daily and the 
member must collect any net mark to market loss, unless otherwise 
provided under paragraph (e)(2)(H)(ii)f. of the rule.\51\ The 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 shall be required to deduct 
the amount of the mark to market loss from net capital as provided in 
SEA Rule 15c3-1 until such time the mark to market loss is 
satisfied.\52\ The rule requires that 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.\53\ Under the rule, members may treat mortgage bankers 
that use Covered Agency Transactions to hedge their pipeline of 
mortgage commitments as exempt accounts for purposes of paragraph 
(e)(2)(H) of this Rule.\54\
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    \50\ The proposed rule change adds to FINRA Rule 4210 new 
Supplementary Material .04, which provides that, for purposes of 
paragraph (e)(2)(H) of the rule, the determination of whether an 
account qualifies as an exempt account must be based upon the 
beneficial ownership of the account. The rule provides that sub-
accounts managed by an investment adviser, where the beneficial 
owner is other than the investment adviser, must be margined 
individually. As discussed further in Item II.C.5, commenters 
expressed concerns regarding the proposed requirement. Supplementary 
Material .04 as proposed in this filing is as proposed in the 
Notice, as FINRA believes individual margining is fundamental sound 
practice. However, in response to comment, and as further discussed 
in Item II.C.4, FINRA has revised the proposed rule change to 
provide that risk limit determinations may be made at the investment 
adviser level, subject to specified conditions. See discussion of 
Risk Limits supra.
    \51\ As discussed further below, paragraph (e)(2)(H)(ii)f. 
addresses the treatment of de minimis transfer amounts.
    \52\ FINRA has made minor revisions to the language as to timing 
of the specified deduction so as to better align with corresponding 
provisions under FINRA Rule 4210(g)(10)(A) in the context of 
portfolio margining.
    \53\ See note 56 infra. Further, to conform with the proposed 
rule change, FINRA is revising paragraph (f)(6) of FINRA Rule 4210, 
which currently permits up to 15 business days for obtaining the 
amount of margin or mark to market, unless FINRA has specifically 
granted the member additional time. As revised, the phrase ``other 
than that required under paragraph (e)(2)(H) of this Rule'' would be 
added to paragraph (f)(6) so as to accommodate the five days 
specified under the proposed rule change. As discussed further in 
Item II.C.8 of this filing, commenters expressed concern that the 
specified five day period, both as to exempt accounts under 
paragraph (e)(2)(H)(ii)d., and as to non-exempt accounts under 
paragraph (e)(2)(H)(ii)e., is too aggressive. FINRA believes the 
five day period is appropriate in view of the potential counterparty 
risk in the TBA market. The rule makes express allowance for 
additional time, which FINRA notes is consistent with longstanding 
practice under current FINRA Rule 4210(f)(6).
    \54\ The proposed rule change adds to Rule 4210 new 
Supplementary Material .02, which provides that for purposes of 
paragraph (e)(2)(H)(ii)d. of the rule, members must adopt written 
procedures to monitor the mortgage banker's pipeline of mortgage 
loan commitments to assess whether the Covered Agency Transactions 
are being used for hedging purposes. This provision is largely as 
proposed in the Notice. Discussion of the proposed rule's potential 
impact on mortgage bankers is discussed further in Item II.B. The 
proposed requirement is appropriate to ensure that, if a mortgage 
banker is permitted exempt account treatment, the member has 
conducted sufficient due diligence to determine that the mortgage 
banker is hedging its pipeline of mortgage production. In this 
regard, FINRA notes that the current Interpretations under Rule 4210 
already contemplate that members evaluate the loan servicing 
portfolios of counterparties that are being treated as exempt 
accounts. See Interpretation/02 of FINRA Rule 4210(e)(2)(F).
---------------------------------------------------------------------------

     Transactions with Non-Exempt Accounts.
    Paragraph (e)(2)(H)(ii)e. of the rule provides that, on any net 
long or net short position, by CUSIP, resulting from bilateral 
transactions with a counterparty that is not an exempt account, 
maintenance margin,\55\ plus any net mark to market loss on such 
transactions, shall be required margin, and the member shall collect 
the deficiency, as defined in paragraph (e)(2)(H)(i)d. of the rule, 
unless otherwise provided under paragraph (e)(2)(H)(ii)f. of the rule. 
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 SEA Rule 15c3-
1 until such time the deficiency is satisfied.\56\ Further, the rule 
provides that if such deficiency is not satisfied within five business 
days from the date the deficiency was created, the member shall 
promptly liquidate positions to

[[Page 63608]]

satisfy the deficiency, unless FINRA has specifically granted the 
member additional time.\57\
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    \55\ As discussed above, the proposed definition of 
``maintenance margin'' specifies margin equal to two percent of the 
contract value of the net long or net short position. See proposed 
FINRA Rule 4210(e)(2)(H)(i)f. in Exhibit 5.
    \56\ The proposed rule change adds to FINRA Rule 4210 new 
Supplementary Material .03, which provides that, for purposes of 
paragraph (e)(2)(H) of the rule, to the extent a mark to market loss 
or deficiency is cured by subsequent market movements prior to the 
time the margin call must be met, the margin call need not be met 
and the position need not be liquidated; provided, however, if the 
mark to market loss or deficiency is not satisfied by the close of 
business on the next business day after the business day on which 
the mark to market loss or deficiency arises, the member shall be 
required to deduct the amount of the mark to market loss or 
deficiency from net capital as provided in SEA Rule 15c3-1 until 
such time the mark to market loss or deficiency is satisfied. See 
note 52 supra. FINRA believes that the proposed requirement should 
help provide clarity in situations where subsequent market movements 
cure the mark to market loss or deficiency.
    \57\ See notes 53 and 56 supra.
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    As discussed further in Item II.B and Item II.C of this filing, 
commenters expressed concern regarding the potential impact of the 
proposed maintenance margin requirement and its implications for non-
exempt accounts versus exempt accounts. FINRA believes that the 
maintenance margin requirement is appropriate because it aligns with 
the potential risk as to non-exempt accounts engaging in Covered Agency 
Transactions and the specified two percent amount is consistent with 
other measures in this area. By the same token, to tailor the 
requirement more specifically to the potential risk, and to ameliorate 
potential burdens on market participants, FINRA has revised the 
proposed maintenance margin requirement vis-[agrave]-vis the version 
published in the Notice. Specifically, as revised, the rule provides 
that no maintenance margin is required if the original contractual 
settlement for the Covered Agency Transaction is in the month of the 
trade date for such transaction or in the month succeeding the trade 
date for such transaction and the customer regularly settles its 
Covered Agency Transactions on a DVP basis or for cash; provided, 
however, that such exception from the required maintenance margin shall 
not apply to a non-exempt account that, in its transactions with the 
member, engages in dollar rolls, as defined in FINRA Rule 6710(z), or 
round robin trades, as defined in proposed FINRA Rule 
4210(e)(2)(H)(i)i., or that uses other financing techniques for its 
Covered Agency Transactions.\58\
---------------------------------------------------------------------------

    \58\ See Item II.B and Item II.C.2 for further discussion of the 
potential economic impact of the proposed requirement and comments 
received in response to the Notice.
---------------------------------------------------------------------------

     De Minimis Transfer Amounts.
    Paragraph (e)(2)(H)(ii)f. of the rule provides that any deficiency, 
as set forth in paragraph (e)(2)(H)(ii)e. of the rule, or mark to 
market losses, as set forth in paragraph (e)(2)(H)(ii)d. of the rule, 
with a single counterparty shall not give rise to any margin 
requirement, and as such need not be collected or charged to net 
capital, if the aggregate of such amounts with such counterparty does 
not exceed $250,000 (``the de minimis transfer amount''). The rule 
provides that the full amount of the sum of the required maintenance 
margin and any mark to market loss must be collected when such sum 
exceeds the de minimis transfer amount.
    FINRA has revised the proposed de minimis transfer provisions vis-
[agrave]-vis the proposal as published in the Notice. As discussed in 
the Notice, FINRA intends the de minimis transfer provisions to reduce 
potential operational burdens on members. However, some commenters 
expressed concerns that the provisions could among other things result 
in imposing forced capital charges.\59\ FINRA believes that the 
proposal, as revised, should help clarify that any deficiency or mark 
to market loss, as set forth under the proposed rule, with a single 
counterparty shall not give rise to any margin requirement, and as such 
need not be collected or charged to net capital, if the aggregate of 
such amounts with such counterparty does not exceed $250,000. FINRA 
believes this is appropriate because the de minimis transfer amount, by 
permitting members to avoid a capital charge that would otherwise be 
required absent the provision, is designed to help prevent smaller 
members from being subject to a potential competitive disadvantage and 
to maintain a level playing field for all members. FINRA does not 
believe that it is necessary for systemic safety to impose a capital 
charge for amounts within the specified thresholds. However, FINRA 
believes it is necessary to set a parameter for limiting excessive risk 
and as such is retaining the $250,000 amount as originally proposed in 
the Notice.\60\
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    \59\ See Item II.C.3 for further discussion.
    \60\ In this regard, FINRA notes further that it is revising the 
provisions with respect to limits on net capital deductions as set 
forth in redesignated paragraph (e)(2)(I) so that the de minimis 
transfer amount, though it would not give rise to any margin 
requirement, must be included toward the concentration thresholds as 
set forth under the rule. See Item II.A.1(C) infra.
---------------------------------------------------------------------------

     Unrealized Profits; Standbys.
    Paragraph (e)(2)(H)(ii)g. of the rule provides that unrealized 
profits in one Covered Agency Transaction position may offset losses 
from other Covered Agency Transaction positions in the same 
counterparty's account and the amount of net unrealized profits may be 
used to reduce margin requirements. With respect to standbys, only 
profits (in-the-money amounts), if any, on long standbys shall be 
recognized. The proposed language is largely as proposed in the Notice.
(B) Conforming Amendments to FINRA Rule 4210(e)(2)(F) (Transactions 
With Exempt Accounts Involving Certain ``Good Faith'' Securities) and 
FINRA Rule 4210(e)(2)(G) (Transactions With Exempt Accounts Involving 
Highly Rated Foreign Sovereign Debt Securities and Investment Grade 
Debt Securities).
    The proposed rule change makes a number of revisions to paragraphs 
(e)(2)(F) and (e)(2)(G) of FINRA Rule 4210 in the interest of 
clarifying the rule's structure and otherwise conforming the rule in 
light of the proposed revisions to new paragraph (e)(2)(H) as discussed 
above:
     The proposed rule change revises the opening sentence of 
paragraph (e)(2)(F) to clarify that the paragraph's scope does not 
apply to Covered Agency Transactions as defined pursuant to new 
paragraph (e)(2)(H). Accordingly, as amended, paragraph (e)(2)(F) 
states: ``Other than for Covered Agency Transactions as defined in 
paragraph (e)(2)(H) of this Rule . . .'' FINRA believes that this 
clarification will help demarcate the treatment of products subject to 
paragraph (e)(2)(F) versus new paragraph (e)(2)(H). For similar 
reasons, the proposed rule change revises paragraph (e)(2)(G) to 
clarify that the paragraph's scope does not apply to a position subject 
to new paragraph (e)(2)(H) in addition to paragraph (e)(2)(F) as the 
paragraph currently states. As amended, the parenthetical in the 
opening sentence of the paragraph states: ``([O]ther than a position 
subject to paragraph (e)(2)(F) or (e)(2)(H) of this Rule).''
     Current, pre-revision paragraph (e)(2)(H)(i) provides that 
members must maintain a written risk analysis methodology for assessing 
the amount of credit extended to exempt accounts pursuant to paragraphs 
(e)(2)(F) and (e)(2)(G) of the rule which shall be made available to 
FINRA upon request. The proposed rule change places this language in 
paragraphs (e)(2)(F) and (e)(2)(G) and deletes it from its current 
location. Accordingly, FINRA proposes to move to paragraphs (e)(2)(F) 
and (e)(2)(G): ``Members shall maintain a written risk analysis 
methodology for assessing the amount of credit extended to exempt 
accounts pursuant to [this paragraph], which shall be made available to 
FINRA upon request.'' Further, FINRA proposes to add to each: ``The 
risk limit determination shall be made by a designated credit risk 
officer or credit risk committee in accordance with the member's 
written risk policies and procedures.'' \61\ FINRA believes this 
amendment makes the risk limit determination language in paragraphs 
(e)(2)(F) and (e)(2)(G) more congruent with the corresponding language 
proposed for new paragraph (e)(2)(H) of the rule.
---------------------------------------------------------------------------

    \61\ See proposed FINRA Rule 4210(e)(2)(F) and Rule 
4210(e)(2)(G) in Exhibit 5.
---------------------------------------------------------------------------

     The proposed rule change revises the references in 
paragraphs (e)(2)(F) and (e)(2)(G) to the limits on net capital 
deductions as set forth in current

[[Page 63609]]

paragraph (e)(2)(H) to read ``paragraph (e)(2)(I)'' in conformity with 
that paragraph's redesignation pursuant to the rule change.
(C) Redesignated Paragraph (e)(2)(I) (Limits on Net Capital Deductions)
    Under current paragraph (e)(2)(H) of FINRA Rule 4210, in brief, a 
member must provide prompt written notice to FINRA and is prohibited 
from entering into any new transactions that could increase the 
member's specified credit exposure if net capital deductions taken by 
the member as a result of marked to the market losses incurred under 
paragraphs (e)(2)(F) and (e)(2)(G), over a five day business period, 
exceed: (1) For a single account or group of commonly controlled 
accounts, five percent of the member's tentative net capital (as 
defined in SEA Rule 15c3-1); or (2) for all accounts combined, 25 
percent of the member's tentative net capital (again, as defined in SEA 
Rule 15c3-1). As discussed earlier, the proposed rule change 
redesignates current paragraph (e)(2)(H) of the rule as paragraph 
(e)(2)(I), deletes current paragraph (e)(2)(H)(i), and makes conforming 
revisions to paragraph (e)(2)(I), as redesignated, for the purpose of 
clarifying that the provisions of that paragraph are meant to include 
Covered Agency Transactions as set forth in new paragraph (e)(2)(H). In 
addition, the proposed rule change clarifies that de minimis transfer 
amounts must be included toward the five percent and 25 percent 
thresholds as specified in the rule, as well as amounts pursuant to the 
specified exception under paragraph (e)(2)(H) for gross open positions 
of $2.5 million or less in aggregate.\62\
---------------------------------------------------------------------------

    \62\ As discussed earlier, FINRA believes that inclusion of the 
de minimis transfer amounts and amounts pursuant to the $2.5 million 
per counterparty exception is appropriate in view of the rule's 
purpose of limiting excessive risk.
---------------------------------------------------------------------------

    Accordingly, as revised by the rule change, redesignated paragraph 
(e)(2)(I) of the rule provides that, in the event that the net capital 
deductions taken by a member as a result of deficiencies or marked to 
the market losses incurred under paragraphs (e)(2)(F) and (e)(2)(G) of 
the rule (exclusive of the percentage requirements established 
thereunder), plus any mark to market loss as set forth under paragraph 
(e)(2)(H)(ii)d. of the rule and any deficiency as set forth under 
paragraph (e)(2)(H)(ii)e. of the rule, and inclusive of all amounts 
excepted from margin requirements as set forth under paragraph 
(e)(2)(H)(ii)c.2. of the rule or any de minimis transfer amount as set 
forth under paragraph (e)(2)(H)(ii)f. of the rule, exceed:
     For any one account or group of commonly controlled 
accounts, 5 percent of the member's tentative net capital (as such term 
is defined in SEA Rule 15c3-1),\63\ or
---------------------------------------------------------------------------

    \63\ See proposed FINRA Rule 4210(e)(2)(I)(i)a. in Exhibit 5.
---------------------------------------------------------------------------

     for all accounts combined, 25 percent of the member's 
tentative net capital (as such term is defined in SEA Rule 15c3-1),\64\ 
and,
---------------------------------------------------------------------------

    \64\ See proposed FINRA Rule 4210(e)(2)(I)(i)b. in Exhibit 5.
---------------------------------------------------------------------------

     such excess as calculated in paragraphs (e)(2)(I)(i)a. or 
b. of the rule continues to exist on the fifth business day after it 
was incurred,\65\ the member must 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 the rule 
that would result in an increase in the amount of such excess under, as 
applicable, paragraph (e)(2)(I)(i) of the rule.
---------------------------------------------------------------------------

    \65\ See proposed FINRA Rule 4210(e)(2)(I)(i)c. in Exhibit 5.
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 180 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\66\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change is 
consistent with the Act because, by establishing margin requirements 
for Covered Agency Transactions (the TBA market), the proposed rule 
change will help to reduce the risk of loss due to counterparty failure 
in one of the largest fixed income markets and thereby help protect 
investors and the public interest by ensuring orderly and stable 
markets. As FINRA has noted, unsecured credit exposures that exist in 
the TBA market today can lead to financial losses by members. 
Permitting members to deal with counterparties in the TBA market 
without collecting margin can facilitate increased leverage by 
customers, thereby potentially posing a risk to FINRA members that 
extend credit and to the marketplace as a whole. FINRA believes that, 
in view of the growth in volume in the TBA market, the number of 
participants and the credit concerns that have been raised in recent 
years, particularly since the financial crises of 2008 and 2009, and in 
light of regulatory efforts to enhance risk controls in related 
markets, there is a need to establish FINRA rule requirements that will 
extend responsible practices to all members that participate in the TBA 
market. In preparing this rule filing, FINRA has undertaken economic 
analysis of the proposed rule change's potential impact and has made 
revisions to the proposed rule change, vis-[agrave]-vis the version as 
originally published in Regulatory Notice 14-02, so as to ameliorate 
the proposed rule change's impact on business activity and to address 
the concerns of smaller customers that do not pose material risk to the 
market as a whole. These revisions include among other things the 
establishment of an exception from the proposed margin requirements for 
any counterparty with gross open positions amounting to $2.5 million or 
less, subject to specified conditions, as well as specified exceptions 
to the proposed maintenance margin requirement and modifications to the 
de minimis transfer provisions.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. As discussed above, FINRA 
published Regulatory Notice 14-02 (January 2014) (the ``Notice'') to 
request comment \67\ on proposed amendments to FINRA Rule 4210 to 
establish margin requirements for transactions in the TBA market. FINRA 
noted that the proposal is informed by the TMPG best practices.
---------------------------------------------------------------------------

    \67\ All references to commenters are to commenters as listed in 
Exhibit 2b and as further discussed in Item II.C of this filing.
---------------------------------------------------------------------------

    The proposed rule change aims to reduce firm exposure to 
counterparty credit risk stemming from unsecured credit exposure that 
exists in the market today. A significant portion of the TBA market is 
non-centrally cleared, exposing parties extending credit in a 
transaction to significant counterparty risk between trade and 
settlement dates.\68\ To the extent that the proposed

[[Page 63610]]

rule change encourages better risk management practices, the loss given 
default by a counterparty with substantial positions in Covered Agency 
Transactions should decrease.
---------------------------------------------------------------------------

    \68\ See, e.g., TMPG Recommends Margining of Agency MBS 
Transactions to Reduce Counterparty and Systemic Risks, November 14, 
2012, available at: <http://www.newyorkfed.org/tmpg/marginambs.pdf;> 
see also TMPG Report.
---------------------------------------------------------------------------

    The unmargined positions in the TBA market may also raise systemic 
concerns. Were one or more counterparties to default, the 
interconnectedness and concentration in the TBA market may lead to 
potentially broadening losses and the possibility of substantial 
disruption to financial markets and participants.
    The repercussions of unmargined bilateral credit exposures were 
demonstrated in the Bear Stearns and Lehman Brothers failures in 2008. 
Since the financial crisis of 2008-09, margining regimes on bilateral 
credit transactions have been strengthened by regulatory bodies and 
adopted as a part of best practices by industry groups. For example, 
margining has become a widespread practice--especially after the 
adoption of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (the Dodd-Frank Act) \69\--in repurchase agreements, securities 
lending and derivatives markets.\70\ Thus, the lack of mandatory 
margining currently between dealers and their customers in the TBA 
market is out of step with regulatory developments in other markets 
with forward settlements. To address this gap, TMPG urged 
implementation of its margining recommendations by the end of 2013.\71\
---------------------------------------------------------------------------

    \69\ Public Law 111-203, 124 Stat. 1376 (2010).
    \70\ See Bank for International Settlements, Margin Requirements 
for Non-centrally Cleared Derivatives--Final Report Issued by the 
Basel Committee and IOSCO, September 2, 2013, available at: <http://www.bis.org/press/p130902.htm.
    \71\ See TMPG Releases Updates to Agency MBS Margining 
Recommendation, March 27, 2013, available at: <http://www.newyorkfed.org/tmpg/Agency%20MBS%20margining%20public%20announcement%2003-27-2013.pdf>.
---------------------------------------------------------------------------

    As discussed above, the proposed rule change would require member 
firms to collect, as to exempt accounts, mark to market margin and, as 
to non-exempt accounts, both mark to market margin and maintenance 
margin, as specified by the rule. Based on discussions with industry 
participants, FINRA expects that very few accounts would be treated as 
non-exempt accounts under the rule, and hence most would not be subject 
to the maintenance margin requirement.\72\ Therefore, the economic 
impact assessment as set forth below is centered on the impact of the 
proposed mark to market margin.
---------------------------------------------------------------------------

    \72\ As discussed above, the proposed rule permits members to 
treat mortgage bankers that use Covered Agency Transactions to hedge 
their pipeline of mortgage commitments as exempt accounts for 
purposes of the rule. Based on discussions with industry 
participants, FINRA believes that a great majority of mortgage 
bankers transact in the market to hedge their loans, and engage in 
very little speculative trading. While TRACE data do not identify 
the motivation for the trade to validate this statement, FINRA 
understands, based on discussions with market participants, that 
most Covered Agency Transactions will be excepted from the proposed 
maintenance margin requirement.
---------------------------------------------------------------------------

1. Economic Baseline
    To better understand the TBA market, FINRA analyzed data from two 
sources. The first dataset contains approximately 2.06 million TBA 
market transactions reported to TRACE by 223 broker-dealers from March 
1, 2012 to July 31, 2013. Of the 2.06 million trades, approximately 
1.10 million were interdealer trades, and 960,000 were dealer-to-
customer trades.\73\ Approximately 26.65% of the interdealer trades and 
28.87% of the dealer-to-customer trades were designated as dollar 
rolls, a funding mechanism in which there is a simultaneous sale and 
purchase of an Agency Pass-Through Mortgage-Backed Security with 
different settlement dates. The mean trade size was $19.33 million (the 
median was $19.34 million) and the median daily trading volume was $199 
billion, totaling $49.3 trillion annually. The mean difference between 
the trade and contractual settlement date was 29.5 days (the median was 
26 days).
---------------------------------------------------------------------------

    \73\ FINRA understands that dealer-to-customer trades in the 
TRACE data include a significant volume of transactions where the 
broker dealer is counterparty to the FRBNY. While such trades are 
not directly distinguishable within the data from other dealer-to-
customer trades in TRACE, the FRBNY publishes a list of its 
transactions available at: <http://www.newyorkfed.org/markets/ambs/ambs_schedule.html>. Based on this public information, FINRA 
estimates that the FRBNY transacted in 44 of the 2,677 distinct 
CUSIPs reported in TRACE, and accounted for 1.63% of the overall 
trades in the sample. However, FRBNY trades are quite large in size, 
and account for, on average, 24.80% of the daily volume for those 
CUSIPs on the days it trades.
---------------------------------------------------------------------------

    Based on FINRA's analysis of the transactions in the TRACE dataset, 
market participation by broker-dealers is highly concentrated, as the 
top ten broker-dealers account for more than approximately 77% of the 
dollar trading volume in the trades analyzed. These are primarily 
broker-dealers affiliated with large bank holding companies and include 
FINRA's ten largest members. Five are members of the TMPG.\74\ Non-
FINRA members are not required to report transactions in TRACE.
---------------------------------------------------------------------------

    \74\ Besides broker-dealers, TMPG members also include banks, 
buy-side firms, market utilities, foreign central banks, and others.
---------------------------------------------------------------------------

    FINRA understands that most interdealer transactions in the TBA 
market are subject to mark to market margin between members of the 
Mortgage-Backed Securities Division (``MBSD'') of the Fixed Income 
Clearing Corporation (``FICC,'' a subsidiary of the Depository Trust & 
Clearing Corporation (``DTCC'')), which acts as a central counterparty. 
Also, FINRA understands that, as of June, 2014, TMPG member firms had, 
on average, margining agreements with approximately 65% of their 
counterparties.\75\ FINRA understands that these firms' activities 
account for approximately 70% of transactions in the TBA market, and 
85% of notional trading volume. However, full adoption of mark to 
market margining practices by TMPG member firms is yet to be achieved. 
The lack of market-wide adoption of margin practices may put some 
market participants at a disadvantage, as they incur the costs 
associated with implementation of mark to market margin, while 
unmargined participants are able to transact at lower economic cost.
---------------------------------------------------------------------------

    \75\ See TMPG Meeting Minutes, June 25, 2014, available at: 
<http://www.newyorkfed.org/tmpg/june_minutes_2014.pdf>.
---------------------------------------------------------------------------

    To assess the likely impact of the proposal, FINRA estimated the 
daily margin requirement that broker-dealers and their customers would 
have had to post under the proposed requirement, using transaction data 
in the TBA market that are available from TRACE and were made available 
by a major clearing broker. FINRA notes that there are several 
limitations to the analysis due to data availability. Among these, the 
data are not granular enough to contain sufficient detail on 
contractual settlement terms, with respect to which the proposed rule 
change establishes parameters for specified exceptions to apply,\76\ or 
as to whether the trade is a specified financing trade (we note that, 
other than dollar roll trades, TRACE does not require a special code 
for round robin, repurchase or reverse repurchase, or financing 
trades), with respect to which specified exceptions under the proposal 
are not available.\77\

[[Page 63611]]

Therefore, FINRA notes that it is able to make only limited inference 
about the current level of trading that would be subject to the 
specified exceptions. Moreover, unique customer identity is not 
available in TRACE, meaning FINRA is unable to assess the activities in 
individual accounts to determine which, if any, exceptions might apply.
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    \76\ To recap, the rule's margin requirements would not apply to 
any counterparty that has gross open positions in Covered Agency 
Transactions amounting to $2.5 million or less in aggregate, if the 
original contractual settlement for all such transactions is in the 
month of the trade date for such transactions or in the month 
succeeding the trade date for such transactions and the counterparty 
regularly settles its Covered Agency Transactions DVP or for cash, 
subject to specified conditions. See proposed FINRA Rule 
4210(e)(2)(H)(ii)c.2. in Exhibit 5.
    \77\ To recap, the $2.5 million per counterparty exception and, 
with respect to non-exempt accounts, the proposed relief from 
maintenance margin, are not available to a counterparty that, in its 
transactions with the member, engages in dollar rolls or round robin 
trades, or that uses other financing techniques for its Covered 
Agency Transactions. See proposed FINRA Rule 4210(e)(2)(H)(ii)c.2. 
and Rule 4210(e)(2)(H)(ii)e. in Exhibit 5.
---------------------------------------------------------------------------

    The second dataset, containing TBA transactions, was provided to 
FINRA by a major clearing broker and contains 5,201 open positions as 
of May 30, 2014, in 375 customer accounts from ten introducing broker-
dealers. These data represent 4,211 open short positions and 990 open 
long positions. The mean sizes for long and short positions were $2.02 
million and $1.69 million, respectively, while the median open position 
size was $1.00 million for both long and short positions. In the 
sample, an account had a mean of 13.87 open positions (a median of 10) 
where the mean gross exposure was $24.31 million (a median of $12 
million). This dataset enables FINRA to make inferences about the 
potential margin obligations that individual customer accounts would 
incur, which is not possible using TRACE, since unique customer 
identifications are not available. As such, these customer accounts may 
provide better understanding of customer, particularly mortgage banker, 
activity. However, the data do not identify whether trades include a 
special financing technique, such as dollar roll or other financing 
techniques, or whether the trades are settled DVP or for cash.
2. Economic Impact
    The proposed rule change is expected to enhance sound risk 
management practices for all parties involved in the TBA market. 
Further, the standardization of margining practice should create a 
fairer environment for all market participants. Ultimately, the 
proposed rule change is expected to mitigate counterparty risk to 
protect both sides to a transaction from a potential default.
    As discussed earlier, FINRA has made revisions to the proposed rule 
change as published in the Notice to ameliorate the proposal's impact 
on business activity and to address the concerns of smaller customers 
that do not pose material risk to the market as a whole, in particular 
those engaging in non-margined, cash only business. After considering 
comments received in response to the Notice, as well as extensive 
discussions with industry participants and other regulators, FINRA's 
proposed revisions include among other things the establishment of an 
exception from the proposed margin requirements for any counterparty 
with gross open positions amounting to $2.5 million or less, subject to 
specified conditions, as well as specified exceptions to the 
maintenance margin requirement and modifications to the de minimis 
transfer provisions.
    FINRA understands that there will likely be direct and indirect 
costs of compliance associated with the proposed rule change as 
revised. Some of the direct costs are largely fixed in nature, and 
mostly include initial start-up costs, such as acquiring systems, 
software or technical support, and allocating staff resources to manage 
a margining regime. Direct costs would also entail developing necessary 
procedures and establishing monitoring mechanisms. FINRA anticipates 
that a significant cost of the proposed rule change is the commitment 
of capital to meet the margin requirements. The magnitude of this cost 
depends on the trading activity of each party, each party's access to 
capital, and each party's having the capital reserves necessary to 
fulfill margin obligations. FINRA's experience with supervision of risk 
controls at larger firms suggests that at present substantially all 
such firms have systems in place for managing the margining of Covered 
Agency Transactions, and thus the system costs of the proposed rule 
change would result from extending the systems to the margining of 
transactions covered by the proposed rule change for those firms. In 
addition, as discussed above, FINRA understands that TMPG members at 
present require a substantial portion of their counterparties to post 
mark to market margin, implying that those firms should already have 
the systems and staff to facilitate margining practices and manage 
capital allocated. Therefore, FINRA believes that most start-up costs 
are likely to be incurred by smaller market participants that might 
have to establish the necessary systems for the first time.
    FINRA understands that the margin requirements for TBA market 
transactions may also impose indirect costs. These costs may result 
from changed market behavior of some participants. Some parties who 
currently transact in the TBA market may choose to withdraw from or 
limit their participation in the TBA market. Reduced participation may 
lead to decreased liquidity in the market for certain issues or 
settlement periods, potentially restricting access to end users and 
increasing costs in the mortgage market. These market-wide impacts on 
liquidity would be limited if exiting market participants represent a 
small proportion of market transactions while market participants that 
choose to remain, or new participants that choose to enter the market, 
increase their activities and thereby offset the impact of participants 
that exit the market.
    The potential impacts of the proposed rule change on mortgage 
bankers, broker-dealers, investors and consumers of mortgages are 
discussed in turn below.
(a) Mortgage Bankers
    Based on discussions with market participants and other regulators, 
FINRA understands that mortgage bankers are among the largest group of 
customers in the TBA market--following institutional buyers--as the 
forward-settling nature of MBS transactions provides mortgage bankers 
with the opportunity to lock in interest rates as new loans are 
originated. These transactions give mortgage lenders an opportunity to 
hedge their exposures to interest rate risk between the time of 
origination and the sale of the home loan in the secondary market.
    To estimate the potential burden on mortgage bankers, FINRA 
analyzed the data described above that was provided by a major clearing 
broker. As discussed earlier, the proposed rule change establishes a 
$250,000 de minimis transfer amount below which the member need not 
collect margin, subject to specified conditions,\78\ and establishes an 
exception from the proposed margin requirements for any counterparty 
with gross open positions amounting to $2.5 million or less, subject to 
specified conditions.\79\ FINRA believes that it may reasonably 
estimate the trades that would be subject to the $2.5 million per 
counterparty exception in the sample even though information describing 
the specified contractual settlement terms that are elements of the 
exception are not available.\80\
---------------------------------------------------------------------------

    \78\ See proposed FINRA Rule 4210(e)(2)(H)(ii)f. in Exhibit 5.
    \79\ See proposed FINRA Rule 4210(e)(2)(H)(ii)c.2. in Exhibit 5.
    \80\ For purposes of this analysis, FINRA assumes that these 
positions include no financing trades, and thus all aggregate 
positions with a single counterparty under the $2.5 million 
threshold would be excepted from the mark to market margining 
requirements. FINRA considers this assumption as reasonable because 
FINRA understands from subject matter experts that mortgage bankers 
do not traditionally employ TBA contracts for financing. Further, 
this assumption does not materially affect estimates of margin 
obligation under the rule, since only a few positions would have to 
post margin due to the $250,000 de minimis transfer amount 
exception.

---------------------------------------------------------------------------

[[Page 63612]]

    For these data, FINRA finds that only nine of the 375 accounts 
would have an obligation to post margin on a total of 35 days for their 
open positions as of May 30, 2014 if subject to the proposed rule 
change. By this analysis, less than 0.01% of the 14,001 account-day 
combinations in the sample would be required to provide margin on their 
TBA positions. For those accounts that would be required to post margin 
on any day during the period studied, FINRA estimates the average 
(median) net daily margin to be posted on these 35 days to be $595,191 
($384,180) for an average (median) gross exposure of $246,901,235 
($253,111,500).\81\ The ratio of the estimated margin to the gross 
exposure ranges between 0.06% and 4.34% and has a mean (median) of 
0.54% (0.29%). The gross positions across all days studied for the 
remaining 366 accounts result in an estimated mark to market obligation 
that is less than the de minimis transfer amount, and hence no 
obligations would be incurred.
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    \81\ For a given customer account at a broker-dealer, margin 
(assuming the application of mark to market margin) is computed for 
each net long or short position, by CUSIP, in Covered Agency 
Transactions by multiplying the net long or short contract amount by 
the daily price change. The margin for all Covered Agency 
Transactions is the sum of the margin required on each net long or 
net short position. On the day following the start of the contract, 
the price change is measured as the difference between the original 
contract price and the end of day closing price.
---------------------------------------------------------------------------

    To the extent that the sample considered in this analysis is 
representative, it appears that mortgage bankers have smaller gross 
exposures, on average, and more positions that would generate margin 
obligations that are less than the $250,000 de minimis transfer amount. 
Accordingly, FINRA expects that the majority of the mortgage bankers' 
positions would be excepted from the proposed margin requirements.
    The Notice invited commenters to provide information concerning the 
potential costs and burdens that the amendments could impose. As 
discussed earlier, the proposed rule change would permit members to 
treat mortgage bankers that use Covered Agency Transactions to hedge 
their pipeline of mortgage commitments as exempt accounts. Members 
would be required to adopt procedures to monitor the mortgage banker's 
pipeline of mortgage loan commitments to assess whether the Covered 
Agency Transactions are being used for hedging purposes.\82\ Some 
commenters in response to the Notice expressed concern that this would 
harm the ability of mortgage bankers to compete. Commenters suggested 
that mortgage bankers should be permitted flexibility to negotiate 
their margin obligations, that they should be treated as exempt 
accounts regardless of the extent to which they are hedging, that 
monitoring hedging by mortgage bankers would be too burdensome, that 
the costs of compliance would drive mortgage bankers to shift to non-
FINRA member counterparties, that margin requirements should be 
modified to reflect the costs of hedging, and that the $250,000 de 
minimis transfer threshold would be too restrictive.\83\
---------------------------------------------------------------------------

    \82\ See proposed FINRA Rule 4210(e)(2)(H)(ii)d. and Rule 
4210.02 in Exhibit 5.
    \83\ Baum, BB&T, BDA, Brean, Duncan-Williams, MBA, MountainView, 
Shearman and SIFMA.
---------------------------------------------------------------------------

    In response, FINRA understands the importance of the role of 
mortgage bankers in the mortgage finance market and for that reason 
designed the proposed rule change to include the provision for members 
to treat mortgage bankers as exempt accounts with respect to their 
hedging. However, FINRA believes that it would work against the rule's 
overall purposes to create a pathway for a mortgage banker that is not 
otherwise an exempt account to engage in speculation in the TBA market, 
which could create incentives leading to distortions in trading 
behavior. In the presence of such incentives, FINRA believes it 
reasonable to expect a party to more frequently enter into transactions 
that are primarily speculative in nature. In fact, where other market 
participants would be constrained by the rule, these types of 
transactions might be more profitable than they are today. As noted 
earlier, the proposed rule change accommodates the business of mortgage 
bankers by providing exempt account treatment to the extent the member 
has conducted sufficient due diligence to determine that the mortgage 
banker is hedging its pipeline of mortgage production. Again, as 
discussed earlier, FINRA notes that the current Interpretations under 
Rule 4210 already contemplate that members evaluate the loan servicing 
portfolios of counterparties that are being treated as exempt 
accounts.\84\
---------------------------------------------------------------------------

    \84\ See note 54 supra.
---------------------------------------------------------------------------

(b) Broker-Dealers
    FINRA believes that currently broker-dealers are the main providers 
of liquidity in the TBA market and their trading behavior impacts 
nearly all market participants. While the direct costs of margin 
requirements will be similar to those of mortgage bankers, the initial 
costs are likely much lower in aggregate as many of these firms have 
systems in place to manage margining practices.
    FINRA understands that, currently, there are 153 members of MBSD 
that already follow mark to market margining procedures required by 
MBSD. Of those 153 firms, 38 are FINRA members, including the ten most 
active broker-dealers in the TBA market, who collectively account for 
approximately 77% of the dollar trading volume reported in TRACE. FINRA 
believes that start-up costs will likely be incurred by smaller and 
regional members that are not MBSD members. Some of these smaller and 
regional firms may already be in the process of establishing in-house 
solutions or outsourcing margining management in order to follow the 
TMPG recommendations.
    FINRA computed bilateral interdealer TBA exposures using 
approximately 1.10 million TBA trades between March 1, 2012 and July 
31, 2013 reported to TRACE and estimated the mark to market margin that 
counterparties would have been required to post if the proposed margin 
requirements existed during the sample period. The mean (median) 
interdealer trade size is $33.98 million ($5.31 million) and the mean 
(median) difference between the trade date and contractual settlement 
date is 25.2 days (20 days).\85\ Estimated margin obligations below the 
$250,000 de minimis transfer amount account for approximately 85.68% of 
all transactions. This result suggests that a great majority of the 
aggregate gross exposures held by broker-dealers could be excepted from 
the proposed margin requirements, subject to specified conditions.\86\ 
As expected, broker-dealers with relatively smaller aggregate exposures 
in the TBA market have a relatively larger share of their transactions 
that would be subject to the de minimis transfer exception.\87\
---------------------------------------------------------------------------

    \85\ For dollar roll transactions, the mean trade size is $76.56 
million (a median of $21.01 million), whereas, for non-financing 
transactions, the mean trade size is $20.28 million (a median of 
$5.18 million).
    \86\ FINRA understands that a significant portion of the 
interdealer trades go through MBSD.
    \87\ For purposes of the analysis, FINRA sorted broker-dealers 
in descending order based on their aggregate positions and analyzed 
them in two subsamples. On average, approximately 99% of the 
aggregate gross exposures of smaller broker-dealers (the half with 
smaller aggregate positions) would result in a margin obligation 
below the $250,000 threshold.
---------------------------------------------------------------------------

    TRACE has a specific flag that identifies certain transactions as 
dollar rolls, a type of financing trade to which specified exceptions 
under the proposed rule change are not available. But dollar rolls are 
not the only type of financing

[[Page 63613]]

trades specified under the proposed rule. Therefore, the analysis above 
potentially underestimates the number and dollar value of transactions 
that would be subject to both maintenance and mark to market margin if 
held in non-exempt accounts under the proposed rule.
    Using the same method employed above,\88\ FINRA estimates that 
approximately half of the broker-dealers transacting in the TBA market 
would not have to post mark to market margin throughout the sample 
period due to the de minimis transfer amount exception. Of the 
remaining broker-dealers, 38% would have to post margin on less than 
10% of the days for which they hold non-zero aggregate gross exposures. 
The remaining 12% would have to post margin on more than 10% of the 
days for which they hold non-zero aggregate gross exposure, although 
none of these broker-dealers would have had a mark to market margin 
requirement for more than 37.5% of the days for which they held non-
zero aggregate gross exposures. In the sample of broker-dealers that 
would incur margin obligation, a broker-dealer would be required to 
post an average (median) daily margin of $84,748 ($0) for an average 
(median) gross exposure of $1.29 billion ($68.68 million). When the 
analysis is limited to the days that margin obligations would be 
incurred under the rule, the average (median) margin obligation to be 
posted to a counterparty is estimated to be $1.14 million ($591,952) 
for an average (median) exposure of $5.71 billion ($2.07 billion) and 
accounts for approximately 0.02% of the aggregate gross exposure value. 
Based on the entire sample, FINRA estimates that a broker-dealer would 
incur an average (median) monthly margin obligation of $24,235,867 ($0) 
for an average (median) aggregate gross counterparty exposure of 
approximately $16.47 billion ($239 million). When the analysis is 
limited to those broker-dealers that would have incurred a margin 
obligation under the rule in the sample period, the average (median) 
monthly margin obligation would be approximately $33.76 million ($1.29 
million) for an average (median) aggregate gross exposure of $22 
billion ($777 million). The sizeable differences between average and 
median values reported here are due to a few large broker-dealer 
positions in the sample.
---------------------------------------------------------------------------

    \88\ See note 81 supra for the margin calculation methodology.
---------------------------------------------------------------------------

    In response to the Notice, some commenters expressed concern that 
the amendments would place small and mid-sized broker-dealers at a 
disadvantage. Specifically, commenters suggested that smaller firms 
have limited resources to meet the anticipated compliance costs, that 
costs would fall disproportionately on smaller firms that are active in 
the MBS and CMO markets, that business would shift to non-FINRA 
members, that the proposal unfairly favors larger or ``too big to 
fail'' firms with easier access to resources, that the proposal would 
result in consolidation of the industry, that the system and 
infrastructure costs faced by smaller firms would be prohibitive, and 
that they have never observed a degradation in value of the products 
between trade date and settlement date.\89\ Some commenters suggested 
such costs as: Up to $500 per account for compliance; an outlay of 
$600,000 to purchase necessary software; payments of up to $100,000 in 
annual fees; payments of up to $400,000 in outsourcing costs; total 
costs of up to $1 million per year; or, according to one commenter, 
system costs as high as $15 million per year.\90\
---------------------------------------------------------------------------

    \89\ Ambassador, Baird, BB&T, BDA, Brean, Clarke, Duncan-
Williams, FirstSouthwest, Mischler, Pershing, Shearman, SIFMA and 
Simmons.
    \90\ Baird, Baum, BDA, Clarke and Sandler.
---------------------------------------------------------------------------

    FINRA is sensitive to the concerns expressed by firms. However, as 
discussed earlier, FINRA believes that to assert that no degradation 
has been observed in the TBA market (other than that associated with 
the collapse of Lehman) does not of itself demonstrate that there is no 
credit risk in this market. TBA market participants have exposure to 
significant counterparty credit risk, defined as the potential failure 
of the counterparty to meet its financial obligations.\91\ The lack of 
margining and proper risk management can lead to a buildup of 
significant counterparty exposure, which can create correlated defaults 
in the case of a systemic event. While the implementation of the 
proposed requirements creates a regulatory cost, incurred by 
establishing or updating systems for the management of margin accounts, 
the benefits should accrue over time and help maintain a properly 
functioning retail mortgage market even in stressed market conditions. 
FINRA believes that this, in turn, should help create a more stable 
business environment that should benefit all market participants.
---------------------------------------------------------------------------

    \91\ Counterparty credit risk increases axiomatically during 
volatile market conditions, as recently experienced in the TBA 
market in the summer of 2011.
---------------------------------------------------------------------------

    With respect to the specific cost amounts suggested by commenters, 
FINRA notes that, though compliance with the proposed amendments will 
involve regulatory costs, as noted above, most of these would be 
incurred as variable costs as margin obligations or fixed startup costs 
for purchase or upgrading of software. FINRA believes, based on 
discussions with providers, that the proffered estimates by commenters 
are plausible but fall towards the higher end of the cost range for 
building, upgrading or outsourcing the necessary systems. Further, 
FINRA believes that, particularly for smaller firms, the proposed 
$250,000 de minimis amount and $2.5 million per counterparty exception 
should serve to mitigate these costs.
(c) Retail Customers and Consumers
    In response to the Notice, some commenters expressed concern that 
the amendments would result in higher costs to retail customers who 
participate in the MBS and CMO market. Commenters suggested that 
recordkeeping costs for investors with exposures to these securities 
would increase significantly; these increased costs would likely 
disincline them to participate in the market; and that those who wanted 
to maintain their exposure would face liquidity constraints in posting 
margin.\92\ On the other hand, one commenter did not agree that impact 
on retail customers would be significant as they rarely trade in the 
TBA market on a forward-settlement basis.\93\
---------------------------------------------------------------------------

    \92\ Ambassador, Baum, BDA and Coastal.
    \93\ BB&T.
---------------------------------------------------------------------------

    In response, FINRA notes that the purpose of the margin rules is to 
protect the market participants from losses that could stem from 
increased volatility and the ripple effects of failures. This is a by-
product that provides direct protection to the customers of 
members.\94\ Margin requirements protect other customers of a member 
firm from the speculation and losses of other large customers.
---------------------------------------------------------------------------

    \94\ See discussion of the original objectives of margin 
regulation in Jules I. Bogen & Herman Edward Krooss, Security 
Credit: Its Economic Role and Regulation 88-89 (Englewood Cliffs, NJ 
Prentice-Hall 1960).
---------------------------------------------------------------------------

    Other commenters drew attention to potential negative impacts to 
the consumer market, suggesting that the amendments would chill the 
mortgage market and impose liquidity constraints because mortgage 
bankers would face higher costs that would be passed on to consumers of 
mortgages.\95\ However, FINRA notes that there is mixed evidence 
regarding the impact of margin requirements on trading volume and 
market liquidity. For instance, in one of the earlier studies, 
researchers found that margin requirements negatively

[[Page 63614]]

affect trading volume in the futures market, a finding consistent with 
expectations from theory.\96\ More recently, other researchers have 
provided evidence from a foreign derivatives market that margin has no 
impact on trading volume.\97\ Thus, claims that the margin requirement 
will have a negative impact on market activity, and hence on mortgage 
rates, are not fully supported by empirical findings in other similar 
markets.
---------------------------------------------------------------------------

    \95\ MBA and MetLife.
    \96\ See Hans R. Dutt & Ira L. Wein, Revisiting the Empirical 
Estimation of the Effect of Margin Changes on Futures Trading 
Volume, 23 The Journal of Futures Markets, (Issue 6) 561-76 (2003).
    \97\ See Kate Phylaktis & Antonis Aristidou, Margin Changes and 
Futures Trading Activity: A New Approach, 19 European Financial 
Management, (Issue 1) 45-71 (2013).
---------------------------------------------------------------------------

3. Interest Rate Volatility and Margin Requirements
    The historically low and stable interest rates that the United 
States has experienced over the last several years might lead FINRA to 
underestimate the margin that market participants would have to post in 
a more volatile market, and thus underestimate the impact of the rule 
proposal.
    To assess the likely impact of the rule on the margin obligation in 
a more volatile interest rate environment, FINRA has estimated the 
volatility \98\ in the TBA market across two periods with different 
interest rate characteristics, relying on Deutsche Bank's TBA 
index.\99\ The first period that FINRA analyzed is from July 1, 2012, 
to June 30, 2014. The average yield on the 10-year U.S. Treasury note 
in this period was measured at 2.25%. The second period FINRA analyzed 
is from June 1, 2004 to May 31, 2006. This second period was marked by 
a substantially higher average 10-year U.S. Treasury yield, measured at 
4.14%. However, FINRA estimates the volatility in the TBA index to have 
been effectively the same, at 3.95%, in both periods. FINRA believes 
this analysis suggests that volatility in the TBA market is not 
expected to significantly increase if interest rates increase in the 
future.\100\ Therefore, a margin obligation for broker-dealers of 
approximately 2% of the contract value over the life of a TBA market 
security appears to be a reasonable estimate.
---------------------------------------------------------------------------

    \98\ For purposes of this section, volatility refers to the 
standard deviation, statistically computed, of the distribution of a 
dataset.
    \99\ For further information, see DB US Mortgage TBA Index, 
available at: <https://index.db.com/servlet/MBSHome>.
    \100\ Alternatively, FINRA compared the first period with 
another, even more volatile interest rate environment, from June 1, 
1999 to May 31, 2000, during which the average yield on the 10-year 
Treasury note was 6.14%. FINRA estimates that the volatility of the 
TBA index in that period was 4.30%, suggesting that volatility in 
the TBA market would not be expected to significantly increase in a 
more volatile interest rate environment.
---------------------------------------------------------------------------

4. Indirect Costs of the Proposed Margin Requirements
    There are several provisions in the proposal that may potentially 
alter market participants' behavior in order to minimize the 
anticipated costs associated with the proposed rule. Such changes in 
behavior could potentially make trading more difficult for some 
settlement periods or contract sizes.
    As proposed in the Notice, the proposed rule change provides a 
$250,000 de minimis transfer amount below which the member need not 
collect margin, subject to specified conditions. FINRA notes that this 
might create an incentive to trade contract sizes smaller than the 
threshold amount by splitting large contracts into contracts with 
smaller sizes. This behavior can potentially make larger contracts 
harder to trade, and hence decrease liquidity in such trades. FINRA 
does not anticipate that such a reaction would impact the total 
liquidity in the TBA market. Rather, the impact could manifest itself 
in increased transaction costs for trading a larger position in smaller 
lots.
    With respect to the $2.5 million per counterparty exception, FINRA 
notes that the parameters for the settlement periods specified in the 
proposed rule may create an incentive to time trading (so that the 
original contractual settlement is in the month of the trade date or in 
the month succeeding the trade date, as provided in the rule) and 
thereby alter trading patterns in order to avoid margin obligations. 
For example, FINRA identified 582,435 trades from TRACE where the 
difference between the settlement date and the trade date is longer 
than 30 days but less than 61 days. Assuming that these trades meet all 
other conditions specified in the rule, approximately 78% of them would 
qualify for the $2.5 million per counterparty by virtue of settling 
within the specified timeframes. In the presence of the proposed rule, 
FINRA anticipates that some traders might alter the timing of their 
trades, others might incur higher costs to achieve the same economic 
exposure, and others yet might choose not to enter into trades with 
those costs.
    As discussed further in Item II.C of this filing, some commenters 
in response to the Notice suggested that market participants, in 
response to the costs imposed by the rule, might shift their trades to 
other counterparties that are not required by regulation to collect 
margin.\101\ As discussed above, there are significant efforts among 
TMPG institutions to impose mark to market margin on these 
transactions. Based on discussions with market participants, FINRA 
understands, as discussed earlier, that members of the TMPG have begun 
imposing mark to market margin requirements on some of their clients in 
order to adhere to the best practices suggested by the group. However, 
FINRA understands, based on the TMPG Report, that the daily average 
customer-to-dealer transaction volume is around $100 billion, of which 
approximately two-thirds is unmargined.\102\ FINRA also understands 
that there is a small number of financial institutions that currently 
deal in the TBA market but are not broker-dealers or members of TMPG. 
FINRA anticipates that there would be limited scope for such 
institutions to participate in the TBA market on a large scale without 
facing a counterparty that would require margin. FINRA will recommend 
to the agencies supervising such dealers that they similarly apply 
margin requirements.
---------------------------------------------------------------------------

    \101\ Ambassador, Baird, BB&T, BDA, Brean, Clarke, Duncan-
Williams, FirstSouthwest, Mischler, Pershing, Shearman, SIFMA and 
Simmons.
    \102\ See note 10 supra.
---------------------------------------------------------------------------

5. Alternatives Considered
    FINRA considered a number of alternatives in developing the 
proposed rule change. As discussed further in Item II.C of this filing, 
FINRA considered, among other things, alternative formulations with 
respect to concentration limits, excepting certain product types from 
the margin requirements, excepting trades with longer settlement cycles 
from the margin requirements, modifications to the de minimis transfer 
provisions, modifications to the proposed risk limit determination 
provisions and establishing exceptions for mortgage brokers from some 
or all provisions of the proposed rule. For example, FINRA considered 
establishing an exception from the proposed margin requirements for 
transactions settling within an extended settlement cycle. However, 
FINRA has been advised by market participants and other regulators, 
including the staff of the FRBNY, that such an exception could 
potentially result in clustering of trades around the specified 
settlement cycles in an effort to avoid margin expenses. Such a 
practice would fundamentally undermine FINRA's goal of improving 
counterparty risk management. Accordingly, as discussed further in Item 
II.C, FINRA determined to retain the specified settlement cycles in the

[[Page 63615]]

proposed definition of Covered Agency Transactions as set forth in the 
Notice and, as an alternative, to establish the $2.5 million per 
counterparty exception.
    FINRA also evaluated various options for the proposed maintenance 
margin requirement. FINRA analyzed maintenance margin requirements 
imposed by regulators for other forward settling contracts. These 
regulators have adopted margin requirements that reflect the risk in 
these products, while balancing the cost of the margin requirements. 
Based on this analysis, as discussed above, FINRA has determined to 
propose 2% as the appropriate maintenance margin rate, as specified in 
the proposed rule.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 14-02 (January 2014) (the ``Notice''). Twenty-nine comments were 
received in response to the Notice. A copy of the Notice is attached as 
Exhibit 2a. A list of commenters \103\ is attached as Exhibit 2b. 
Copies of the comment letters received in response to the Notice are 
attached as Exhibit 2c. Detailed discussion of the comments received on 
the proposed rule change, and FINRA's response, follows below. A number 
of the comments that speak to the economic impact of the proposed rule 
change are addressed in Item II.B of this filing.
---------------------------------------------------------------------------

    \103\ All references to commenters are to the commenters as 
listed in Exhibit 2b.
---------------------------------------------------------------------------

1. Scope of Products
    As proposed in the Notice, the rule change would apply to: (1) TBA 
transactions,\104\ inclusive of ARM transactions, for which the 
difference between the trade date and contractual settlement date is 
greater than one business day; (2) Specified Pool Transactions \105\ 
for which the difference between the trade date and contractual 
settlement date is greater than one business day; and (3) transactions 
in CMOs,\106\ issued in conformity with a program of an Agency or GSE, 
for which the difference between the trade date and contractual 
settlement date is greater than three business days.\107\ As discussed 
in the Notice and in Item II.A of this filing, these product types and 
settlement cycles are congruent with the recommendations of the TMPG.
---------------------------------------------------------------------------

    \104\ See note 3 supra.
    \105\ See note 4 supra.
    \106\ See note 5 supra.
    \107\ As proposed in the Notice, the products covered by the 
proposed rule change are defined collectively as ``Covered Agency 
Securities.'' FINRA has revised this term to read ``Covered Agency 
Transactions,'' which FINRA believes is clearer and more consistent 
with the proposal's intent to reach forward settling transactions, 
as discussed further below.
---------------------------------------------------------------------------

    Commenters expressed concern that the scope of products proposed to 
be covered by the rule change is overbroad, that the TBA market has not 
historically posed significant risk and that regulation in this area is 
not necessary.\108\ Commenters suggested that imposing margin 
requirements on these types of products would have detrimental effects 
on various market participants, in particular smaller member firms, 
mortgage bankers, investors and consumers of mortgages, and that these 
detrimental effects would outweigh the regulatory benefit.\109\ Many 
commenters suggested FINRA should ameliorate the proposal's impact by 
excluding some of the product types altogether, or by specifying a 
longer excepted settlement cycle than the proposed one business day 
with respect to TBA transactions and Specified Pool Transactions and 
three business days with respect to CMOs.\110\ For example, some 
commenters suggested that by imposing requirements solely on TBA 
transactions, and eliminating Specified Pool Transactions, ARMs or CMOs 
from the proposal, FINRA would be able to address most of the risk that 
exists in the TBA market overall while at the same time avoid causing 
undue disruption.\111\ Some commenters also recommended that, if FINRA 
determines to impose margin on the TBA market, then FINRA should 
specify, for all products covered by the proposal, three or five-day 
settlement cycles. Commenters suggested that margining for settlement 
cycles of less than three days would be too burdensome for smaller 
firms in particular, is unnecessary as it leads to margining of cash 
settled transactions, and does not truly address forward settling 
transactions.\112\
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    \108\ Ambassador, BDA, Coastal, Duncan-Williams, FirstSouthwest, 
MetLife, Mischler, PIMCO and Vining Sparks.
    \109\ See Items II.B.2(a) through II.B.2(c) of this filing for 
discussion of the proposal's economic impact on mortgage bankers, 
broker-dealers and retail customers and consumers.
    \110\ Ambassador, Baird, Baum, BB&T, BDA, Coastal, Crescent, 
FirstSouthwest, MBA, MetLife, Pershing, PIMCO and SIFMA.
    \111\ Ambassador, Baum, BDA, Coastal, FirstSouthwest and SIFMA.
    \112\ Baird, BB&T, BDA, FirstSouthwest, ICI, MetLife, PIMCO and 
SIFMA.
---------------------------------------------------------------------------

    As discussed earlier, in response to commenter concerns, FINRA has 
engaged in extensive discussions with market participants and other 
supervisors, including staff of the FRBNY. To ameliorate potential 
burdens on members, FINRA considered, among other things, various 
options for narrowing the covered product types. The FRBNY staff has 
advised FINRA that, such modifications to the proposal would result in 
a mismatch between FINRA standards and the TMPG best practices, thereby 
resulting in perverse incentives in favor of non-margined products and 
leading to distortions of trading behavior.
    FINRA is proposing, as an alternative approach in response to 
commenter concerns, to establish an exception from the proposed margin 
requirements that would apply to any counterparty that has gross open 
positions \113\ in Covered Agency Transactions amounting to $2.5 
million or less in aggregate, if (1) the original contractual 
settlement for all the counterparty's 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 and (2) the 
counterparty regularly settles its Covered Agency Transactions on a DVP 
basis or for cash.\114\ This exception would not apply to a 
counterparty that, in its transactions with the member, engages in 
dollar rolls, as defined in FINRA Rule 6710(z),\115\ or round robin 
trades,\116\ or that uses other financing techniques for its Covered 
Agency Transactions.\117\
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    \113\ The proposal defines ``gross open positions'' to mean, 
with respect to Covered Agency Transactions, the amount of the 
absolute dollar value of all contracts entered into by a 
counterparty, in all CUSIPs. The amount must be computed net of any 
settled position of the counterparty held at the member and 
deliverable under one or more of the counterparty's contracts with 
the member and which the counterparty intends to deliver.
    \114\ See proposed FINRA Rule 4210(e)(2)(H)(ii)c.2. in Exhibit 
5.
    \115\ See note 48 supra.
    \116\ The term ``round robin'' trade is defined in proposed 
FINRA Rule 4210(e)(2)(H)(i)i. to mean any transaction or 
transactions resulting in equal and offsetting positions by one 
customer with two separate dealers for the purpose of eliminating a 
turnaround delivery obligation by the customer.
    \117\ FINRA believes that the exception would not be appropriate 
for dollar rolls, round robin trades or trades involving other 
financing techniques for the specified positions given that these 
transactions generate the types of exposure that the rule is meant 
to address.
---------------------------------------------------------------------------

    Though FINRA shares commenters' concerns regarding the potential 
effects of margin in the TBA market, FINRA believes that margin is 
needed because the unsecured credit exposures that exist in the TBA 
market today can lead to financial losses by members. Permitting 
counterparties to participate in the TBA market without posting margin 
can facilitate increased leverage by customers, thereby posing risk to 
the

[[Page 63616]]

member extending credit and to the marketplace and potentially 
imposing, in economic terms, negative externalities on the financial 
system in the event of failure. While the volatility in the TBA market 
seems to respond only slightly to the volatility in the U.S. interest 
rate environment (proxied by the 10-year U.S. Treasury yield),\118\ 
FINRA notes that price movements in the TBA market over the past five 
years suggest that the market still has potential for a significant 
amount of volatility.\119\ Accordingly, FINRA believes it would 
undermine the effectiveness of the proposal to modify the product types 
to which the proposal would apply or to modify the applicable 
settlement cycles. However, FINRA does not intend the proposal to 
unnecessarily burden the normal business activity of market 
participants, or to otherwise alter market participants' trading 
decisions. To that end, FINRA believes it is appropriate to establish 
the specified $2.5 million per counterparty exception. Based on 
discussions with market participants and analysis of selected 
data,\120\ FINRA believes that this should significantly reduce 
potential burdens on members by removing from the proposal's scope 
smaller intermediaries that do not pose systemic risk.\121\ Further, as 
discussed earlier, because many such intermediaries deal with smaller 
counterparties, this will reduce the burdens that would be associated 
with applying the new margin requirements for Covered Agency 
Transactions.
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    \118\ See Item II.B.3 of this filing.
    \119\ To assess volatility in the TBA market, FINRA looked to 
several sources of information, including: (i) five-day price 
changes over the previous five years based on selected Deutsche Bank 
indices designed to track the TBA market (five days corresponds with 
the proposed settlement cycle and is consistent with the payment 
period under Regulation T); (ii) margin requirements for interest 
rate contracts traded on the Chicago Board of Trade (``CBOT'') and 
cleared at Chicago Mercantile Exchange (``CME''); and (iii) margin 
requirements for repurchase contracts.
    \120\ Based on analyses of TRAC data, FINRA found that about 30 
percent of customer trades over selected periods were in amounts 
under $2.5 million. These trades amounted to approximately half of 
one percent of the total dollar volume of activity in the TBA market 
over the selected periods. See also discussion in Item II.B. of this 
filing.
    \121\ FINRA believes that transactions falling within the 
proposed $2.5 million per counterparty exception do not pose 
systemic risk given that, as noted above, such transactions are a 
small portion of the total dollar volume of activity in the TBA 
market. However, similar to de minimis transfer amounts as discussed 
further below, FINRA has revised the proposed rule change to clarify 
that amounts subject to the exception would count toward a member's 
concentration limits as set forth under paragraph (e)(2)(I) of the 
rule as redesignated. See Item II.C.6 of this filing.
---------------------------------------------------------------------------

2. Maintenance Margin
    As proposed in the Notice, for transactions with non-exempt 
accounts, members would be required to collect mark to market margin 
and to collect maintenance margin equal to 2% of the market value of 
the securities.
    Commenters expressed concerns about the proposed maintenance margin 
requirement. Some suggested that imposing a maintenance margin 
requirement would place FINRA members at a competitive disadvantage 
because investors, rather than bear these types of disproportionate 
costs, would prefer to leave the TBA market entirely or would take 
their business to banks or other entities not subject to the 
requirement.\122\ Commenters suggested that a maintenance margin 
requirement is unnecessary because the aggregate size of the TBA market 
makes the products easier to liquidate and defaulted positions easier 
to replace, that there is no precedent for maintenance margin in the 
TBA market, and that the proposed requirement is not within the scope 
of the TMPG's recommendations.\123\ Some commenters suggested that 
maintenance margin would not provide significant protection and that 
the proposal should establish various tiered approaches, such as 
thresholds based on transaction amounts or permitting the members to 
negotiate the margin based on their risk assessments.\124\ On the other 
hand, some commenters suggested they support or at least do not object 
to maintenance margin at specified percentages of market value or for 
some of the products.\125\
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    \122\ AIA, Clarke, Credit Suisse, Shearman, SIFMA and SIFMA AMG.
    \123\ AMG, BDA, Clarke, FIF, FirstSouthwest, Sandler and SIFMA.
    \124\ Baird, BB&T, Clarke, Duncan-Williams, Shearman and Vining 
Sparks.
    \125\ MountainView and Pershing.
---------------------------------------------------------------------------

    In response to commenter concerns, FINRA is revising the proposed 
maintenance margin requirement for non-exempt accounts. Specifically, 
the member would be required to collect maintenance margin equal to two 
percent of the contract \126\ value of the net long or net short 
position, by CUSIP, with the counterparty.\127\ However, no maintenance 
margin would be required if the original contractual settlement for the 
Covered Agency Transaction is in the month of the trade date for such 
transaction or in the month succeeding the trade date for such 
transaction and the customer regularly settles its Covered Agency 
Transactions on a DVP basis or for cash. Similar to the proposed $2.5 
million per counterparty exception, the exception from the required 
maintenance margin would not apply to a non-exempt account that, in its 
transactions with the member, engages in dollar rolls, as defined in 
FINRA Rule 6710(z), or round robin trades, or that uses other financing 
techniques for its Covered Agency Transactions.
---------------------------------------------------------------------------

    \126\ As proposed in the Notice, the rule would specify ``market 
value.'' FINRA has replaced ``market value'' with ``contract value'' 
as more in keeping with industry usage.
    \127\ See the definition of ``maintenance margin'' under 
proposed FINRA Rule 4210(e)(2)(H)(i)f. and the treatment of non-
exempt accounts pursuant to proposed FINRA Rule 4210(e)(2)(H)(ii)e. 
in Exhibit 5.
---------------------------------------------------------------------------

    The TMPG recommendations do not include maintenance margin. FINRA 
understands, however, that the TMPG does not oppose the proposed 
maintenance margin requirements. Commenters opposed maintenance margin 
because of its impact on non-exempt accounts.\128\ However, FINRA 
believes the proposed two percent amount aligns with the potential risk 
in this area. FINRA's analysis of selected indices designed to track 
the TBA market over the past five years identified instances of price 
differentials of approximately two percent over a five-day period.\129\ 
Further, FINRA notes that two percent aligns with the standard haircut 
for reverse repo transactions in FNMA, GNMA and FHLMC mortgage pass-
through certificates \130\ and approximates the amount charged by MBSD. 
The two percent amount also approximates the initial margin charged by 
the CME Group for corresponding products.\131\ Accordingly, the two 
percent amount

[[Page 63617]]

that FINRA proposes is consistent with other risk measures in this 
area. FINRA believes that transactions that are similar in economic 
purpose should receive the same economic treatment in the absence of a 
sound reason for a difference.
---------------------------------------------------------------------------

    \128\ FINRA notes that the assertion that maintenance margin in 
this market is unprecedented is incorrect. Under current 
Interpretation/05 of Rule 4210(e)(2)(F), maintenance margin of five 
percent is required for non-exempt counterparties on transactions 
with delivery dates or contract maturity dates of more than 120 days 
from trade date.
    \129\ Indeed, the distribution of five-day price differentials 
is not a ``normal'' Gaussian Bell curve, but has a ``fat tail'' 
especially on the price decline side.
    \130\ FINRA notes reverse repos are a valid point of comparison 
because a TBA transaction is very similar in effect to a dealer firm 
repoing out securities to a counterparty for a term that ends at the 
date a TBA would settle in the future.
    \131\ FINRA's information as to margin requirements for TBA 
transactions cleared by MBSD and for repurchase transactions for 
FNMA, GNMA and FHLMC mortgage pass-through certificates is based on 
discussions the staff has had with market participants. Margin 
requirements on various interest rate futures contracts cleared by 
CME Group is available at: <www.cmegroup.com/trading/interest-rates/us-treasury/ultra-t-bond_performance_bonds.html> (for Ultra U.S. 
Treasury Bond contracts) and <http://www.cmegroup.com/trading/interest-rates/us-treasury/30-year-us-treasury-bond_performance_bonds.html> (for U.S. Treasury Bond contracts).
---------------------------------------------------------------------------

    By the same token, in order to tailor the requirement more 
specifically to the potential risk, and to address commenters' 
concerns, FINRA believes that it is appropriate to create the exception 
for transactions where the original contractual settlement is in the 
month of the trade date for the transaction or in the month succeeding 
the trade date for the transaction and the customer regularly settles 
its Covered Agency Transactions DVP or for cash. FINRA believes that 
transactions that settle DVP or for cash in this timeframe pose less 
risk, thereby lessening the need for maintenance margin and reducing 
potential burdens on members. As discussed earlier, FINRA believes that 
the exception would not be appropriate for counterparties that, in 
their transactions with the member, engage in dollar rolls, round robin 
trades or trades involving other financing techniques for the specified 
positions given that these transactions generate the types of exposure 
that the rule is meant to address.
3. De Minimis Transfer
    As proposed in the Notice, the proposed rule change would provide 
for a minimum transfer amount of $250,000 (the ``de minimis transfer'') 
below which the member need not collect margin, provided the member 
deducts the amount outstanding in computing net capital as provided in 
SEA Rule 15c3-1 at the close of business the following business day.
    Commenters voiced various concerns about the proposed de minimis 
transfer provisions. Some commenters said that members should be 
permitted to set their own thresholds or to negotiate the de minimis 
transfer amounts with the counterparties with which they deal.\132\ 
Some commenters proposed alternative amounts or suggested tiering the 
amount.\133\ Some commenters argued that the de minimis transfer 
provisions would operate as a forced capital charge on uncollected 
deficiencies or mark to market losses below the threshold amount, which 
would unfairly burden smaller firms in particular when aggregated 
across accounts.\134\ Commenters suggested that capital charges should 
not be required below the threshold amount, or that the de minimis 
transfer provisions should be eliminated altogether.\135\
---------------------------------------------------------------------------

    \132\ AII, Baird, BDA, FIF, Shearman and SIFMA.
    \133\ Clarke, Crescent, ICI and MountainView.
    \134\ Clarke, Sandler and SIFMA.
    \135\ BDA and Sandler.
---------------------------------------------------------------------------

    In response, FINRA has revised the de minimis transfer provisions 
to provide that any deficiency or mark to market loss, as set forth 
under the proposed rule change, with a single counterparty shall not 
give rise to any margin requirement, and as such need not be collected 
or charged to net capital, if the aggregate of such amounts with such 
counterparty does not exceed $250,000.\136\ As explained in the Notice, 
the de minimis transfer provisions are intended to reduce the potential 
operational burdens on members. FINRA believes it is not essential to 
the effectiveness of the proposal to charge the uncollected de minimis 
transfer amounts to net capital, which should help provide members 
flexibility. FINRA believes that, by permitting members to avoid a 
capital charge that would otherwise be required absent the de minimis 
transfer provisions, the proposal should help to avoid disproportionate 
burdens on smaller members, which is consistent with the proposal's 
intention. However, FINRA believes it is necessary to set a parameter 
for limiting excessive risk and as such is retaining the proposed 
$250,000 amount.\137\
---------------------------------------------------------------------------

    \136\ See proposed FINRA Rule 4210(e)(2)(H)(ii)f.
    \137\ In this regard, FINRA notes that it has revised the 
proposal's provisions with respect to concentrated exposures to 
clarify that the de minimis transfer amount, though it would not 
give rise to any margin requirement, the amount must be included 
toward the concentration thresholds as set forth under paragraph 
(e)(2)(I) as redesignated. FINRA believes that this clarification is 
necessary as a risk control. See Item II.C.6 of this filing.
---------------------------------------------------------------------------

4. Risk Limit Determinations
    As proposed in the Notice, members that engage in Covered Agency 
Transactions with any counterparty would be required to make a written 
determination of a risk limit to be applied to each such counterparty. 
The risk limit determination would need to be made by a credit risk 
officer or credit risk committee in accordance with the member's 
written risk policies and procedures. As proposed in the Notice, the 
rule change would further establish a new Supplementary Material .05 to 
Rule 4210, which would provide that members of limited size and 
resources would be permitted to designate an appropriately registered 
principal to make the risk limit determinations.
    Some commenters said that the proposed provisions regarding risk 
limit determinations would be burdensome, that members should be 
permitted flexibility, that the proposal should allow risk limits to be 
determined across all product lines (and not be limited to Covered 
Agency Transactions), and that members should be permitted to define 
risk limits at the investment adviser or manager level rather than the 
sub-account level.\138\ One commenter said that risk limit 
determinations should be the responsibility of the broker that 
introduces the account to a carrying firm.\139\
---------------------------------------------------------------------------

    \138\ BB&T, FIF, Duncan-Williams and SIFMA.
    \139\ Pershing.
---------------------------------------------------------------------------

    In response, FINRA has revised proposed Supplementary Material .05 
to provide that, if a member engages in transactions with advisory 
clients of a registered investment adviser, the member may elect to 
make the risk limit determinations at the investment adviser level, 
except with respect to any account or group of commonly controlled 
accounts whose assets managed by that investment adviser constitute 
more than 10 percent of the investment adviser's regulatory assets 
under management as reported on the investment adviser's most recent 
Form ADV. The member may base the risk limit determination on 
consideration of all products involved in the member's business with 
the counterparty, provided the member makes a daily record of the 
counterparty's risk limit usage.\140\ Further, FINRA is revising the 
Supplementary Material to apply not only to Covered Agency 
Transactions, as addressed under paragraph (e)(2)(H) of Rule 4210, but 
also to paragraph (e)(2)(F) (transactions with exempt accounts 
involving certain ``good faith'' securities'') and paragraph (e)(2)(G) 
(transactions with exempt accounts involving highly rated foreign 
sovereign debt securities and investment grade debt securities). These 
revisions should provide members flexibility to make the required risk 
limit determinations without imposing burdens at the sub-account level 
and without limiting the risk limit determinations to Covered Agency 
Transactions.\141\ FINRA believes

[[Page 63618]]

the 10 percent threshold is appropriate given that accounts above that 
threshold pose a higher magnitude of risk.
---------------------------------------------------------------------------

    \140\ In addition, as revised, the proposed rule change 
clarifies that the risk limit determination must be made by a 
designated credit risk officer or credit risk committee. See 
proposed FINRA Rule 4210(e)(2)(H)(ii)b. and Rule 4210.05 in Exhibit 
5.
    \141\ To clarify the rule's structure, FINRA is revising 
paragraphs (e)(2)(F) and (e)(2)(G) so that the risk analysis 
language that appears under current, pre-revision paragraph 
(e)(2)(H), and which currently by its terms applies to both 
paragraphs (e)(2)(F) and (e)(2)(G), would be placed in each of those 
paragraphs and deleted from its current location. Accordingly, FINRA 
proposes to move to paragraphs (e)(2)(F) and (e)(2)(G): ``Members 
shall maintain a written risk analysis methodology for assessing the 
amount of credit extended to exempt accounts pursuant to [this 
paragraph], which shall be made available to FINRA upon request.'' 
FINRA proposes to further add to each: ``The risk limit 
determination shall be made by a designated credit risk officer or 
credit risk committee in accordance with the member's written 
policies and procedures.'' FINRA believes this is logical as it 
makes the risk limit language more congruent with the language 
proposed for paragraph (e)(2)(H) of the rule.
---------------------------------------------------------------------------

    Separately, not in response to comment, as noted earlier \142\ 
FINRA has revised the opening sentence of proposed Rule 
4210(e)(2)(H)(ii)b. to provide that 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 that the member 
shall enforce. FINRA believes that this is appropriate to clarify that 
the member must make, and enforce, a written risk limit determination 
for each counterparty with which the member engages in Covered Agency 
Transactions. Further, FINRA is adding to Supplementary Material .05 a 
provision that, for purposes of any risk limit determination pursuant 
to paragraphs (e)(2)(F) through (H), a member must consider whether the 
margin required pursuant to the rule is adequate with respect to a 
particular counterparty account or all its counterparty accounts and, 
where appropriate, increase such requirements. FINRA believes that this 
requirement is consistent with the purpose of a risk limit 
determination to ensure that the member is properly monitoring its risk 
and that it is logical for a member to increase the required margin 
where it appears the risk is greater.
---------------------------------------------------------------------------

    \142\ See note 40 supra.
---------------------------------------------------------------------------

5. Determination of Exempt Accounts
    As proposed in the Notice, the rule change provides that the 
determination of whether an account qualifies as an exempt account must 
be based on the beneficial ownership of the account. The rule change 
provides that sub-accounts managed by an investment adviser, where the 
beneficial owner is other than the investment adviser, must be margined 
individually.
    Commenters expressed concern that exempt account determination and 
margining at the sub-account level would be onerous, especially for 
managers advising large numbers of clients.\143\ In response, FINRA, as 
discussed above, is revising the proposed rule change so that risk 
limit determinations may be made at the investment adviser level, 
subject to specified conditions. FINRA believes that the proposed risk 
limit determination language, in combination with the proposed $2.5 
million per counterparty exception as discussed above, should reduce 
potential burdens on members. Individual margining of sub-accounts, 
however, would still be required given that individual margining is 
required in numerous other settings and is fundamental to sound 
practice. FINRA notes that, among other things, an investment adviser 
cannot use one advised client's money and securities to meet the margin 
obligations of another without that other client's consent and that 
current FINRA Rule 4210(f)(4) sets forth the conditions under which one 
account's money and securities may be used to margin another's debit.
---------------------------------------------------------------------------

    \143\ Baird, BB&T, BDA, Clarke, FIF, Mischler, Sandler, Shearman 
and SIFMA AMG.
---------------------------------------------------------------------------

6. Concentration Limits
    Under current (pre-revision) paragraph (e)(2)(H) of Rule 4210, a 
member must provide written notification to FINRA and is prohibited 
from entering into any new transactions that could increase credit 
exposure if net capital deductions, over a five day business period, 
exceed: (1) For a single account or group of commonly controlled 
accounts, five percent of the member's tentative net capital; or (2) 
for all accounts combined, 25 percent of the member's tentative net 
capital. As proposed in the Notice, the proposed rule change would 
expressly include Covered Agency Transactions, within the calculus of 
the five percent and 25 percent thresholds.
    Several commenters said that the five percent and 25 percent 
thresholds are too restrictive, that they would be easily reached in 
volatile markets, that they would have the effect of reducing market 
access by smaller firms, and that the limits should be raised.\144\
---------------------------------------------------------------------------

    \144\ BB&T, BDA, FirstSouthwest, Mischler, Sandler, SIFMA and 
SIFMA AMG.
---------------------------------------------------------------------------

    In response, FINRA notes that the five percent and 25 percent 
thresholds are not new requirements. The thresholds are currently in 
use and are designed to address aggregate risk in this area. FINRA 
believes that the suggestion that the thresholds are easily reached in 
volatile markets, if anything, confirms that they serve an important 
purpose in monitoring risk. Accordingly, FINRA proposes to retain the 
thresholds, with non-substantive edits to further clarify that the 
provisions are meant to include Covered Agency Transactions. In 
addition, the proposed rule change would clarify that de minimis 
transfer amounts must be included toward the concentration thresholds, 
as well as all amounts pursuant to the $2.5 million per counterparty 
exception as discussed earlier.\145\
---------------------------------------------------------------------------

    \145\ See proposed FINRA Rule 4210(e)(2)(I) in Exhibit 5.
---------------------------------------------------------------------------

7. Central Banks
    As proposed in the Notice, the proposed rule change would not apply 
to Covered Agency Transactions with central banks. As explained in the 
Notice, FINRA would interpret ``central bank'' to include, in addition 
to government central banks and central banking authorities, 
sovereigns, multilateral development banks and the Bank for 
International Settlements. One commenter proffered language to expand 
the proposed exemption for central banks to include sovereign wealth 
funds.\146\ The Federal Home Loan Banks (FHLB) requested exemption from 
the requirements on grounds of the low counterparty risk that they 
believe they present.\147\ Two commenters suggested that in the 
interest of clarity the interpretive language in the Notice as to 
``central banks'' should be integrated into the rule text.\148\
---------------------------------------------------------------------------

    \146\ SIFMA.
    \147\ FHLB.
    \148\ SIFMA and SIFMA AMG.
---------------------------------------------------------------------------

    In response, as noted earlier \149\ FINRA has revised the proposed 
rule language as to central banks and similar entities to make the 
rule's scope more clear and to provide members flexibility to manage 
their risk vis-[agrave]-vis such entities. Specifically, proposed Rule 
4210(e)(2)(H)(ii)a.1. provides that, with respect to Covered Agency 
Transactions with any counterparty that is a Federal banking agency, as 
defined in 12 U.S.C. 1813(z),\150\ central bank, multinational central 
bank, foreign sovereign, multilateral development bank, or the Bank for 
International Settlements, a member may elect not to apply the margin 
requirements specified in paragraph (e)(2)(H) of the rule provided the 
member makes a written risk limit determination for each such 
counterparty that the member shall enforce pursuant to paragraph 
(e)(2)(H)(ii)b. FINRA believes that, in addition to providing members 
flexibility from the standpoint of managing their risk, the proposal as 
revised is more clear as to the types of entities that are included 
within the scope of the election that paragraph (e)(2)(H)(ii)a.1. makes 
available to members. Specifically, the terms Federal banking agency, 
central bank, multinational central bank, and foreign sovereign are 
consistent with usage in

[[Page 63619]]

the ``Volcker Rules'' as adopted in January, 2014.\151\ As explained in 
the Notice, the inclusion of multilateral development banks and the 
Bank for International Settlements is consistent with usage by the 
Basel Committee on Banking Supervision (``BCBS'') and the Board of the 
International Organization of Securities Commissioners 
(``IOSCO'').\152\ FINRA does not propose to include sovereign wealth 
funds, as such entities engage in market activity as commercial 
participants. Informed by discussions with the FRBNY staff, FINRA does 
not propose to include other specific entities, other than the Bank for 
International Settlements on account of its role vis-[agrave]-vis 
central banks, given that FINRA has been advised that doing so would 
create perverse incentives for regulatory arbitrage. Further, absent a 
showing that an entity is expressly backed by the full faith and credit 
of a sovereign power or powers and is expressly limited by its 
organizing charter as to any speculative activity in which it may 
engage, including such an entity within the scope of the election made 
available under paragraph (e)(2)(H)(ii)a.1. would cut against the 
overall purpose of the rule amendments.
---------------------------------------------------------------------------

    \149\ See note 39 supra.
    \150\ See note 38 supra.
    \151\ See OCC, Federal Reserve, FDIC and SEC, 79 FR 5536 
(January 31, 2014) (Final Rule: Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships 
With, Hedge Funds and Private Equity Funds).
    \152\ See BCBS and IOSCO, Margin Requirements for Non-Centrally 
Cleared Derivatives, September 2013, available at: <http://www.bis.org/publ/bcbs261.pdf>.
---------------------------------------------------------------------------

8. Timing of Margin Collection and Transaction Liquidation
    The proposed rule change, with minor revision vis-[agrave]-vis the 
version as set forth in the Notice, provides that, unless FINRA has 
specifically granted the member additional time, the member would be 
required to liquidate positions if, with respect to exempt accounts, a 
mark to market loss is not satisfied within five business days, or, 
with respect to non-exempt accounts, a deficiency is not satisfied 
within such period.
    Commenters suggested that the proposed five-day timeframe is too 
short, that the appropriate timeframe is 15 days, as set forth in 
current Rule 4210(f)(6), that firms may not be able to collect the 
margin within the specified timeframe, and that firms should be 
permitted to negotiate the timeframe with their customers.\153\ One 
commenter sought clarification as to whether a member would be required 
to take a capital charge on deficiencies on the day such deficiencies 
are cured.\154\
---------------------------------------------------------------------------

    \153\ AII, BB&T, BDA, Credit Suisse, Duncan-Williams, ICI, 
MetLife, Pershing, Sandler, Shearman, SIFMA and SIFMA AMG.
    \154\ SIFMA.
---------------------------------------------------------------------------

    In response, FINRA believes that the five-day period as proposed is 
appropriate in view of the potential counterparty risk in the TBA 
market.\155\ Accordingly, the proposed requirement is largely as set 
forth in the Notice, with minor revision as noted earlier to better 
align the language with corresponding provisions under FINRA Rule 
4210(g)(10)(A) in the context of portfolio margining.\156\ Further, 
consistent with longstanding practice under current Rule 4210(f)(6), 
FINRA notes that the proposed rule makes allowance for FINRA to 
specifically grant the member additional time.\157\ FINRA maintains, 
and regularly updates, the online Regulatory Extension System for this 
purpose. With respect to the curing of deficiencies, FINRA notes that 
the margin rules have consistently been interpreted so that a capital 
charge, once created, is removed when the deficiency is cured.
---------------------------------------------------------------------------

    \155\ In the interest of clarity, FINRA is revising paragraph 
(f)(6) of Rule 4210 so as to except paragraph (e)(2)(H) of the rule 
from the 15-day timeframe set forth in paragraph (f)(6).
    \156\ See notes 52, 53 and 56 supra.
    \157\ See proposed FINRA Rule 4210(e)(2)(H)(ii)d.
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9. Miscellaneous Issues
(a) Cleared TBA Market Products
    One commenter suggested that the proposed amendments should apply 
to Covered Agency Transactions cleared through a registered clearing 
agency.\158\ FINRA does not propose to apply the requirements to 
cleared transactions at this time given that such requirements would 
appear to duplicate the efforts of the registered clearing agencies and 
increase burdens on members.
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    \158\ Brevan.
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(b) Introducing and Carrying/Clearing Firms
    One commenter sought clarification as to whether introducing firms 
or carrying/clearing firms would be responsible for calculating, 
collecting and holding custody of the customer's margin under the 
proposed amendments.\159\ In response, FINRA notes that Rule 4311 
permits firms to allocate responsibilities under carrying agreements so 
that, for instance, an introducing firm could calculate margin and make 
margin calls, provided, however, that the carrying firm is responsible 
for the safeguarding of funds and securities for the purposes of SEA 
Rule 15c3-3.\160\
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    \159\ Sandler.
    \160\ With respect to any customer funds and securities, an 
introducing firm is subject to the obligation of prompt transmission 
or delivery.
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(c) Margining of Fails
    Three commenters sought clarification as to whether members would 
be required to margin fails to deliver.\161\ In response, FINRA notes 
that currently Rule 4210 does not require the margining of fails to 
deliver. However, FINRA notes that members need to consider the 
relevant capital requirements under SEA Rule 15c3-1, in particular the 
treatment of unsecured receivables under Rule 15c3-1(c)(2)(iv). FINRA 
does not propose to address fails to deliver as part of the proposed 
rule change.
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    \161\ Pershing, Sandler and SIFMA.
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(d) Eligible Collateral
    Several commenters suggested that FINRA should clarify that the 
proposal is not specifying what type of collateral a firm should accept 
and that there should be flexibility for parties to negotiate 
collateral via the terms of the Master Securities Forward Transaction 
Agreement (MSFTA).\162\ Some commenters suggested the proposal should 
impose limits with respect to types of collateral.\163\ In response, 
FINRA believes that all margin eligible securities, with the 
appropriate margin requirement, should be permissible as collateral 
under Rule 4210 to satisfy required margin.
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    \162\ AII, Clarke, FIF and SIFMA.
    \163\ BB&T and Duncan-Williams.
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(e) Protection of Customer Margin; Two-Way Margining
    One commenter suggested that, in light of the Bankruptcy Court 
decision concerning TBA products in the Lehman case,\164\ FINRA should 
enhance protection of the margin that customers post by requiring that 
members hold the margin through tri-party custodial arrangements.\165\ 
One commenter suggested that, as a way to manage the risk of Covered 
Agency Transactions, FINRA should implement two-way margining that 
would require members to post the same mark to market margin that would 
be required of counterparties, and that FINRA should, as part of the 
rule change, permit the

[[Page 63620]]

use of tri-party custodial arrangements.\166\
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    \164\ See Memorandum Decision Confirming the Trustee's 
Determination of Claims Relating to TBA Contracts, In re Lehman 
Brothers, Inc., Debtor, 462 B.R. 53, 2011 Bankr. LEXIS 4753 
(S.D.N.Y. December 8, 2011).
    \165\ Brevan.
    \166\ ICI.
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    In response, though FINRA is supportive of enhanced customer 
protection wherever possible, implementation of such requirements at 
this time could impose substantial additional burdens on members, or 
otherwise raise issues that are beyond the scope of the proposed rule 
change. FINRA is considering the issue of tri-party arrangements but 
does not propose to address it as part of the proposed rule change. 
Further, FINRA supports the use of two-way margining as a means of 
managing risk but does not propose to address such a requirement as 
part of the rule change.
(f) Unrealized Profits; Standbys
    The proposed rule change, with minor revision vis-[agrave]-vis the 
version as set forth in the Notice, provides that unrealized profits in 
one Covered Agency Transaction may offset losses from other Covered 
Agency Transaction positions in the same counterparty's account and the 
amount of net unrealized profits may be used to reduce margin 
requirements. Further, the rule provides that, with respect to 
standbys, only profits (in-the-money amounts), if any, on long standbys 
shall be recognized.
    One commenter sought clarification as to whether for long standbys 
only profits, not losses, may be factored into the setoff.\167\ In 
response, FINRA notes that this is correct.
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    \167\ SIFMA.
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(g) Definition of Exempt Account
    One commenter suggested FINRA should revise the definition of 
``exempt'' account under Rule 4210 to include the non-US equivalents of 
the types of entities set forth under the definition.\168\ In response, 
FINRA notes that the definition of exempt account plays an important 
role under Rule 4210 and believes that issue is better addressed as 
part of a future, separate rulemaking effort.
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    \168\ Shearman.
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(h) Standardized Pricing
    One commenter suggested FINRA should suggest standardized sources 
for pricing and a calculation methodology for the TBA market.\169\ In 
response, though FINRA agrees that market transparency is important, 
FINRA does not propose at this time to suggest or mandate sources for 
valuation, as this currently is a market function. FINRA notes that the 
FINRA Web site makes available extensive TRACE data and other market 
data for use by the public.\170\
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    \169\ BB&T.
    \170\ See for instance bond data available on the FINRA Web site 
at: <http://finra-markets.morningstar.com/BondCenter/Default.jsp>.
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(i) MSFTA
    One commenter sought clarification as to whether FINRA would 
require a member to have an executed MSFTA in place prior to engaging 
in any Covered Agency Transactions.\171\ In response, FINRA does not 
propose to mandate the use of MSFTAs. FINRA notes, however, that 
members are obligated under, among other things, the books and records 
rules to maintain and preserve proper records as to their trading.
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    \171\ Vining Sparks.
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(j) Implementation
    Commenters suggested implementation periods ranging from six to 24 
months for the proposed rule change once adopted.\172\ In response, 
FINRA supports in general the suggestion of an implementation period 
that permits members adequate time to prepare for the rule change and 
welcomes further comment on this issue.\173\
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    \172\ AII, BB&T, Credit Suisse, FIF, ICI and Pershing.
    \173\ FINRA understands that firms that are following the TMPG 
recommendations have been doing so since the recommendations took 
effect in December 2013.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-036 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-036. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2015-036 and should be 
submitted on or before November 10, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\174\
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    \174\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-26518 Filed 10-19-15; 8:45 am]
 BILLING CODE 8011-01-P