Document ID: SEC-2016-0656-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-04-15T04:00Z

[Federal Register Volume 81, Number 73 (Friday, April 15, 2016)]
[Notices]
[Pages 22347-22359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08644]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77579; File No. SR-FINRA-2015-036]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 2 and Designation of 
a Longer Period for Commission Action on Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change To Amend FINRA 
Rule 4210 (Margin Requirements) To Establish Margin Requirements for 
the TBA Market, as Modified by Amendment Nos. 1 and 2

April 11, 2016.

I. Introduction

    On October 6, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 4210 (Margin 
Requirements) to establish margin requirements for covered agency 
transactions, also referred to, for purposes of this proposed rule 
change as the To Be Announced (``TBA'') market.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on October 20, 2015.\3\ On November 10, 2015, FINRA extended 
the time period in which the Commission must approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule change 
to January 15, 2016.\4\ The Commission received 109 comment letters in 
response to the proposal.\5\ On January 13, 2016, FINRA responded to 
the comments and filed Amendment No. 1 to the proposal.\6\ On January 
14, 2016, the Commission issued an order instituting proceedings 
pursuant to Section 19(b)(2)(B) of the Exchange Act \7\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment No. 1. The Order Instituting Proceedings was published in 
the Federal Register on January 21, 2016.\8\ The Commission received 23 
comment letters in response to the Order Instituting Proceedings.\9\

[[Page 22348]]

On March 21, 2016, FINRA responded to the comments and filed Amendment 
No. 2.\10\ The Commission is publishing this notice to solicit comments 
on Amendment No. 2 to the proposed rule change from interested persons 
and to extend to June 16, 2016 the time period in which the Commission 
must approve or disapprove the proposed rule change, as modified by 
Amendment Nos. 1 and 2.
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    \3\ See Exchange Act Release No. 76148 (Oct. 14, 2015), 80 FR 
63603 (Oct. 20, 2015) (File No. SR-FINRA-2015-036) (``Notice'').
    \4\ See Extension No. 1, dated November 10, 2015. FINRA's 
extension of time for Commission action. The extension is available 
at, http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-036-extension-1.pdf>.
    \5\ See Exchange Act Release No. 76908 (Jan. 14, 2016), 81 FR 
3532 (Jan. 21, 2016) (Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove Proposed Rule Change to Amend FINRA 
Rule 4210 (Margin Requirements), to Establish Margin Requirements 
for the TBA Market, as Modified by Partial Amendment No. 1) (``Order 
Instituting Proceedings'').
    \6\ See Amendment No. 1, dated January 13, 2016 (``Amendment No. 
1''). FINRA's responses to comments received and proposed amendments 
are included in Amendment No. 1.
    \7\ 15 U.S.C. 78s(b)(2)(B) (if the Commission does not approve 
or disapprove a proposed rule change under Section 19(b)(2)(A) of 
the Exchange Act--i.e., within 90 days of publication of notice of 
the filing of the proposed rule change in the Federal Register--the 
Commission shall institute proceedings to determine whether to 
approve or disapprove the proposed rule change).
    \8\ See supra note 5.
    \9\ See Letters from Matrix Applications, LLC, dated February 9, 
2016 (``Matrix 2 Letter''); Tari Flannery, M&T Realty Capital 
Corporation, dated February 9, 2016 (``M&T 2 Realty Letter''); Holly 
MacDonald-Korth, JW Korth & Company, dated February 9, 2016 (``Korth 
Letter''); Chris Melton, Coastal Securities, dated February 10, 2016 
(``Coastal 2 Letter''); Rodrigo Lopez, NorthMarq Capital Finance, 
L.L.C., dated February 10, 2016 (``NorthMarq 2 Letter''); Steve 
Wendel, CBRE, Inc., dated February 11, 2016 (``CBRE 2 Letter''); 
Tony Love, Forest City Capital Corporation, dated February 11, 2016 
(``Forest City 3 Letter''); Robert Kirkwood, Lancaster Pollard 
Mortgage Company, dated February 11, 2016 (``Lancaster Pollard 2 
Letter''); Mike Nicholas, Bond Dealers of America, dated February 
11, 2016 (``BDA 2 Letter''); Blake Lanford, Walker & Dunlop, LLC, 
dated February 11, 2016 (``W&D 2 Letter''); Allen Riggs, Vining 
Sparks IBG, LP, dated February 11, 2016 (``Vining Sparks Letter''); 
John Gidman, Association of Institutional Investors, dated February 
11, 2016 (``AII 2 Letter''); Christopher B. Killian, Securities 
Industry and Financial Markets Association, dated February 11, 2016 
(``SIFMA 2 Letter''); Roderick D. Owens, Committee on Healthcare 
Financing, dated February 10, 2016 (``CHF 2 Letter''); Bruce 
Sandweiss, Gershman Mortgage, dated February 11, 2016 (``Gershman 3 
Letter''); Timothy W. Cameron and Laura Martin, Securities Industry 
and Financial Markets Association, Asset Management Group, dated 
February 11, 2016 (``SIFMA AMG 2 Letter''); Mike McRobers, 
Prudential Mortgage Capital Company, dated February 11, 2016 
(``Prudential 2 Letter''); James M. Cain, Sutherland Asbill & 
Brennan LLP (on behalf of Federal Home Loan Banks), dated February 
11, 2016 (``Sutherland 2 Letter''); Carl B. Wilkerson, American 
Council of Life Insurers, dated February 11, 2016 (``ACLI 2 
Letter''); David H. Stevens, Mortgage Bankers Association, dated 
February 11, 2016 (``MBA 2 Letter''); U.S. Senator Tom Cotton, dated 
February 11, 2016 (``Senator Cotton Letter''); Robert Tirschwell, 
Brean Capaital, LLC, dated February 17, 2016 (``Brean Capital 3 
Letter''); Lauren Sarper, Prudential Financial, Inc., dated March 1, 
2016 (``Prudential 3 Letter'').
    \10\ See Amendment No. 2, dated March 21, 2016 (``Amendment No. 
2''). FINRA's responses to comments received on the Order 
Instituting Proceedings and proposed amendments in Amendment No. 1 
are included in Amendment No. 2. The text of Amendment No. 2 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.

II. Description of the Proposed Rule Change \11\
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    \11\ The proposed rule change, as modified by Amendment No. 1, 
as described in this Item II, is excerpted, in part, from the 
Notice, which was substantially prepared by FINRA, and the Order 
Instituting Proceedings. See supra notes 3 and 5. Amendment No. 2 is 
described in section II.D. below.

    In its filing, FINRA proposed amendments to FINRA Rule 4210 (Margin 
Requirements) to establish requirements for: (1) TBA transactions,\12\ 
inclusive of adjustable rate mortgage (``ARM'') transactions; (2) 
Specified Pool Transactions; \13\ and (3) transactions in 
Collateralized Mortgage Obligations (``CMOs''),\14\ issued in 
conformity with a program of an agency \15\ or Government-Sponsored 
Enterprise (``GSE''),\16\ with forward settlement dates, (collectively, 
``Covered Agency Transactions,'' also referred to, for purposes of this 
filing, as the ``TBA market'').
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    \12\ See FINRA Rule 6710(u) (defining 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).
    \13\ See FINRA Rule 6710(x).
    \14\ See FINRA Rule 6710(dd).
    \15\ See FINRA Rule 6710(k).
    \16\ See FINRA Rule 6710(n) and 2 U.S.C. 622(8).
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    FINRA stated that most trading of agency and GSE Mortgage-Backed 
Security (``MBS'') takes place in the TBA market, which is 
characterized by transactions with forward settlements as long as 
several months past the trade date.\17\ FINRA stated that 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. With a view to this gap between the TBA market 
versus other markets, FINRA noted the TPMG recommended standards (the 
``TMPG best practices'') regarding the margining of forward-settling 
agency MBS transactions.\18\ FINRA stated that the TMPG best practices 
are recommendations and as such currently are not rule requirements. 
FINRA's present requirements do not address the TBA market 
generally.\19\
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    \17\ 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, https://www.newyorkfed.org/medialibrary/media/research/epr/2013/1212vick.pdf>; see also, SEC's Staff Report, Enhancing Disclosure in 
the Mortgage-Backed Securities Markets, January 2003, available at, 
https://www.sec.gov/news/studies/mortgagebacked.htm; see 
also, Treasury Market Practices Group (``TMPG''), Margining in 
Agency MBS Trading, November 2012, available at, https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/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.
    \18\ See TMPG, Best Practices for Treasury, Agency, Debt, and 
Agency Mortgage-Backed Securities Markets, revised June 10, 2015, 
available at, https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG_June%202015_Best%20Practices>.
    \19\ 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 proposed 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), and to add to the rule new Supplementary Materials .02 
through .05. The proposed rule change is described in further detail 
below.
A. Proposed FINRA Rule 4210(e)(2)(H) (Covered Agency Transactions) \20\
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    \20\ This section describes the proposed rule change prior to 
the proposed amendments in Amendment No. 2, which are described in 
section II.D. below.
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    The core requirements of the proposed rule change are set forth in 
new paragraph (e)(2)(H) of FINRA Rule 4210.
1. Definition of Covered Agency Transactions (Proposed FINRA Rule 
4210(e)(2)(H)(i)c) \21\
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    \21\ See supra notes 3 and 5; see also, Exhibit 5 in Amendment 
No. 1, text of proposed rule change, as modified by Amendment No. 1.
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    Proposed paragraph (e)(2)(H)(i)c. of the rule would define Covered 
Agency Transactions to mean:
     TBA transactions, as defined in FINRA Rule 6710(u), 
inclusive of ARM transactions, for which the difference between the 
trade date and contractual settlement date is greater than one business 
day;
     Specified Pool Transactions, as defined in FINRA Rule 
6710(x), for which the difference between the trade date and 
contractual settlement date is greater than one business day; and
     CMOs, as defined in FINRA Rule 6710(dd), issued in 
conformity with a program of an agency, as defined in FINRA Rule 
6710(k), or a GSE, as defined in FINRA Rule 6710(n), for which the 
difference between the trade date and contractual settlement date is 
greater than three business days.
2. Other Key Definitions Established by the Proposed Rule Change 
(Proposed FINRA Rule 4210(e)(2)(H)(i)) \22\
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    \22\ See supra notes 3 and 5; see also, Exhibit 5 in Amendment 
No. 1, text of proposed rule change, as modified by Amendment No. 1.
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    In addition to Covered Agency Transactions, the proposed rule 
change would establish 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;
     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;
     The term ``deficiency'' means the amount of any required 
but uncollected maintenance margin and any required but uncollected 
mark to market loss;
     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;
     The term ``maintenance margin'' means margin equal to two 
percent of

[[Page 22349]]

the contract value of the net long or net short position, by CUSIP, 
with the counterparty;
     The term ``mark to market loss'' means the counterparty's 
loss resulting from marking a Covered Agency Transaction to the market;
     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;
     The term ``round robin'' trade means 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; and
     The term ``standby'' means contracts that are put options 
that trade over-the-counter (``OTC''), as defined in paragraph 
(f)(2)(A)(xxvii) of Rule 4210, with initial and final confirmation 
procedures similar to those on forward transactions.
3. Requirements for Covered Agency Transactions (Proposed FINRA Rule 
4210(e)(2)(H)(ii)) \23\
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    \23\ This section describes the proposed rule change prior to 
the proposed amendments in Amendment No. 2, which are described in 
section II.D. below.
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    The specific requirements that would apply to Covered Agency 
Transactions are set forth in proposed paragraph (e)(2)(H)(ii). These 
requirements would address the types of counterparties that are subject 
to the proposed rule, risk limit determinations, specified exceptions 
from the proposed margin requirements, transactions with exempt 
accounts,\24\ transactions with non-exempt accounts, the handling of de 
minimis transfer amounts, and the treatment of standbys.
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    \24\ The term ``exempt account'' is defined under FINRA Rule 
4210(a)(13). 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 supra note 5.
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 Counterparties Subject to the Rule
    Paragraph (e)(2)(H)(ii)a. of the proposed 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 proposed 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, 
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.
    In Amendment No. 1, FINRA proposed to add to FINRA Rule 4210 
paragraph (e)(2)(H)(ii)a.2. to provide that a member may elect not to 
apply the margin requirements of paragraph (e)(2)(H) of the rule with 
respect to Covered Agency Transactions with a counterparty in 
multifamily housing securities or project loan program securities, 
provided that: (1) Such securities are issued in conformity with a 
program of an Agency, as defined in FINRA Rule 6710(k), or a GSE, as 
defined in FINRA Rule 6710(n), and are documented as Freddie Mac K 
Certificates, Fannie Mae Delegated Underwriting and Servicing bonds, or 
Ginnie Mae Construction Loan or Project Loan Certificates, as commonly 
known to the trade; and (2) 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. of Rule 4210.\25\
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    \25\ See Exhibit 4 and Exhibit 5 in Amendment No. 1. Proposed 
Rule 4210(e)(2)(H)(ii)b. sets forth the rule's requirements as to 
written risk limits. See also supra notes 5 and 6.
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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. 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. The new Supplementary Material provides that, for 
purposes of any risk limit determination pursuant to paragraphs 
(e)(2)(F), (e)(2)(G) or (e)(2)(H) of the rule:
    [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;
    [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;
    [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; and
    [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.
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), and are subject to the margin requirements of 
that clearing agency; and
    [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),\26\ or round robin 
trades, or that uses other financing techniques for its Covered Agency 
Transactions.
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    \26\ See FINRA Rule 6710(z).
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Transactions With Exempt Accounts
    Paragraph (e)(2)(H)(ii)d. of the proposed rule provides that, on 
any net long or net short position, by CUSIP, resulting from bilateral 
transactions

[[Page 22350]]

with a counterparty that is an exempt account, no maintenance margin 
shall be required. 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. 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 Exchange Act Rule 15c3-1 until such time the 
mark to market loss is satisfied. 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. 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.
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, 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 Exchange Act 
Rule 15c3-1 until such time the deficiency is satisfied. 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 satisfy the deficiency, unless 
FINRA has specifically granted the member additional time.
    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.
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 proposed 
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.
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.

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) \27\
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    \27\ This section describes the proposed rule change prior to 
the proposed amendments in Amendment No. 2, which are described in 
section II.D. below.

    The proposed rule change makes a number of revisions to paragraphs 
(e)(2)(F) and (e)(2)(G) of FINRA Rule 4210: \28\
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    \28\ See supra notes 3 and 5; see also, Exhibit 5 in Amendment 
No. 1, text of proposed rule change, as modified by Amendment No. 1.
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     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 . . .'' 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.'' FINRA believes Amendment No. 1 
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.
     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 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) 
\29\
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    \29\ This section describes the proposed rule change prior to 
the proposed amendments in Amendment No. 2, which are described in 
section II.D. below.

    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

[[Page 22351]]

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 Exchange 
Act Rule 15c3-1); or (2) for all accounts combined, 25 percent of the 
member's tentative net capital (again, as defined in Exchange Act Rule 
15c3-1). As discussed above, 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.
    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: \30\
---------------------------------------------------------------------------

    \30\ See supra notes 3 and 5; see also, Exhibit 5 in Amendment 
No. 1, text of proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

     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 Exchange Act Rule 15c3-1), or
     for all accounts combined, 25 percent of the member's 
tentative net capital (as such term is defined in Exchange Act Rule 
15c3-1), and,
     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,
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.
    In Amendment No. 1, FINRA proposed that the risk limit 
determination requirements as set forth in paragraphs (e)(2)(F), 
(e)(2)(G) and (e)(2)(H) of Rule 4210 and proposed Supplementary 
Material .05 become effective six months from the date the proposed 
rule change is approved by the Commission.\31\ FINRA proposed that the 
remainder of the proposed rule change become effective 18 months from 
the date the proposed rule change is approved by the Commission.\32\
---------------------------------------------------------------------------

    \31\ See supra notes 5 and 6.
    \32\ See supra note 5.

D. Amendment No. 2 \33\
---------------------------------------------------------------------------

    \33\ See supra note 10. With the exception of comments received 
related to multifamily housing and project loan securities, FINRA's 
responses to comments received on the Order Instituting Proceedings 
are discussed in section III. below. See supra note 5.

    In Amendment No. 2, FINRA responded to comments received on the 
Order Instituting Proceedings \34\ and, in response to comments, 
proposes to amend the rule language in paragraph (e)(2)(H)(ii)a.2. In 
Amendment No. 2, FINRA is also proposing a conforming formatting 
revision to proposed paragraph (e)(2)(H)(ii)a.1. of the rule.
---------------------------------------------------------------------------

    \34\ See supra note 5.
---------------------------------------------------------------------------

1. Multifamily and Project Loan Securities
    Commenters expressed support for the proposed exception for 
multifamily and project loan securities as set forth in proposed 
paragraph (e)(2)(H)(ii)a.2. in Amendment No. 1.\35\ Several commenters 
asked that FINRA provide guidance to ensure that the risk limit 
determinations as proposed do not disrupt existing practices or 
arrangements between mortgage bankers and member firms, are not 
inconsistently or arbitrarily applied, or are not otherwise interpreted 
as requiring member firms to impose margin requirements with respect to 
transactions in the specified products, and called for care in the 
implementation of the requirement.\36\ One commenter asked FINRA to 
state that there are no conditions at this time that would require 
margining with respect to such transactions.\37\ Some commenters said 
that FINRA should engage in various forms of communication or outreach 
to clarify the rule.\38\ Other commenters suggested FINRA clarify the 
intent of the proposed exception by changing ``a member may elect not 
to apply the margin requirements'' to ``a member is not required to 
apply the margin requirements.'' \39\ Some commenters expressed concern 
that, because of changes in nomenclature or other future action by the 
agencies or GSEs, some securities that have the characteristics of 
multifamily and project loan securities may not be documented as 
Freddie Mac K Certificates, Fannie Mae Delegated Underwriting and 
Servicing bonds, or Ginnie Mae Construction Loan or Project Loan 
Certificates, and may thereby inadvertently not be included within the 
proposed exception.\40\ These commenters proffered language so that the 
scope of the proposed exception would include other multifamily and 
project loan securities with ``substantially similar'' characteristics 
issued in conformity with a program or an agency or GSE.
---------------------------------------------------------------------------

    \35\ See CBRE 2 Letter, Forest City 3 Letter, Gershman 3 Letter, 
Lancaster 2 Letter, M&T Realty 2 Letter, MBA 2 Letter, NorthMarq 2 
Letter, and W&D 2 Letter.
    \36\ See CBRE 2 Letter, Forest City 3 Letter, Gershman 3 Letter, 
Lancaster 2 Letter, MBA 2 Letter, and W&D 2 Letter.
    \37\ See Forest City 3 Letter.
    \38\ See Forest City 3 Letter and W&D 2 Letter.
    \39\ See MBA 2 Letter and Lancaster 2 Letter.
    \40\ See Forest City 3 Letter, Gershman 3 Letter, Lancaster 2 
Letter, and MBA 2 Letter.
---------------------------------------------------------------------------

    Some commenters opposed the modified rule language in Amendment No. 
1 on grounds that the rule should not permit members discretion to 
impose margin requirements as to multifamily and project loan 
securities and that such securities should be fully exempted from the 
proposed rule's application.\41\ One commenter said that FINRA should 
confirm that good faith deposits provide sufficient protection to 
broker-dealers involved in multifamily and project loan securities 
transactions, that FINRA did not do analysis of good faith deposits, 
that giving broker-dealers discretion to impose margin in such 
transactions protects the broker-dealer but not other parties to the 
trade, and that in the presence of margin, lenders in multifamily 
projects will not be able to structure their mortgage costs 
confidently.\42\ Another commenter said that multifamily and project 
loan securities should be fully exempted from the proposed rule because 
such securities do not present systemic risk.\43\ This commenter said 
that there are significant protections in place to

[[Page 22352]]

insulate purchasers of such securities from credit and counterparty 
risk, that under the proposed rule margin would depend upon a broker-
dealer's risk limit determination, that there would be no objective 
standard for when margin would be required, and that FINRA offered no 
clear rationale for including multifamily and project loan securities 
in any margining regime.\44\ The commenter proffered language to fully 
exempt multifamily and project loan securities from the rule's 
application and suggested that additional language be added to enable 
broker-dealers and sellers of multifamily and project loan securities 
to agree contractually on appropriate margin and to count good faith 
deposits toward margin.\45\
---------------------------------------------------------------------------

    \41\ See CHF 2 Letter and Prudential 2 Letter.
    \42\ See CHF 2 Letter.
    \43\ See Prudential 2 Letter.
    \44\ Id.
    \45\ Id.
---------------------------------------------------------------------------

    In response, FINRA is sensitive to commenters' concerns that the 
proposed rule not disrupt business activity. FINRA stated in Amendment 
No. 1 that FINRA is not proposing at this time to require that members 
apply the proposed margin requirements \46\ to multifamily and project 
loan securities, subject to the conditions as specified in proposed 
paragraph (e)(2)(H)(ii)a.2. of Rule 4210. In the interest of further 
clarity, FINRA proposes in Amendment No. 2 to revise the phrase ``a 
member may elect not to apply the margin requirements . . .'' in 
paragraph (e)(2)(H)(ii)a.2. to read ``a member is not required to apply 
the margin requirements . . .'' \47\ However, while the rule is not 
intended to require margin as to transactions in multifamily and 
project loan securities, neither is it intended to prevent members from 
imposing margin. As FINRA stated in Amendment No. 1, the proposal 
imposes on members the requirement to make and enforce risk limits as 
to counterparties in multifamily and project loan securities to help 
ensure that members are properly monitoring their risk. The rule 
presumes that risk limits will be a tool that members may employ to 
exercise sound discretion as to the management of their business. 
Members need, and under FINRA rules have, discretion to impose margin 
over and above the requirements under the rules.\48\ Though it is 
possible that members' application of the risk limit requirements may 
lead to different determinations among members as to multifamily and 
project loan securities, FINRA notes that members and their 
counterparties have been transacting in these products for a 
considerable time and they are well understood to the industry. FINRA 
will consider further guidance as needed.
---------------------------------------------------------------------------

    \46\ See supra note 5. The ``proposed margin requirements'' 
refers to the margin requirements as to Covered Agency Transactions 
as set forth in the original filing, as modified by Amendment Nos. 1 
and 2. Products or transactions that are outside the scope of 
Covered Agency Transactions are otherwise subject to the 
requirements of FINRA Rule 4210, as applicable.
    \47\ See proposed FINRA Rule (e)(2)(H)(ii)a.2. in Exhibit 4 in 
Amendment No. 2.
    \48\ FINRA noted that proposed Supplementary Material .05(a)(4) 
provides that, for purposes of paragraphs (e)(2)(F), (e)(2)(G) or 
(e)(2)(H) of the rule, a member ``shall consider whether the margin 
required pursuant to this Rule is adequate with respect to a 
particular counterparty account or all its counterparty accounts 
and, where appropriate, increase such requirements.'' See Exhibit 5 
in Amendment No. 2.
---------------------------------------------------------------------------

    FINRA notes the concern that, owing to changes in nomenclature or 
other future action by the agencies or GSEs, some securities that have 
the characteristics of multifamily and project loan securities may not 
be documented as Freddie Mac K Certificates, Fannie Mae Delegated 
Underwriting and Servicing bonds, or Ginnie Mae Construction Loan or 
Project Loan Certificates, and may thereby inadvertently fall outside 
the scope of the exception proposed under paragraph (e)(2)(H)(ii)a.2. 
In response, in Amendment No. 2, FINRA proposes to revise proposed 
paragraph (e)(2)(H)(ii)a.2.A. to add the phrase ``or are such other 
multifamily housing securities or project loan program securities with 
substantially similar characteristics, issued in conformity with a 
program of an Agency or a Government-Sponsored Enterprise, as FINRA may 
designate by Regulatory Notice or similar communication.'' As such, 
proposed paragraph (e)(2)(H)(ii)a.2.A. as revised would read: ``. . . 
such securities are issued in conformity with a program of an Agency, 
as defined in Rule 6710(k), or a Government-Sponsored Enterprise, as 
defined in Rule 6710(n), and are documented as Freddie Mac K 
Certificates, Fannie Mae Delegated Underwriting and Servicing bonds, or 
Ginnie Mae Construction Loan or Project Loan Certificates, as commonly 
known to the trade, or are such other multifamily housing securities or 
project loan program securities with substantially similar 
characteristics, issued in conformity with a program of an Agency or a 
Government-Sponsored Enterprise, as FINRA may designate by Regulatory 
Notice or similar communication . . .'' \49\ FINRA believes that the 
revised language should help promote clarity in the rule's application 
by ensuring that FINRA has the ability to efficiently include within 
the scope of the proposed exception, by Regulatory Notice or similar 
communication, any multifamily and project loan securities, consistent 
with the rule's intent, that may otherwise inadvertently be omitted.
---------------------------------------------------------------------------

    \49\ See proposed FINRA Rule (e)(2)(H)(ii)a.2.A. in Exhibit 4 in 
Amendment No. 2.
---------------------------------------------------------------------------

    In response to comments, FINRA believes that a complete exemption 
for multifamily and project loan securities, not only with respect to 
the margin requirements, but also the obligation of members to make and 
enforce risk limits, would not serve the interests of sound 
regulation.\50\ As already noted above and in Amendment No. 1, the 
rule's risk limit provisions are designed as an appropriately tailored 
requirement to ensure that members are properly managing their risk. It 
would undercut the core purposes of the rule to create classes of 
products within the Covered Agency Transactions category where such 
monitoring is not required. FINRA does not believe that a separate 
analysis of good faith deposits is necessary given that, as more fully 
set forth in Amendment No. 1, FINRA took note of the provision of good 
faith deposits by the borrower to the lender, among other 
characteristics of multifamily and project loan securities, in 
considering the exception set forth in the proposed rule. Nor does 
FINRA propose to introduce into the rule language providing for 
negotiation of margin or for recognition of good faith deposits. FINRA 
does not object to parties engaging in negotiation, provided the margin 
requirements as set forth under the rule are met. FINRA does not 
believe it is necessary to separately set forth a rationale for 
regulation of multifamily and project loan securities for purposes of 
Amendment No. 2 given that, in the original filing, FINRA set forth in 
full the rationale for regulating Covered Agency Transactions and, in 
Amendment No. 1, FINRA specifically addressed its proposed approach to 
multifamily and project loan securities.\51\
---------------------------------------------------------------------------

    \50\ See CHF 2 Letter, Prudential 2 Letter and Prudential 3 
Letter.
    \51\ See supra notes 3 and 5.
---------------------------------------------------------------------------

2. Other
    In Amendment No. 2 (not in response to a comment), FINRA has made a 
conforming formatting revision to proposed paragraph (e)(2)(H)(ii)a.1. 
of the rule so that the phrase ``paragraph (e)(2)(H)(ii)b; and . . .'' 
reads ``paragraph (e)(2)(H)(ii)b.; and . . .'' \52\
---------------------------------------------------------------------------

    \52\ See Exhibit 4 in Amendment No. 2.

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

[[Page 22353]]

III. Summary of Comments and FINRA's Responses \53\
---------------------------------------------------------------------------

    \53\ Comments related to the multifamily housing and project 
loan securities are addressed in section II.D. above.

    As noted above, the Commission received 23 comment letters on the 
proposed rule change, as modified by Amendment No. 1.\54\ These 
comments and FINRA's responses to the comments are summarized 
below.\55\
---------------------------------------------------------------------------

    \54\ See supra notes 5 and 6.
    \55\ See supra note 10.
---------------------------------------------------------------------------

A. Impact and Costs of the Proposal (Other Than With Respect to 
Multifamily and Project Loan Securities)

    Commenters expressed concerns regarding the proposed rule's 
potential impact on the market and the costs of implementing the 
requirements.\56\ One commenter believed that the comment period has 
been inadequate and that FINRA did not quantify the proposal's burdens 
on all broker-dealers and market participants.\57\ This commenter said 
that FINRA's economic impact statement in the proposed rule change was 
deficient.\58\ Another commenter said FINRA should consider the 
comprehensive costs and burdens of the proposal vis-[agrave]-vis the 
cost of alternatives recommended by the commenter.\59\ This commenter 
also said its members have observed the shifting of TBA market business 
to non-FINRA members, who have a significant competitive advantage over 
FINRA-regulated broker-dealers.\60\ Further, this commenter said that 
the proposal would result in a reduction in the number of investors 
willing to invest in TBA market products, and that it would be willing 
to work with FINRA to supply market or economic information within the 
access of its members.\61\ One commenter said that the costs of the 
proposal would be considerable, that implementation work would be 
extensive in executing or renegotiating Master Securities Forward 
Transaction Agreements (``MSFTAs''), and that requirements such as 
maintenance margin and position liquidation would impose additional 
costs.\62\ Another commenter said the proposal would have an 
inequitable impact on competition between small dealers and large 
dealers, that many small dealers would exit the TBA market rather than 
implement the rule, that large firms might not be willing to deal with 
small firms, and that liquidity for small firms would be negatively 
affected.\63\ A different commenter said that many firms that pose no 
systemic risk potential and do only a moderate amount of mortgage 
business may choose to exit the marketplace rather than comply with the 
rule, which would further harm liquidity in the U.S. fixed income 
market, with possible adverse effects on the U.S. mortgage market, and 
that the proposal would require small-to-medium sized dealers to 
execute margin agreements with all their mortgage counterparties.\64\ 
This commenter said that large investment managers would be unlikely to 
agree to execute margin agreements with an unlimited number of 
counterparties.\65\ Similarly, another commenter said that the proposal 
would exacerbate a concentration of activity in the largest active 
firms and that the rule would impose burdens on investment managers, 
who would enter into margin agreements only with the largest dealer 
counterparties, thereby negatively impacting smaller firms.\66\ One 
commenter stated that as a result of the proposal only FINRA members 
would be required to impose margin requirements and that non-FINRA 
member banks that currently are following the TMPG best practices may 
choose not to do so.\67\ This commenter said that smaller members would 
exit the market rather than implement the required margin.\68\ 
Similarly, another commenter said large firms that follow the TMPG best 
practices already have margining mechanisms in place but that smaller 
firms would be disproportionately affected by the proposal because more 
TBA market transactions will migrate to non-FINRA member banks.\69\ 
This commenter said the proposal would lead to fewer competitors and 
higher costs for consumers.\70\
---------------------------------------------------------------------------

    \56\ See ACLI 2 Letter, AII 2 Letter, BDA 2 Letter, Coastal 2 
Letter, Senator Cotton Letter, Korth Letter, SIFMA AMG 2 Letter, and 
Vining Sparks Letter.
    \57\ See ACLI 2 Letter.
    \58\ Id.
    \59\ See SIFMA 2 Letter.
    \60\ Id.
    \61\ Id.
    \62\ See AII 2 Letter.
    \63\ See Korth Letter.
    \64\ See Senator Cotton Letter.
    \65\ Id.
    \66\ See BDA 2 Letter.
    \67\ See Coastal 2 Letter.
    \68\ Id.
    \69\ See Vining Sparks Letter.
    \70\ Id.
---------------------------------------------------------------------------

    Some commenters proffered estimates as to the cost of implementing 
the proposal.\71\ A commenter said the proposal would require FINRA 
members of all sizes, regardless of how active they are in the market, 
to hire new personnel to comply with the rule.\72\ This commenter said 
that hiring three new employees to staff a new margin department would 
cost an estimated $150,000 per employee per year, that third party 
vendor technology could cost $625,000 in licensing fees in the first 
year, and that a competing vendor solution would cost as much as 
$875,000 over the first two years of use.\73\ Another commenter stated 
that buying or licensing a system to comply with the rule would cost 
over $100,000, that there would be costs for development resources, and 
that cost for implementation could run to $250,000 or more.\74\ This 
commenter said that third party pricing would be between $150,000 and 
$400,000 per year depending on the vendor, that two or maybe three 
employees would be needed, and that this could cost an additional 
$200,000 per year.\75\ This commenter said the ongoing cost of the 
proposal would be in the $300,000 to $400,000 range.\76\
---------------------------------------------------------------------------

    \71\ See BDA 2 Letter and Vining Sparks Letter.
    \72\ See BDA 2 Letter.
    \73\ Id.
    \74\ See Vining Sparks Letter.
    \75\ Id.
    \76\ Id.
---------------------------------------------------------------------------

    In response, FINRA addressed the commenters' concerns in the 
original filing and in Amendment No. 1.\77\ In the original filing, 
FINRA set forth an extensive analysis of the proposal's potential 
impact.\78\ FINRA addressed, among other things, the proposal's 
potential impact on mortgage bankers,\79\ broker-dealers, including 
smaller firms,\80\ and retail customers and consumers, and presented 
quantitative analysis of trade and account data.\81\ As FINRA discussed 
in the original filing, and again in response to comments in Amendment 
No. 1, FINRA noted that there will likely be direct and indirect costs 
associated with the rule change, and that firms will be impacted.\82\ 
FINRA considered and analyzed alternatives.\83\ FINRA also set forth 
the need for the rule change, including the need to manage the risk to 
members extending credit and to help maintain a properly functioning 
retail mortgage market even in stressed market conditions.\84\ FINRA 
noted that comment on the proposed rule change has been solicited on 
three occasions: First in response to Regulatory Notice 14-02; \85\ 
second in response to the original filing; and third in response to the 
Order Instituting Proceedings. In three rounds of comment, with a total 
of

[[Page 22354]]

132 individual letter comments,\86\ a handful of commenters have 
provided in the public record specific, quantified estimates as to the 
potential cost of implementing the proposed rule change.\87\ FINRA 
notes commenters concerns as to the quantitative analysis.\88\ However, 
FINRA further notes that a key purpose of the comment process is to 
supply the public record with specific information for regulators to 
consider in the development of rulemaking. FINRA notes that it is of 
little assistance to the comment process to state in a comment letter 
that the pertinent information is available, and then not provide such 
information in the letter for public review.
---------------------------------------------------------------------------

    \77\ See supra notes 3 and 5.
    \78\ See Notice, 80 FR 63603, 63611 through 63615.
    \79\ See Notice, 80 FR 63603, 63611.
    \80\ See Notice, 80 FR 63603, 63612 through 63613.
    \81\ See Notice, 80 FR 63603, 63611 through 63614.
    \82\ See Notice, 80 FR 63603, 63611; see also supra notes 5 and 
6.
    \83\ See Notice, 80 FR 63603, 63614 through 63615.
    \84\ See Notice, 80 FR 63603, 63604, 63611, 63613.
    \85\ See Regulatory Notice 14-02 (January 2014) (FINRA Requests 
Comment on Proposed Amendments to FINRA Rule 4210 for Transactions 
in the TBA Market).
    \86\ FINRA received 29 comments in response to Regulatory Notice 
14-02. As discussed above, the Commission received 55 individual 
letter comments and 54 form letters in response to the Notice, and 
23 individual letter comments in response to the Order Instituting 
Proceedings.
    \87\ See Notice, note 90 at 80 FR 63603, 63613; see also, BDA 2 
Letter and Vining Sparks Letter, as discussed above.
    \88\ See SIFMA 2 Letter and ACLI 2 Letter.
---------------------------------------------------------------------------

    In response to comments, FINRA has engaged in ongoing discussions 
with various market participants and providers to understand the 
potential regulatory costs of compliance with the proposed rule.\89\ 
Similar to the original filing,\90\ FINRA believes the commenters' 
estimates fall toward the higher end of the cost range for building, 
upgrading, maintaining, licensing or outsourcing the necessary systems 
and hiring of necessary staff. FINRA understands that estimates will 
vary depending on the size and business model of a firm, and the extent 
of its current and anticipated involvement in TBA market transactions.
---------------------------------------------------------------------------

    \89\ See BDA 2 Letter and Vining Sparks Letter.
    \90\ See Notice, 80 FR 63603, 63613.
---------------------------------------------------------------------------

    As a result of these ongoing discussions, FINRA understands that 
some firms have been transacting in the TBA market for years and 
margining has been a common practice due to the TMPG best practices or 
prudent counterparty risk management practices at these firms. These 
firms already have the technology and staffing in place for collateral 
management in their repo, swap and OTC derivatives transactions and 
would only have to build into their current systems the exceptions 
provided for under the proposed rule.\91\ Costs associated with such 
enhancements or additions to the current systems should vary based on 
the scalability and flexibility of such systems. For instance, sources 
at one firm estimated that it required approximately 60 hours of 
programming time, at a cost of approximately $5,000, to build systems 
to track margin obligations consistent with the TMPG best practices. 
The same firm did not plan to hire additional staff to track margin 
obligations pursuant to the proposed rule; however, another firm 
estimated that its total annual costs to comply with the proposed 
requirements could run from $60,000 to $100,000, including both 
staffing and technology costs.
---------------------------------------------------------------------------

    \91\ See, e.g., the ``cash account'' exceptions and the de 
minimis transfer amount as discussed in Sections F and G, 
respectively, of Amendment No. 2.
---------------------------------------------------------------------------

    FINRA understands that there are various technology solutions and 
service providers for firms that have relatively less engagement in TBA 
market transactions, and therefore would need more affordable and 
flexible products. One service provider to firms noted that costs could 
vary widely depending on the level of service that a firm purchases and 
estimated that it would be typical of its firm customers to pay, in 
addition to a basic set up fee of $1,000, approximately $1,000 to 
$2,500 per month for the use of a web-based system to manage margin 
requirements pursuant to the proposed rule. While this service is 
purely designed to compute margin obligations, the provider estimated 
that a firm seeking more robust levels of service, which would include 
a more sophisticated tracking system of counterparty exposures and 
margin obligations for all of its asset types, including margining for 
TBA market transactions, could spend higher amounts on software to 
manage such systems, and that installation and preparation would 
require approximately one week.
    FINRA understands that firms with significant trading activity in 
the TBA market may already have the systems built, or the flexibility 
to enhance current systems, to comply with the proposed rule, whereas 
firms with relatively little activity in this market, whose business 
models and trading activity would qualify them for the exceptions as 
set forth in the proposed rule, can find affordable solutions. One firm 
that does a significant business in the TBA market said that it has 
already built systems to reflect the TMPG best practices and estimated 
it would need to spend $50,000 to $100,000 on additional software and 
technology costs to reflect the additional requirements under the 
proposed rule change, and would need to hire two to three additional 
staff at approximately $70,000 to $100,000 per person to track margin 
obligations. FINRA acknowledges that there may also be firms whose 
customers' trading activity in the TBA market may qualify them for the 
de minimis transfer exception on some days only, and may be at a level 
that would require a more sophisticated margin tracking system on other 
days. Implementation costs may be higher for such firms, as they may 
have to determine the size of their activity in TBA market transactions 
and hence scale their systems accordingly, or they may choose to 
implement more rigorous solutions in order to avoid non-compliance. 
FINRA recognizes that some firms may seek to update existing master 
agreements or to renegotiate master agreement terms upon the adoption 
of the proposed rule. Any related costs to these activities will likely 
vary with the amount of the activity conducted by a member, the number 
of counterparties and the amount of the activity conducted by its 
counterparties.

B. Scope of the Proposal

    One commenter said that the scope of Covered Agency Transactions 
should be amended to cover only forward settling TBA market 
transactions whose settlement dates extend beyond the relevant 
industry-published standard settlement dates.\92\ Another commenter 
stated the rule should exclude Specified Pool Transactions, ARMs and 
CMOs on grounds similar to the proposed exception for multifamily and 
project loan securities.\93\ A different commenter said that, on 
similar grounds, SBA securities should be excluded from the 
proposal.\94\ And, one commenter stated that the proposed rule should 
not include Specified Pool Transactions and CMOs, that these products 
do not pose systemic risks, that FINRA should analyze the specified 
pool and CMO markets, and that FINRA should address why the proposed 
rule requirements are not being imposed on member banks of the Federal 
Reserve System.\95\
---------------------------------------------------------------------------

    \92\ See ACLI 2 Letter.
    \93\ See BDA 2 Letter.
    \94\ See Vining Sparks Letter.
    \95\ See Coastal 2 Letter.
---------------------------------------------------------------------------

    In response, in the original filing, and again in response to 
comment in Amendment No. 1, FINRA addressed the commenters' concerns as 
to the scope of Covered Agency Transactions as defined in the rule.\96\ 
FINRA notes that Specified Pool Transactions, ARMs, CMOs and the SBA 
securities as specified under the rule all share the type of extended 
settlement risk that the proposed rule change aims to address, for 
which reason they are included within the scope of Covered Agency 
Transactions. FINRA's reasoning and

[[Page 22355]]

approach as to multifamily and project loan securities, as set forth in 
Amendment Nos. 1 and 2, are designed with a view to those products in 
the totality of their characteristics, which is distinct from the 
products raised by the commenters. For the reasons set forth in the 
original filing and Amendment No. 1, FINRA does not propose to revise 
the definition of Covered Agency Transactions.\97\
---------------------------------------------------------------------------

    \96\ See Notice, 80 FR 63603, 63605, 63615 through 63616; see 
also supra notes 3 and 5.
    \97\ See supra notes 3 and 5.
---------------------------------------------------------------------------

C. Creation of Account Types

    One commenter said that the proposed rule change effectively 
mandates that members create an account type that would be specific to 
TBA market transactions.\98\ This commenter said that is because the 
proposed rule imposes distinct requirements from other types of 
products, and that the requirements are being imposed at the same time 
as industry is preparing to expend significant resources to migrate to 
``T+2'' settlement.
---------------------------------------------------------------------------

    \98\ See SIFMA 2 Letter.
---------------------------------------------------------------------------

    In response, FINRA notes that the proposed rule does not mandate 
the creation of account types dedicated to TBA market transactions. 
Based on discussions with various market participants and service 
providers, FINRA believes it is well within the operational and 
technological ability of firms to appropriately handle margining of TBA 
market transactions. As discussed above, FINRA has acknowledged that 
implementation of the proposal will involve costs. FINRA is aware that 
the proposed rule change is not the only regulatory development that 
could affect firms. At the same time, however, FINRA notes that 
regulation, like industry, continually evolves with new and ongoing 
initiatives. FINRA is aware that the T+2 migration will involve demands 
on member resources, yet FINRA also notes that the T+2 initiative, with 
all its attendant resource demands, has been sought and advocated by 
industry.\99\ It would not be consistent with FINRA's mission of 
investor protection and market integrity, nor could it ever be 
feasible, for FINRA to refrain from rulemaking until the completion of 
every initiative by other regulators and by industry that could impose 
burdens or demands on resources.
---------------------------------------------------------------------------

    \99\ See Letter from Paul Schott Stevens, President & CEO, 
Investment Company Institute, and Kenneth E. Bentsen, Jr., President 
and CEO, SIFMA, to Mary Jo White, Chair, Commission (June 18, 2015).
---------------------------------------------------------------------------

D. Maintenance Margin

    As set forth more fully in the original filing and again in 
Amendment No. 1,\100\ non-exempt accounts \101\ would be required to 
post two percent maintenance margin plus any net mark to market loss on 
their Covered Agency Transactions.\102\ A few commenters expressed 
opposition to the proposed maintenance margin requirement.\103\ These 
commenters believed that the proposal is inconsistent with the TMPG 
best practices, that the requirement would unfairly affect market 
participants that do not pose systemic risk, and that the requirement 
places FINRA members at a competitive disadvantage. One commenter said 
that if FINRA imposes the maintenance margin requirement, the 
requirement should be revised so as to be easier to implement.\104\ 
This commenter said that FINRA should consider a tiered approach for 
trades that are under a defined gross dollar amount and that 
clarification as to the requirement's application to DVP accounts is 
needed.\105\
---------------------------------------------------------------------------

    \100\ See supra notes 3 and 5.
    \101\ The term ``exempt account'' is defined under FINRA Rule 
4210(a)(13). See Notice, 80 FR 63603, 63606; see also proposed FINRA 
Rule 4210(a)(13)(B)(i) in Exhibit 5 in Amendment No. 2.
    \102\ See Notice, 80 FR 63603, 63607 through 63608; see also 
supra notes 3 and 5.
    \103\ See AII 2 Letter, Matrix 2 Letter, SIFMA 2 Letter, and 
SIFMA AMG 2 Letter.
    \104\ See Matrix 2 Letter.
    \105\ Id.
---------------------------------------------------------------------------

    In its response, in the original filing and again in Amendment No. 
1, FINRA addressed the commenters' concerns as to the proposed 
maintenance margin requirement.\106\ FINRA noted that maintenance 
margin is a mainstay of margin regimes in the securities industry, and, 
as such, the need to appropriately track transactions should be well 
understood to market participants. FINRA is sensitive to commenters' 
concerns as to the potential impact of the requirement on members and 
their non-exempt customer accounts. For this reason, as set forth more 
fully in the original filing, and as discussed further below, FINRA 
revised the proposal to include an exception tailored to customers 
engaging in non-margined, cash account business.\107\ As such, in 
response to comments, FINRA does not believe it is necessary or 
appropriate to further tier the requirement.\108\ With respect to the 
application of the requirement to DVP accounts, FINRA will consider 
specific interpretive issues as they are raised and will consider 
guidance as needed. FINRA does not propose to revise the maintenance 
margin requirement.
---------------------------------------------------------------------------

    \106\ See Notice, 80 FR 63603, 63616 through 63617; see also 
supra notes 3 and 5.
    \107\ See supra notes 3 and 5.
    \108\ See Matrix 2 Letter.
---------------------------------------------------------------------------

E. ``Cash Account'' Exceptions

    As set forth more fully in the original filing, the proposed margin 
requirements would not apply to any counterparty that has gross open 
positions \109\ 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 DVP basis or for cash. Similarly, a 
non-exempt account would be excepted from the rule's proposed two 
percent maintenance margin requirement 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. The rule uses 
parallel language with respect to both of these exceptions to provide 
that they are not available to a counterparty that, in its transactions 
with the member, engages in dollar rolls, as defined in FINRA Rule 
6710(z),\110\ or ``round robin'' \111\ trades, or that uses other 
financing techniques for its Covered Agency Transactions. FINRA further 
noted that these exceptions are intended to address the concerns of 
smaller customers engaging in non-margined, cash account business.\112\
---------------------------------------------------------------------------

    \109\ See supra note 3. Paragraph (e)(2)(H)(i)e. of the rule 
defines ``gross open position'' 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; 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. See Exhibit 5 in 
Amendment No. 2.
    \110\ 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.
    \111\ Paragraph (e)(2)(H)(i)i. defines ``round robin'' trade 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. See Exhibit 5 in Amendment No. 2.
    \112\ See Notice, 80 FR 63603, 63605. For convenience, the $2.5 
million and maintenance margin exceptions are referred to as the 
``cash account'' exceptions for purposes of Amendment No. 2.

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

[[Page 22356]]

    One commenter said that is was not clear how FINRA had arrived at 
the $2.5 million exception and suggested that the amount should be 
raised to $10 million.\113\ Another commenter said members should be 
allowed to negotiate the amount.\114\ A different commenter stated that 
it had concerns about how to interpret the term ``regularly settles'' 
and that it was skeptical that members would find it worthwhile to 
build systems to comply with the cash account exceptions, thereby 
making it likely members will not offer them to counterparties.\115\ 
This commenter said it would take the term ``regularly settles'' to 
mean ``a substantial portion of the time.'' \116\
---------------------------------------------------------------------------

    \113\ See SIFMA 2 Letter.
    \114\ See SIFMA AMG 2 Letter.
    \115\ See SIFMA 2 Letter.
    \116\ Id.
---------------------------------------------------------------------------

    In response, FINRA addressed commenters' concerns in Amendment No. 
1 and does not propose to modify the cash account exceptions as 
proposed in the original filing.\117\ The cash account exceptions are 
designed to help address the concerns of smaller participants in the 
market. If members believe that it is too onerous to offer these 
exceptions to their customers, they are not obligated under the rule to 
do so. Commenters on the original filing asked for guidance as to the 
term ``regularly settles,'' \118\ and in response FINRA noted that, as 
worded, the term ``regularly settles'' is designed to provide scope for 
flexibility on members' part as to how they implement the exceptions. 
FINRA said that it expects that members are in a position to make 
reasonable judgments as to the observed pattern and course of dealing 
in their customers' behavior by virtue of their interactions with their 
customers. However, FINRA does not agree with one commenter's 
interpretation that ``regularly'' is to be equated with ``substantial 
portion of the time.'' \119\ FINRA views the term ``regularly'' as 
conveying the prevailing or dominant pattern and course of the 
customer's behavior. FINRA stated in Amendment No. 1 that, in 
ascertaining the customer's regular pattern, a member may use the 
customer's history of transactions with the member, as well as any 
other relevant information of which the member is aware, and, further, 
that members should be able to rely on the reasonable representations 
of their customers where necessary for purposes of the requirement. As 
FINRA noted in Amendment No. 1, FINRA will consider issuing further 
guidance as needed.\120\
---------------------------------------------------------------------------

    \117\ See supra notes 5 and 10.
    \118\ See supra notes 5 and 6.
    \119\ See SIFMA 2 Letter.
    \120\ See supra notes 5 and 10.
---------------------------------------------------------------------------

    With respect to a commenter's suggestion to increase the $2.5 
million amount to $10 million,\121\ FINRA noted in the original filing, 
and again in Amendment No. 1, that the amount is meant to be 
appropriately tailored to smaller accounts that are less likely to pose 
systemic risk.\122\ FINRA noted that increasing the amount would 
undermine the rule's purpose. FINRA does not object if parties attempt 
to negotiate thresholds, provided the thresholds are not greater than 
prescribed by the rule. In that regard, FINRA noted that permitting 
parties to negotiate higher thresholds by separate agreement, whether 
entered into before the rule takes effect or afterwards, would only 
serve to cut against the rule's objectives.
---------------------------------------------------------------------------

    \121\ See SIFMA 2 Letter.
    \122\ See Notice, 80 FR 63603, 63616; see also supra notes 3 and 
5.
---------------------------------------------------------------------------

F. De Minimis Transfer

    The proposed rule sets forth, for a single counterparty, a $250,000 
de minimis transfer amount up to which margin need not be collected or 
charged to net capital, as specified by the rule.\123\ One commenter 
stated members should be allowed to negotiate the de minimis transfer 
amount with their counterparties.\124\ Some commenters said the de 
minimis transfer amount should be $500,000,\125\ which one commenter 
suggested would align with requirements for swaps.\126\ A different 
commenter said the amount should be $1 million.\127\ One commenter 
expressed concern that members would end up needing to monitor the 
$250,000 amount even though it would benefit few if any customers.\128\
---------------------------------------------------------------------------

    \123\ See Notice, 80 FR 63603, 63608; see also supra notes 3 and 
5.
    \124\ See SIFMA AMG 2 Letter.
    \125\ See ACLI 2 Letter and SIFMA 2 Letter.
    \126\ See SIFMA 2 Letter.
    \127\ See BDA 2 Letter.
    \128\ See SIFMA 2 Letter.
---------------------------------------------------------------------------

    In response, FINRA addressed commenters' concerns in Amendment No. 
1 and does not propose to modify the de minimis transfer provisions as 
proposed in the original filing.\129\ FINRA noted in the original 
filing that the de minimis transfer amount is meant to be appropriately 
tailored to help prevent smaller members from being subject to 
competitive disadvantage.\130\ FINRA noted that increasing the amount 
would undermine the rule's purpose. As noted above, FINRA does not 
object if parties attempt to negotiate de minimis transfer thresholds, 
provided the thresholds are not greater than prescribed by the rule.
---------------------------------------------------------------------------

    \129\ See supra notes 3 and 5.
    \130\ See Notice, 80 FR 63603, 63608, 63617; see also supra 
notes 3 and 5.
---------------------------------------------------------------------------

G. Timing of Margin Collection and Position Liquidation

    The proposed rule provides that, with respect to exempt accounts, 
if a mark to market loss, or, with respect to non-exempt accounts, a 
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 must deduct the amount of the mark to 
market loss or deficiency from net capital as provided in Exchange Act 
Rule 15c3-1. Further, unless FINRA has specifically granted the member 
additional time, the member is 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.\131\ One commenter said 
the required timing of margin collection should be replaced with a 
three-day transfer period.\132\ Another commenter said that the 
proposed margin collection timing is operationally impractical for TBA 
market transactions, that the requirement would create technological 
difficulties because it deviates from ordinary operational practices, 
that FINRA's Regulatory Extension System would not be suitable for 
requirements that are impractical to begin with, and that the portfolio 
margin provisions under FINRA Rule 4210(g)(10)(B) are not a comparable 
analogy for purposes of margin collection timing.\133\ This commenter 
also said the Regulatory Extension System is intended to grant waivers 
from ordinarily applicable requirements arising under unusual 
circumstances.\134\ This commenter asked whether the Regulatory 
Extension System would accommodate permanent waivers for certain firms 
and customers and whether there would be any limit to the number of 
waivers a firm could obtain either generally or for a particular 
customer.\135\ Another commenter suggested the proposed requirement is 
not consistent with FINRA Rule 4210.\136\ With respect to the proposed

[[Page 22357]]

liquidation requirement, some commenters said the requirement should be 
omitted, that five business days is too short, and that parties should 
be permitted to negotiate the time frames under the rule.\137\
---------------------------------------------------------------------------

    \131\ See Notice, 80 FR 63603, 63607 through 63608; see also 
supra notes 3 and 5.
    \132\ See SIFMA AMG 2 Letter.
    \133\ See SIFMA 2 Letter.
    \134\ Id.
    \135\ Id.
    \136\ See Matrix 2 Letter.
    \137\ See ACLI 2 Letter, Matrix 2 Letter, SIFMA 2 Letter, and 
SIFMA AMG 2 Letter.
---------------------------------------------------------------------------

    In response, FINRA addressed the commenters' concerns in Amendment 
No. 1.\138\ FINRA does not propose to modify the proposed requirements. 
As FINRA noted in Amendment No. 1, consistent with longstanding 
practice under FINRA Rule 4210(f)(6), the proposed rule allows FINRA to 
specifically grant the member additional time.\139\ FINRA maintains, 
and regularly updates,\140\ the Regulatory Extension System for this 
purpose, which is well understood to industry participants. In response 
to comments, FINRA notes that the Regulatory Extension System does not 
grant waivers from requirements under Rule 4210, whether permanent or 
temporary.\141\ Additional time is granted, pursuant to the rule, for 
meeting specified obligations and, consistent with longstanding 
practice under the rule, FINRA may limit or restrict the extensions 
granted for a firm or customer. FINRA will consider additional guidance 
as needed. FINRA referenced the portfolio margin rules in Amendment No. 
1 to illustrate that, with respect to the timing of margin collection, 
the proposed language ``by the close of business on the next business 
day after the business day'' on which the mark to market loss or 
deficiency arises is consistent with existing language under Rule 4210 
and is well understood by members.\142\ With respect to the liquidation 
requirement, FINRA noted that the five business day period should 
provide sufficient time for members to resolve issues. Further, as 
FINRA noted in the original filing and in Amendment No. 1, FINRA 
believes the specified period is appropriate in view of the potential 
counterparty risk in the TBA market.\143\
---------------------------------------------------------------------------

    \138\ See supra note 5.
    \139\ See supra note 5.
    \140\ See, e.g., Regulatory Notice 10-28 (June 2010) (Extension 
of Time Requests); Regulatory Notice 14-13 (March 2014) (Regulatory 
Extension System Update).
    \141\ See SIFMA 2 Letter.
    \142\ See FINRA Rule 4210(g)(10)(B); see supra note 5.
    \143\ See Notice, 80 FR 63603, 63619; see also supra notes 3 and 
5.
---------------------------------------------------------------------------

H. Two-Way (Bilateral) Margin

    Some commenters said that the proposed rule change should require 
bilateral, two-way margining.\144\ In response, FINRA addressed this in 
the original filing and in Amendment No. 1. FINRA noted its support for 
the use of two-way margining as a means of managing risk.\145\ However, 
FINRA noted that it does not propose to address such a requirement at 
this time as part of the proposed rule change.
---------------------------------------------------------------------------

    \144\ See ACLI 2 Letter, SIFMA AMG 2 Letter, and Sutherland 2 
Letter.
    \145\ See Notice, 80 FR 63603, 63619 through 63620; see also 
supra notes 3 and 5.
---------------------------------------------------------------------------

I. Third Party Custodians

    A commenter said the proposed rule change should provide for a 
member's counterparty to have the right to segregate any margin posted 
with a FINRA member with an independent third party custodian.\146\ In 
response, FINRA addressed this concern in Amendment No. 1.\147\ FINRA 
noted that, with respect to third party custodial arrangements, FINRA 
believes these are best addressed in separate rulemaking or guidance, 
as appropriate. FINRA welcomes further discussion of these issues, but 
does not propose to address them as part of the proposed rule change.
---------------------------------------------------------------------------

    \146\ See Sutherland 2 Letter.
    \147\ See supra notes 5 and 6.
---------------------------------------------------------------------------

J. Exchange Act Rule 15c3-3

    One commenter said that the proposed rule change does not address 
the treatment of customer margin for purposes of the segregation 
requirements under Exchange Act Rule 15c3-3.\148\ This commenter 
suggested that the Commission should issue an interpretation to 
correspond with the proposed rule change.\149\ FINRA notes the 
suggestion is outside the scope of the proposed rule change and 
welcomes further discussion of this issue.
---------------------------------------------------------------------------

    \148\ See SIFMA 2 Letter.
    \149\ Id.
---------------------------------------------------------------------------

K. Sovereign Entities

    As set forth more fully in the original filing, the proposed 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),\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 proposed 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.\151\ One commenter said that sovereign wealth funds 
should be excepted from the proposed margin requirements.\152\ In 
response, FINRA addressed this concern in the original filing \153\ and 
again in Amendment No. 1.\154\ FINRA believes that to include sovereign 
wealth funds within the parameters of the proposed exception would 
create perverse incentives for regulatory arbitrage.
---------------------------------------------------------------------------

    \150\ 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 (``Federal Reserve Board''), or the Federal 
Deposit Insurance Corporation.
    \151\ See Notice, 80 FR 63603, 63606; see also supra notes 3 and 
5.
    \152\ See SIFMA AMG 2 Letter.
    \153\ See Notice, 80 FR 63603, 63619.
    \154\ See supra note 5.
---------------------------------------------------------------------------

L. Exempt Account Treatment

    Some commenters said that the exempt account definition should be 
expanded as part of the rule change to include foreign equivalent 
entities and collective investment trusts.\155\ Another commenter 
suggested the exempt account definition should be updated.\156\ In 
response, in Amendment No. 1, FINRA noted that, other than for purposes 
of one conforming revision, as set forth in the original filing,\157\ 
the proposed rule change is not intended to revisit the definition of 
exempt accounts for the broader purposes of Rule 4210. FINRA believes 
that this issue is properly addressed by separate rulemaking or 
guidance, as appropriate.
---------------------------------------------------------------------------

    \155\ See SIFMA 2 Letter and SIFMA AMG 2 Letter.
    \156\ See Matrix 2 Letter.
    \157\ See Notice, 80 FR 63603, 63606; see also supra notes 3 and 
5.
---------------------------------------------------------------------------

M. Third Party Providers

    A commenter suggested that FINRA should make clear that members 
required to collect margin under the proposed rule change may utilize 
third party service providers and products.\158\ FINRA addressed this 
concern in Amendment No. 1.\159\ FINRA believes that third party 
service providers are permissible provided the member complies with all 
applicable rules and guidance, including, among other things, the 
member's obligations under FINRA Rule 3110 and as described in Notice 
to Members 05-48 (July 2005) (Outsourcing).
---------------------------------------------------------------------------

    \158\ See Matrix 2 Letter.
    \159\ See supra note 5.
---------------------------------------------------------------------------

N. Netting Services

    A commenter said that the proposal should not be implemented until 
the Mortgage-Backed Securities Division (``MBSD'') of Fixed Income 
Clearing Corporation enlarges the universe of transactions for which it 
provides netting services and that, until MBSD does so, the proposal 
would unfairly

[[Page 22358]]

discriminate against mid-sized firms.\160\ In Amendment No. 1, FINRA 
noted that coordination with MBSD is outside the scope of the proposed 
rule change.\161\ FINRA welcomes further discussion of this issue.
---------------------------------------------------------------------------

    \160\ See Brean Capital 3 Letter.
    \161\ See supra note 5.
---------------------------------------------------------------------------

O. Scope of FINRA's Authority

    Some commenters said that the proposed rule change is not 
consistent with the intent of Section 7 of the Exchange Act and 
questioned FINRA's authority to proceed with the proposed rule 
change.\162\ The commenters cited the Senate Report \163\ in connection 
with Congress's adoption of the Secondary Mortgage Market Enhancement 
Act of 1984 \164\ (``SMMEA'') in support of this view. In response, 
FINRA notes that Section 7 of the Exchange Act sets forth the 
parameters of the margin setting authority of the Federal Reserve Board 
and does not bar action by FINRA. SMMEA does not address FINRA's 
authority as the statute was designed, among other things, to level the 
competitive playing field between issuers of private-label MBS (defined 
under the SMMEA as ``mortgage related securities'' under Section 
3(a)(41) of the Exchange Act) vis-[agrave]-vis agency and GSE MBS.\165\ 
As FINRA noted in the original filing and Amendment No. 1, FINRA 
believes the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Exchange Act.\166\
---------------------------------------------------------------------------

    \162\ See BDA 2 Letter, Coastal 2 Letter, and Senator Cotton 
Letter.
    \163\ See S. Rep. No. 293, 98th Cong., 2d Session (1983).
    \164\ Public Law 98-440, 98 Stat. 1689 (1984).
    \165\ See David Abelman, The Secondary Mortgage Market 
Enhancement Act, 14 Real Estate Law Journal 136, 138 (1985) (noting 
that Congress sought to encourage private issuance by eliminating 
competitive advantages in favor of government issued securities); 
Edward L. Pittman, Economic and Regulatory Developments Affecting 
Mortgage Related Securities, 64 Notre Dame Law Review 497, 537 
(noting that the SMMEA amendments to Section 7 of the Exchange Act 
were intended to facilitate the creation of mortgage related 
securities).
    \166\ See 80 FR 63603, 63609. Section 15A(b)(6) of the Exchange 
Act 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. See also supra notes 3 
and 5.
---------------------------------------------------------------------------

P. Implementation Period

    In Amendment No. 1, FINRA stated that it believes that a phased 
implementation should be appropriate. FINRA proposed that the risk 
limit determination requirements as set forth in paragraphs (e)(2)(F), 
(e)(2)(G) and (e)(2)(H) of Rule 4210 and proposed Supplementary 
Material .05 of the rule become effective six months from the date the 
proposed rule change is approved by the Commission. FINRA proposed that 
the remainder of the proposed rule change become effective 18 months 
from the date the proposed rule change is approved by the 
Commission.\167\ One commenter said 18 months represents a reasonable 
time frame.\168\ Another commenter said that the implementation time 
frame as proposed in Amendment No. 1 is sufficiently reasonable.\169\ A 
different commenter said that compliance with the proposed requirements 
would be difficult to complete and that it would prefer a time frame of 
24 months, but that its members could aim to complete their 
implementation work within 18 months.\170\ One commenter said that an 
implementation period of at least 18 months would be appropriate and 
that two years would be more practical.\171\ This commenter said that 
the proposed six-month period for implementation of the risk limit 
requirements would effectively require broker-dealers to complete their 
diligence as to their customers within six months even though the 
proposed rule does not take effect in full until a year after that six-
month period.\172\ Another commenter said that it would need 18 to 24 
months to complete implementation of the proposed requirements and 
suggested that FINRA should not have a separate time frame for the risk 
limit requirements.\173\
---------------------------------------------------------------------------

    \167\ See supra note 5.
    \168\ See ACLI 2 Letter.
    \169\ See AII 2 Letter.
    \170\ See SIFMA AMG 2 Letter.
    \171\ See SIFMA 2 Letter.
    \172\ Id.
    \173\ See Vining Sparks Letter.
---------------------------------------------------------------------------

    In response, FINRA does not propose to change the implementation 
periods as set forth in Amendment No. 1.\174\ FINRA does not believe it 
would serve the public interest to extend implementation of the rule 
beyond 18 months once approved by the Commission. FINRA believes the 
six-month time frame for the risk limit requirements is appropriate 
given that members engaging in business in the TBA market should 
undertake the effort to understand their counterparties.
---------------------------------------------------------------------------

    \174\ See supra note 5.
---------------------------------------------------------------------------

IV. Designation of a Longer Period for Commission Action on Proceedings 
To Determine Whether To Approve or Disapprove SR-FINRA-2015-036

    Section 19(b)(2) of the Exchange Act \175\ provides that, after 
initiating approval or disapproval proceedings, the Commission shall 
issue an order approving or disapproving the proposed rule change not 
later than 180 days after the date of the publication of the notice of 
filing of the proposed rule change. The Commission may extend the 
period for issuing an order approving or disapproving the proposed rule 
change, however, by not more than 60 days if the Commission determines 
that a longer period is appropriate and publishes the reasons for such 
determination.\176\ The 180th day after publication of the Notice in 
the Federal Register is April 17, 2016 and the 240th day after 
publication of the Notice in the Federal Register is June 16, 
2016.\177\
---------------------------------------------------------------------------

    \175\ 15 U.S.C. 78s(b)(2).
    \176\ 15 U.S.C. 78s(b)(2)(B)(ii)(II)(aa).
    \177\ See supra note 3.
---------------------------------------------------------------------------

    The Commission is extending the 180-day time period. The Commission 
finds that it is appropriate to designate a longer period within which 
to take action on the proposed rule change so that it has sufficient 
time to consider the proposed rule change, as modified by Amendment 
Nos. 1 and 2, including the matters raised in the comment letters and 
FINRA's submissions.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the filing, as 
amended by Amendment No. 2, is consistent with the Exchange 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

[[Page 22359]]

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 May 2, 2016.
    Accordingly, the Commission, pursuant to Section 19(b)(2)(B) of the 
Exchange Act, designates June 16, 2016 as the date by which the 
Commission shall either approve or disapprove the proposed rule change 
(File No. SR-FINRA-2015-036).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\178\
---------------------------------------------------------------------------

    \178\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08644 Filed 4-14-16; 8:45 am]
BILLING CODE 8011-01-P