At its September Board meeting, FINRA approved significant revisions to margin requirements for Covered Agency TBA (to-be-announced) Transactions.

The revisions would, pending approval by the SEC: (i) eliminate the 2 percent maintenance margin requirement and (ii) allow firms to take capital charges in lieu of collecting margin, within certain limits. In addition, FINRA approved the publication of a Regulatory Notice to seek comments on amendments to Rule 4210 to "clarify and incorporate . . . current interpretations" regarding "when-issued" and extended settlement transactions.

In other matters, the Board approved:

  • the proposal of amendments to extend the time for non-parties to respond in arbitration proceedings; and
  • the issuance of a request for comments on proposed amendments to expand the Trade Reporting and Compliance Engine (TRACE) trade reporting rules to include transactions in U.S. dollar-denominated foreign sovereign debt securities.

Commentary / Steven Lofchie

The two margin actions are significant. Eliminating the requirement to collect initial margin on TBA transactions will vastly simplify the implementation of the rule. Although this requirement seemed "common sense," it would have created tremendous operational problems, the difficulties and expense of which overwhelmed the benefits, which were not that great in light of the limited risks of the product.

Likewise, it is all to the good that FINRA is seeking comment on the margin on when-issued trades. It is clear that FINRA does not believe that the current margin requirements derived from a literal reading of the rules are sufficient. Unfortunately, that has tempted FINRA to provide more creative readings of the rules. This has resulted in enforcement (or at least threatened enforcement) in ways that are inequitable; much better that FINRA should engage in an actual rulemaking process.

On a very separate note, the TBA rule proposal is a good example for (at least one reason) why Dodd-Frank has not gone well (even though the TBA rule change was not directly mandated by Dodd-Frank). Rulemaking is complicated and has all sorts of unintended consequences. The TBA rulemaking created unforeseen issues as to regulatory capital, interaction with other margin rules, requirements as to rehypothecation, and operational issues, and would have discouraged a good number of market participants from the TBA market. So you take all of the unanticipated problems created by a single rule, and you multiply that by thousands. It just doesn't work that well. Nobody is smart enough to conduct rulemaking on that scale. It took a good five years to get the TBA rule on track; it will be a lot more than that for the Dodd-Frank rules.

(Disclosure: Cadwalader represented SIFMA in seeking revisions to the TBA rulemaking.)

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