The Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 21-11 requesting comment on proposed amendments to the margin rule regarding When Issued and other Extended Settlement Transactions. FINRA is seeking comment for the Margin Requirements that would clarify and incorporate into the Rule’s current interpretation while also providing relief to facilitate the application of the Rule to these transactions.

FINRA Rule 4210

An overview of FINRA Rule 4210 is as follows:

Rule 4210 protects member firms against customer credit risk by generally requiring firms to collect margin when they extend credit to their customers. Extensions of credit covered by the rule include transactions in which member firms permit customers to make partial or delayed payment on securities purchases (or partial or delayed delivery of securities sold).

The Compliance Deadline for FINRA Rule 4210 is just around the corner on October 26, 2021.

When Issued Securities Exemption

A noteworthy highlight from FINRA's release discusses the exemption of When Issued Securities:

New Exceptions for U.S. Treasury and Municipal Securities. In clarifying the scope of the public offering exception, FINRA recognizes that firms have often understood the original language of the rule to except new issuances of U.S. Treasury securities and municipal securities from margin requirements. FINRA believes these transactions present low risks relative to other non-equity offerings and proposes new exceptions to avoid disruptions to these markets. The new provisions would except from the margin requirements when issued transactions in cash accounts in any U.S. Treasury security scheduled to be issued by the 14th calendar day after the trade date and in any municipal security scheduled to be issued by the 42nd calendar day after the trade date.12 FINRA believes these exceptions would have applied to all recent U.S. Treasury securities issuances and substantially all recent municipal securities issuances.

Limitation of Capital Charges Collected in Lieu of Collecting Margin

FINRA further clarifies the limitation of capital charges collected in lieu of collecting margin:

Rule 4210 prescribes limits on net capital deductions. In part, the rule limits the amount of capital charges a member firm may take in lieu of collecting margin for transactions in certain nonequity securities. These capital limits are 5 percent of the member firm’s tentative net capital (TNC) for a single account or group of commonly controlled accounts and 25 percent of the member firm’s TNC across all accounts. FINRA proposes to codify a current interpretation that these limits apply to all capital charges taken in lieu of collecting margin, including capital charges on when issued transactions and other extended settlement transactions under existing and proposed exceptions from the generally applicable margin requirements.

To read the full FINRA Regulatory Notice on their website, click here.

Comment Period Deadline

The Comment Period Deadline is May 14, 2021. Comments must be submitted through one of the following methods:

Online using FINRA’s comment form for this Notice;
Emailing comments to pubcom@finra.org; or
Mailing comments in hard copy to:

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506

So, What's Next?

It is time to prepare and comply to FINRA Rule 4210. Matrix Application's MarginCalculator is the simple, cost-effective solution:

Easily track your outstanding TBA trades by dealer.
Independently validate or contest margin calls in real-time.
Clearly see any over-margined postings and call back your capital.
Effectively optimize credit lines and counterparty for the next trade with consolidated exposures.
Simply use our extensive features for support analysis, operations and audits.

MarginCalculator is a cloud-based software that runs in your Internet browser, so there is nothing to install. We are also partnered with ICE Data Services to provide independent 3 PM prices, so you can easily mark-to-market and compare trade confirm exposure with your dealer.

About Matrix Applications

Founded in New York in 2000, Matrix Applications is a fintech service bureau offering a suite of products and services for institutional fixed income clients. We work hands-on with our clients to identify an optimal service mix, from simple position management to complex settlement services. We leverage our extensive technical experience, a deep network across the finance industry and a team of Operations, Regulatory and Legal gurus to deliver bespoke managed services for firms – big and small – worldwide. Every day. Without Fail.