SIFMA today submitted comments to the Financial Industry Regulatory Authority (FINRA) regarding FINRA’s proposed amendments to FINRA Rule 4210 to establish margin requirements for transactions in the “to-be-announced” (“TBA”) market (the “Proposed Amendments”). SIFMA submitted two parallel letters: a general SIFMA letter focused on the impact to FINRA member firms, and one from SIFMA’s Asset Management Group (AMG) that highlights specific insight and feedback from the buy-side community.
“The TBA market is one of the largest and most liquid markets in the world and is essential to the availability of affordable mortgages in this country,” said Randy Snook, executive vice president, business policies and practices. “SIFMA supports FINRA’s goal of reducing counterparty credit risk in this vital marketplace. It is essential that any new regulation is appropriately balanced and does not impede the ability of the TBA market to function efficiently as a critical source of mortgage funding.”
SIFMA’s broad membership shares similar views on many aspects of the Proposed Amendments. Both letters underscore SIFMA’s opposition to the proposed maintenance margin requirement and note that if implemented, it could lead to a fragmented market that puts FINRA member firms at a disadvantage. The letters make similar recommendations regarding the scope of the new requirements and suggest a compliance date that is at least 18 months past the effective date, among other issues. Each letter further details specific insight of and impact to FINRA member firms and the buy-side.
SIFMA’s general letter provides industry insight on a number of aspects in the Proposed Amendments:
Maintenance Margin Requirements - SIFMA opposes the 2% maintenance margin requirement. This deviation from the Treasury Market Practice Group (TMPG) Best Practices can place FINRA members at a competitive disadvantage or have an adverse impact on the market. SIFMA also seeks clarification that margin would not be required for failed transactions.
Scope of Proposed Amendments – SIFMA asks FINRA to codify its footnoted definition regarding what constitutes an exempted “central bank.” The letter also recommends an exemption for sovereign wealth funds and bona fide cash transactions by smaller firms, and clarification that only pools of single-family residential mortgages are covered by the Proposed Amendments.
Exempt Accounts – SIFMA seeks clarification on what constitutes an exempt account.
Margin Collection and Transaction Liquidation Timeframes – SIFMA believes the proposed timelines are too short and recommends an extension to 15 days, which is in line with related regulations.
De Minimis Transfer Amount – SIFMA believes that the determination of appropriate thresholds below which margin would not need to be collected should continue to be established by member firm’s credit departments, based on their evaluations of, and agreements with, counterparties.
Concentrated Exposures – SIFMA recommends that FINRA raise the limit for net capital deductions to 10% of tentative net capital for any one account or group of commonly controlled accounts, while maintaining the limit of 25% of tentative net capital for all accounts combined.
Further Clarification: SIFMA seeks further clarifications regarding setoff of profits and losses, cured deficiencies, eligible collateral, investment advisor omnibus accounts, and risk limits.
Impact on Smaller Member Firms – SIFMA notes that the Proposed Amendments are likely to have a significant impact on smaller member firms that are not primary dealers and have not applied the TMPG Best Practices to all their client relationships. SIFMA recommends that FINRA consider the acute effects of the Proposed Amendments on the smaller member firms.
Compliance Date – SIFMA believes that an implementation period of eighteen months after approval would be appropriate, assuming the SEC will have issued interpretations or other guidance with respect to its net capital and customer protection rules’ treatment of customer margin.
SIFMA AMG’s letter highlights areas of focus for the investor community:
The Maintenance Margin Requirement Should Be Eliminated – SIFMA AMG’s investor members reiterate a strong opposition to the maintenance margin requirement for the highly liquid TBA market and note that the TMPG Best Practices currently contains no such requirement. Should FINRA move forward with this requirement, non-exempt customers would be forced to transact with banks that are not FINRA members, thereby severely fragmenting the market.
Liquidating Action Following a Default Should Not Be Mandated – This type of liquidation is a business decision and should not be mandated by rulemaking.
Commonly Controlled Accounts Should Not Include Accounts by Virtue of Being Managed by the Same Asset Manager – SIFMA AMG members believe that the definition of commonly controlled accounts should exclude accounts by virtue of being managed by the same or affiliated asset managers. Accounts do not share the same credit profile simply because they share an asset manager and aggregating the exposure for such accounts is not indicative of greater credit risk with respect to any individual account. Because there is no recourse among the various accounts of a single investment manager, grouping such accounts together for the purposes of determining credit exposure will not mitigate risk.
Settlement Period for Posting Margin – The Parties to Covered Agency Security Transactions should be free to negotiate the settlement period for posting margin up to a three-day period
Technical Changes – SIFMA AMG members believe FIRNA should codify its footnoted definition of what constitutes an exempted “central bank” and recommend an exemption for sovereign wealth funds. The letter also suggests that bilateral variation margin should be permissible and makes recommendations regarding omnibus accounts.
Compliance Date – SIFMA AMG members agree that the Proposed Amendments should have a compliance date that is at least 18 months following the date of their effectiveness.
SIFMA’s general letter is available here: http://www.sifma.org/issues/item.aspx?id=8589948237
SIFMA AMG’s letter is available here: http://www.sifma.org/issues/item.aspx?id=8589948238
