81 FR 40364 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval to 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, 2, and 3
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 119 (June 21, 2016)
Federal Register Volume 81, Issue 119 (June 21, 2016)
| Page Range | 40364-40377 | |
| FR Document | 2016-14561 |
[Federal Register Volume 81, Number 119 (Tuesday, June 21, 2016)] [Notices] [Pages 40364-40377] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-14561] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78081; File No. SR-FINRA-2015-036] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval to 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, 2, and 3 June 15, 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- 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, including 50 Type A comment letters and four Type B 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.\8\ The Order Instituting Proceedings was published in the Federal Register on January 21, 2016.\9\ The Commission received 23 comment letters in response to the Order Instituting Proceedings.\10\ On March 21, 2016, FINRA responded to the comments and filed Amendment No. 2.\11\ On April 11, 2016, the Commission noticed Amendment No. 2 to the proposed rule change to solicit comments from interested persons and designated a longer period for [[Page 40365]] Commission action on the proposal, until June 16, 2016.\12\ The Commission received nine additional comment letters in response to the Amendment No. 2 Notice.\13\ On May 26, 2016, FINRA responded to the comments and filed Amendment No. 3.\14\ The Commission is publishing this notice and order to solicit comment on Amendment No. 3 and to approve the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 on an accelerated basis.\15\ --------------------------------------------------------------------------- \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 Nov. 10, 2015. FINRA's extension of time for Commission action, available at http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-036-extension-1.pdf. \5\ The public comment file for the proposed rule change is on the Commission's Web site available at https://www.sec.gov/comments/sr-finra-2015-036/finra2015036.shtml. The Type A and B form letters generally contain language opposing the inclusion of multifamily housing and project loan securities within the scope of the proposed rule change, as originally proposed in the Notice. See Notice, supra note 3. The Commission staff also participated in numerous meetings and conference calls with certain commenters and other market participants. \6\ See Amendment No. 1 to the proposed rule change, dated Jan. 13, 2016 (``Amendment No. 1''), available at http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-036-amendment-1.pdf. FINRA's responses to comments received on the Notice and proposed amendments in response to those comments are included in Amendment No. 1. \7\ 15 U.S.C. 78s(b)(2)(B). \8\ 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''). \9\ Id. \10\ See comment file, supra note 5. \11\ See Amendment No. 2 to proposed rule change, dated Mar. 21, 2016 (``Amendment No. 2''), available at http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-036-ammendment2.pdf. FINRA's responses to comments received on the Order Instituting Proceedings and proposed amendments in response to those comments are included in Amendment No. 2. \12\ See Exchange Act Release No. 77579 (Apr. 11, 2016), 81 FR 22347 (Apr. 15, 2016) (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 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) (``Amendment No. 2 Notice''). \13\ See Letters from Robert Fine, Brean Capital, LLC, dated April 27, 2016 (``Brean Capital 4 Letter''); Mortgage Bankers Association, dated May 2, 2016 (``MBA 3 Letter''); Securities Industry and Financial Markets Association, dated May 2, 2016 (``SIFMA 3 Letter''); James M. Cain, Sutherland Asbill & Brennan LLP (on behalf of the banks of the Farm Credit System), dated May 2, 2016 (``Sutherland 3 Letter''); James M. Cain, Sutherland Asbill & Brennan LLP (on behalf of the Federal Home Loan Banks, dated May 02, 2016, (``Sutherland 4 Letter''); Chris Melton, Coastal Securities, dated May 2, 2016 (``Coastal 3 Letter''); Michael Nicholas, Bond Dealers of America, dated May 2, 2016 (``BDA 3 Letter''); Manisha Kimmel, Thomson Reuters, dated May 2, 2016 (``Thompson Reuters Letter''); and Bond Dealers of America, dated May 26, 2016 (``BDA 4 Letter''). See also supra note 5. \14\ See Amendment No. 3 to proposed rule change, dated May 26, 2016 (``Amendment No. 3''), available at http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-036-amendment-3.pdf. FINRA's responses to comments received on the Amendment No. 2 Notice and proposed amendments in response to comments to Amendment No. 2 are included in Amendment No. 3. \15\ The text of the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 (the ``Amendments'') is available at the principal office of FINRA, on FINRA's Web site at http://www.finra.org, and at the Commission's Public Reference Room. --------------------------------------------------------------------------- II. Description of the Proposed Rule Change 16 --------------------------------------------------------------------------- \16\ The proposed rule change, as modified by Amendment Nos. 1 and 2, as described in this Item II.A.-C., is excerpted, in part, from the Notice and Amendment Nos. 1 and 2, which were substantially prepared by FINRA, and the Order Instituting Proceedings and Amendment No. 2 Notice. See supra notes 3, 8, and 12. See also supra notes 6 and 11. Amendment No. 3 is described in section II.D. below. --------------------------------------------------------------------------- FINRA proposed amendments to FINRA Rule 4210 (Margin Requirements) to establish requirements for: (1) TBA transactions,\17\ inclusive of adjustable rate mortgage (``ARM'') transactions; (2) Specified Pool Transactions; \18\ and (3) transactions in collateralized mortgage obligations (``CMOs''),\19\ issued in conformity with a program of an agency or Government-Sponsored Enterprise (``GSE''), with forward settlement dates, (collectively, ``Covered Agency Transactions,'' also referred to, for purposes of this order, as the ``TBA market''). --------------------------------------------------------------------------- \17\ 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). \18\ FINRA Rule 6710(x) defines Specified Pool Transaction to mean a transaction in an Agency Pass-Through MBS or an SBA-Backed ABS requiring the delivery at settlement of a pool or pools that is identified by a unique pool identification number at the time of execution. \19\ FINRA Rule 6710(dd) defines CMO to mean a type of Securitized Product backed by Agency Pass-Through MBS, mortgage loans, certificates backed by project loans or construction loans, other types of MBS or assets derivative of MBS, structured in multiple classes or tranches with each class or tranche entitled to receive distributions of principal or interest according to the requirements adopted for the specific class or tranche, and includes a real estate mortgage investment conduit (``REMIC''). --------------------------------------------------------------------------- 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.\20\ 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 took note of the TPMG recommended standards (the ``TMPG best practices'') regarding the margining of forward- settling agency MBS transactions.\21\ FINRA stated that the TMPG best practices are recommendations and, as such, currently are not rule requirements. FINRA's existing margin requirements do not address the TBA market generally. --------------------------------------------------------------------------- \20\ 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 Commission's Staff Report, Enhancing Disclosure in the Mortgage-Backed Securities Markets, Jan. 2003, available at https://www.sec.gov/news/studies/mortgagebacked.htm; see also Treasury Market Practices Group (``TMPG''), Margining in Agency MBS Trading, Nov. 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. \21\ See TMPG, Best Practices for Treasury, Agency, Debt, and Agency Mortgage-Backed Securities Markets, revised Feb. 2016, available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG_BestPractices_2_19_16.pdf. --------------------------------------------------------------------------- Accordingly, to establish margin requirements for Covered Agency Transactions, FINRA proposed to redesignate current paragraph (e)(2)(H) of FINRA Rule 4210 as new paragraph (e)(2)(I), to add new paragraph (e)(2)(H), 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, as modified by Amendments Nos. 1 and 2, is described in further detail in sections A.-C. below. The changes proposed in Amendment No. 3 are described in section D. below. A. Proposed FINRA Rule 4210(e)(2)(H) (Covered Agency Transactions) The key 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) 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)) In addition to Covered Agency Transactions, the proposed rule change would define the following key terms 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 [[Page 40366]] 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 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)) 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,\22\ transactions with non-exempt accounts, the handling of de minimis transfer amounts, and the treatment of standbys. --------------------------------------------------------------------------- \22\ The term ``exempt account'' is defined under FINRA Rule 4210(a)(13). Broadly, an exempt account means a FINRA member, non- FINRA member registered broker-dealer, account that is a ``designated account'' under FINRA Rule 4210(a)(4) (specifically, a bank as defined under Section 3(a)(6) of the Exchange Act, a savings association as defined under Section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation, an insurance company as defined under Section 2(a)(17) of the Investment Company Act, an investment company registered with the Commission under the Investment Company Act, a state or political subdivision thereof, or a pension plan or profit sharing plan subject to the Employee Retirement Income Security Act or of an agency of the United States or of a state or political subdivision thereof), and any person that has a net worth of at least $45 million and financial assets of at least $40 million for purposes of paragraphs (e)(2)(F) and (e)(2)(G) of the rule, as set forth under paragraph (a)(13)(B)(i) of Rule 4210, and meets specified conditions as set forth under paragraph (a)(13)(B)(ii). FINRA is proposing a conforming revision to paragraph (a)(13)(B)(i) so that the phrase ``for purposes of paragraphs (e)(2)(F) and (e)(2)(G)'' would read ``for purposes of paragraphs (e)(2)(F), (e)(2)(G) and (e)(2)(H).'' --------------------------------------------------------------------------- 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. Paragraph (e)(2)(H)(ii)a.2. of the proposed rule provides that a member is not required 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, 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; 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.\23\ --------------------------------------------------------------------------- \23\ See Exhibit 4 and Exhibit 5 in Amendment No. 2. See also supra note 11. --------------------------------------------------------------------------- Risk Limits \24\ --------------------------------------------------------------------------- \24\ This section describes the proposed rule change prior to the proposed amendments to new Supplementary Material .05 in Amendment No. 3, which are described in section II.D. below. --------------------------------------------------------------------------- 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. [[Page 40367]] Exceptions From the Proposed Margin Requirements: (1) Registered Clearing Agencies; (2) Gross Open Positions of $2.5 Million or Less in Aggregate \25\ --------------------------------------------------------------------------- \25\ This section describes the proposed rule change prior to the proposed amendment to increase the $2.5 million to $10.0 million in Amendment No. 3, which is described in section II.D. below. --------------------------------------------------------------------------- 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), or round robin trades, or that uses other financing techniques for its Covered Agency Transactions. 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 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 maintenance margin requirement 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''). 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. B. Conforming Amendments to FINRA Rule 4210(e)(2)(F) (Transactions With Exempt Accounts Involving Certain ``Good Faith'' Securities) and FINRA Rule 4210(e)(2)(G) (Transactions With Exempt Accounts Involving Highly Rated Foreign Sovereign Debt Securities and Investment Grade Debt Securities) The proposed rule change makes a number of revisions to paragraphs (e)(2)(F) and (e)(2)(G) of FINRA Rule 4210: \26\ --------------------------------------------------------------------------- \26\ See supra notes 3, 8, and 12; see also Exhibit 5 in Amendment No. 2, text of proposed rule change, as modified by Amendment Nos. 1 and 2. --------------------------------------------------------------------------- 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 [[Page 40368]] 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.'' 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) 27 --------------------------------------------------------------------------- \27\ This section describes the proposed rule change prior to the proposed amendments in Amendment No. 3 including increasing the $2.5 million cash account exception to $10.0 million. The proposed changes in Amendment No. 3 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 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: \28\ --------------------------------------------------------------------------- \28\ See supra notes 3, 8, and 12; see also Exhibit 5 in Amendment No. 2, text of proposed rule change, as modified by Amendment Nos. 1 and 2. --------------------------------------------------------------------------- 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. Implementation Date \29\ --------------------------------------------------------------------------- \29\ See section II.D. below for a clarification in Amendment No. 3 regarding the specific provisions related to the risk limit determinations that become effective six months after Commission approval of the proposed rule change. See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- 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.\30\ 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.\31\ --------------------------------------------------------------------------- \30\ See supra notes 8 and 12. \31\ Id. --------------------------------------------------------------------------- D. Amendment No. 3 In response to comments the Commission received on the Amendment No. 2 Notice,\32\ FINRA filed Amendment No. 3 to propose revisions to paragraph (e)(2)(H)(ii)c.2. and Supplementary Material .05(a)(1).\33\ Specifically, in Amendment No. 3, FINRA proposes to increase the specified amount for the gross open position exception from $2.5 million or less in aggregate to $10 million and amend new Supplementary Material .05(a)(1) to revise the proposed language to delete the clause that reads ``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.'' Finally, FINRA clarified which provisions related to the risk limit determinations in the proposed rule change would become effective with regard to the six month implementation timeframe after the proposed rule change is approved by the Commission. --------------------------------------------------------------------------- \32\ See supra note 12. With the exception of the comments received on the gross open position exception, the $250,000 de minimis transfer amount, new Supplementary Material .05, and the clarification of which provisions of the proposed rule change become effective six months after Commission approval of the proposed rule change, FINRA's responses to comments received on the Amendment No. 2 Notice are discussed in section III. below. \33\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- 1. Gross Open Position Exception and the $250,000 De Minimis Transfer Amount As proposed in the Notice and modified by Amendment Nos. 1 and 2, the proposed rule would set forth an exception from the proposed margin requirements for counterparties whose gross open positions in Covered Agency Transactions with the FINRA member total $2.5 million or less in aggregate, subject to specified conditions.\34\ The proposed rule also 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, subject to specified conditions. --------------------------------------------------------------------------- \34\ See supra notes 3, 8, and 12. See also description of proposed rule change in section II.A.-C. above. --------------------------------------------------------------------------- In response to the solicitation of comments on the Amendment No. 2 Notice,\35\ and similar to comments received on the Notice and the Order Instituting Proceedings,\36\ commenters suggested increasing the $2.5 million gross open position amount and the $250,000 de minimis transfer amount.\37\ Two commenters recommended that the $2.5 million be increased to $10 [[Page 40369]] million.\38\ One commenter suggested that increasing the gross open position amount to $10 million would have ``a material impact in reducing the level of automation and operations staff required to support TBA margining.'' \39\ Another commenter stated that the $2.5 million threshold ``will likely serve as a barrier to entry for a large number of participants that might otherwise enter the market and add to the market's liquidity, system stability and competition,'' and suggested an increase to $10 million.\40\ With respect to the $250,000 de minimis transfer amount, one commenter suggested increasing it to $500,000.\41\ --------------------------------------------------------------------------- \35\ See Amendment No. 2 Notice, supra note 12. \36\ See discussion of comments received and FINRA's responses in the Order Instituting Proceedings and the Amendment No. 2 Notice, supra notes 8 and 12. \37\ See Brean Capital 4 Letter and Thomson Letter. \38\ Id. \39\ See Thomson Letter. \40\ See Brean Capital 4 Letter. \41\ See Thomson Letter. --------------------------------------------------------------------------- In response to these comments, with respect to the amount of the proposed gross open position exception, FINRA stated it has reconsidered and proposed to increase the specified amount from $2.5 million or less to $10 million or less.\42\ FINRA stated that it has ``taken note of the ongoing concerns expressed in comments and believes that increasing the amount to $10 million is consistent with the goal, as noted in the original filing, of ameliorating the rule's impact on business activity and addressing the concerns of smaller firms and customers.'' \43\ --------------------------------------------------------------------------- \42\ See proposed paragraph (e)(2)(H)(ii)c.2. in Exhibit 4 in Amendment No. 3. \43\ See Amendment No. 3, supra note 14. See also Notice, supra note 3. --------------------------------------------------------------------------- To estimate the likely impact of the proposed increase for the gross open position amount to $10 million, FINRA staff analyzed the dataset that was provided to FINRA by a major clearing broker and contained 5,201 open positions as of May 30, 2014, in 375 customer accounts from ten introducing broker-dealers.\44\ FINRA stated that, in this dataset, only 66 accounts had gross open positions less than the originally proposed threshold of $2.5 million. FINRA stated, according to its analysis, increasing the gross open position exception to $10 million would include within the proposed exception an additional 150 accounts that had exposures greater than $2.5 million but less than or equal to $10 million. FINRA concluded that a greater number of smaller firms and customers would be subject to the gross open position exception for the proposed margin obligations, and, therefore, not subject to the margin requirements under the rule.\45\ --------------------------------------------------------------------------- \44\ See Amendment No. 3, supra note 14. FINRA made use of this dataset in the original filing. See Notice, supra note 3. The dataset provides account-level information. \45\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- Based on the sample of data available, FINRA stated that it estimated that neither the number of the accounts that would be required to post margin under the proposed rule, nor the estimated margin that would have to be posted for those accounts, would change due to the proposed increase in the gross open position amount.\46\ FINRA stated this result is mainly due to the proposed $250,000 de minimis transfer amount, which already provides significant relief to customers with smaller aggregate positions. Therefore, to the extent the sample examined is representative of the activity in Covered Agency Transactions more generally, FINRA stated that it believes that the proposed change is not likely to have significant impact on the expected margin obligations of firms and customers with large gross open positions.\47\ However, FINRA stated the proposed increase for the gross open position amount is expected to benefit smaller firms and customers, as the higher aggregate amount limits the costs to increasing business activity in Covered Agency Transactions without having to post margin under the proposed rule requirements for smaller firms.\48\ --------------------------------------------------------------------------- \46\ Id. \47\ Id. \48\ See Amendment No. 3, supra note 14. In other words, the increase of the gross open position amount from $2.5 million to $10.0 million may reduce costs for smaller counterparties, as well as potentially reduce compliance costs for smaller firms, without significantly impacting the overall amount of margin expected to be posted under the proposed rule by counterparties with large gross open positions. --------------------------------------------------------------------------- With respect to the $250,000 de minimis transfer amount, as FINRA noted in Amendment Nos. 1 and 2, FINRA stated that it believes that the proposed threshold is appropriate for the rule's purposes and does not propose to amend the requirement at this time.\49\ However, FINRA stated that it will reconsider the requirement as appropriate when the Commission completes its rulemaking as to margin requirements for security-based swaps.\50\ --------------------------------------------------------------------------- \49\ See supra notes 8 and 12. See also Notice, supra note 3. \50\ See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers; Proposed Rule, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214 (Nov. 23, 2012). --------------------------------------------------------------------------- 2. Risk Limit Determinations As proposed in the Notice, proposed Supplementary Material .05(a)(1) requires that, for purposes of any risk limit determination pursuant to paragraphs (e)(2)(F), (e)(2)(G), or (e)(2)(H) of Rule 4210, 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.\51\ --------------------------------------------------------------------------- \51\ See Notice, supra note 3. See also description of proposed rule change in section II.A.-C. above. --------------------------------------------------------------------------- In response to the solicitation of comments on the Amendment No. 2 Notice,\52\ and similar to comments received on the Order Instituting Proceedings,\53\ one commenter expressed concern that FINRA members may have difficulty determining which accounts constitute more than 10 percent of an investment adviser's regulatory assets, because this ``information is frequently maintained confidentially by an investment adviser due to privacy practices and regulations.'' \54\ This commenter proffered rule language to address this issue.\55\ --------------------------------------------------------------------------- \52\ See Amendment No. 2 Notice, supra note 12. \53\ See Order Instituting Proceedings, supra note 8. \54\ See Brean Capital 4 Letter. \55\ Id. --------------------------------------------------------------------------- In response to comments received, FINRA stated that it has reconsidered the proposed requirements set forth in Supplementary Material .05(a)(1) and is revising the proposed language to delete the clause that reads ``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.'' \56\ As such, for purposes of any risk limit determination pursuant to paragraphs (e)(2)(F), (e)(2)(G) or (e)(2)(H) of Rule 4210, the proposed requirement under Supplementary Material .05(a)(1) as revised would read: ``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; . . .'' \57\ FINRA stated that it is mindful of the concerns its members have expressed as to potential burdens under the rule, and believes the revision is appropriate. However, FINRA noted that it expects [[Page 40370]] members to be mindful of their obligations as to making and enforcing risk limits under the rule. In making risk limit determinations as to advisory accounts, FINRA stated that it expects members to exercise appropriate diligence in understanding the extent of their risk and to craft their risk limit determinations accordingly.\58\ --------------------------------------------------------------------------- \56\ See Amendment No. 3, supra note 14. \57\ See Exhibit 4 in Amendment No. 3. \58\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- FINRA stated that it does not have data to assess the number of accounts, investment advisers or firms that might be impacted by this amendment. FINRA also stated that it anticipates that this change to the proposed rule will reduce the regulatory burden since it reduces the regulatory compliance costs associated with making the required risk limit determinations. FINRA further stated that the change does create the potential for firms to accept higher risk limits than they otherwise would, given that FINRA proposes to delete the 10 percent threshold. However, FINRA believes this additional risk is mitigated by the firms' obligations to make and enforce appropriate risk limits as described in section II.A.3. above.\59\ --------------------------------------------------------------------------- \59\ Id. --------------------------------------------------------------------------- 3. Implementation Period In response to solicitation of comments on the Amendment No. 2 Notice,\60\ and similar to comments received on the Notice and the Order Instituting Proceedings,\61\ one commenter stated that a 24-month implementation period for the proposed rule should be permitted so as to permit ``adequate interpretative guidance that is likely to impact system requirements.'' \62\ This commenter also believed a 24-month period would be needed to implement the rule because of other significant regulatory initiatives, such as the T+2 migration and the new conflict of interest rule promulgated by the Department of Labor.\63\ --------------------------------------------------------------------------- \60\ See Amendment No. 2 Notice, supra note 12. \61\ See Notice, and Order Instituting Proceedings, supra notes 3 and 8. \62\ See Thomson Letter. \63\ See Thomson Letter. --------------------------------------------------------------------------- In response to this comment, FINRA stated that it is mindful of the implementation challenges posed by various regulatory initiatives.\64\ However, FINRA stated that it continues to believe that the rule change should become effective 18 months from the date the proposed rule change is approved by the Commission, except 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 would become effective six months from the date the proposed rule change is approved by the Commission.\65\ FINRA also noted the rule change has been under consideration in the public domain for a period of more than two years. FINRA stated that it does not believe it would serve the public interest to extend the rule's implementation beyond 18 months once approved by the Commission.\66\ --------------------------------------------------------------------------- \64\ See Amendment No. 3, supra note 14. \65\ In the interest of clarity, FINRA noted that the following provisions would become effective six months after the proposed rule change is approved by the Commission: (1) under paragraph (e)(2)(F) and paragraph (e)(2)(G), each as revised by the proposed rule change, the sentences that begin ``Members shall maintain a written risk analysis methodology . . .'' and ``The risk limit determination shall be made . . .''; (2) under proposed paragraph (e)(2)(H), as set forth in the proposed rule change, proposed paragraph (e)(2)(H)(ii)b.; and (3) proposed Supplementary Material .05, as revised by Amendment No. 3. To help effectuate the application of these provisions, the proposed definitions of ``counterparty,'' as set forth in proposed paragraph (e)(2)(H)(i)b., and ``Covered Agency Transactions,'' as set forth in proposed paragraph (e)(2)(H)(i)c., would also become effective six months after the proposed rule change is approved by the Commission. To ensure clarity of cross- references within the rule, under paragraph (e)(2)(F) and paragraph (e)(2)(G), each as revised by the proposed rule change, the proposed phrase ``subject to the limits provided in paragraph (e)(2)(I) of this Rule'' in the final sentence of the first paragraph of paragraph (e)(2)(F) and paragraph (e)(2)(G) would become effective six months after the proposed rule change is approved by the Commission, as would: (1) The proposed header for new paragraph (e)(2)(H), which, as set forth in the rule change, would read ``Covered Agency Transactions''; (2) under new paragraph (e)(2)(H), as set forth in the proposed rule change, the proposed designation ``(i) Definitions'' and the proposed designation ``(ii) Margin Requirements for Covered Agency Transactions''; (3) the phrase ``For purposes of paragraph (e)(2)(H) of this Rule:'' Under proposed new paragraph (e)(2)(H)(i); and (4) the proposed redesignation of current paragraph (e)(2)(H) as new paragraph (e)(2)(I), except that the proposed revision to the header of paragraph (e)(2)(I) would become effective 18 months from the date the proposed rule change is approved by the Commission. See Exhibit 5 in Amendment No. 3. \66\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- III. Summary of Comments Received on the Amendment No. 2 Notice and FINRA's Responses As noted above, the Commission received 109 comment letters, including 50 Type A letters and four Type B letters, on the Notice; 23 comment letters on the Order Instituting Proceedings; and an additional nine comment letters on the Amendment No. 2 Notice.\67\ The comments received on the Notice and FINRA's response to those comments are described in detail in the Order Instituting Proceedings.\68\ The comments received on the Order Instituting Proceedings and FINRA's response to those comments are described in detail in the Amendment No. 2 Notice.\69\ The nine comment letters received in response to the Amendment No. 2 Notice and FINRA's response to comments are summarized below.\70\ --------------------------------------------------------------------------- \67\ See discussion in section I. above. See also comment file, supra note 5. \68\ The topics covered by commenters in response to the Notice and in FINRA's response to those comments included: Multi-family and project loan securities; implementation time period; impact and scope of the proposal; maintenance margin; cash account exceptions; bilateral margining; $2.5 million gross open position amount and the $250,000 de minimis transfer amount; timing of margin collection and position liquidation; concentration limits; mortgage bankers; risk limit determinations; advisory clients of registered investment advisors; Federal Home Loan Banks and Farm Credit Banks and other comments. See Order Instituting Proceedings, supra note 8. See also Amendment No. 1, supra note 6. \69\ The topics covered by commenters in response to the Order Instituting Proceedings and in FINRA's response to those comments included: Multifamily and project loan securities; impact and costs of the proposal; scope of the proposal; creation of account types; maintenance margin; cash account exceptions; de minimis transfer amount; timing of margin collection and position liquidation; bilateral margining; third party custodians; exempt account treatment; third party providers; netting services; scope of FINRA's authority; and the implementation period. See Amendment No. 2 Notice, supra note 12. See also Amendment No. 2, supra note 11. \70\ See Amendment No. 3, supra note 14. Comments related to the increase in the gross open position exception to $10 million; the clarification of the treatment of the risk limit determinations for investment advisers in new Supplementary Material .05; and the clarification of specific rule language that takes effect six months after the date of Commission approval with regard to the risk limit determinations are addressed in section II.D. above. --------------------------------------------------------------------------- A. Scope of the Proposal 1. Multifamily and Project Loan Securities \71\ --------------------------------------------------------------------------- \71\ See Order Instituting Proceedings, supra note 8 and Amendment No. 2 Notice, supra note 12 (for a full discussion of the comments related to the proposed inclusion of multifamily housing securities within the scope of the rule, FINRA's responses to these comments, and FINRA's analysis of the impact of excluding multifamily housing securities from the scope of the rule). --------------------------------------------------------------------------- In the Notice, FINRA included multifamily and project loan securities within the scope of Covered Agency Transactions noting it intended that the scope of products to be consistent with the scope of products addressed by the TMPG best practices.\72\ In response to the publication of the Notice, many commenters expressed concerns with FINRA including multifamily and project loan securities within the scope of the proposed margin requirements.\73\ These commenters generally stated that the proposed rule change would impose undue burdens on participants in the multifamily housing securities market, that the multifamily housing securities market is small relative to the overall [[Page 40371]] TBA market, and that the regulatory benefits gained from any reduction of systemic risk and counterparty exposure would be outweighed by the harms caused to the market.\74\ Commenters also stated that multifamily housing and project loan securities are not widely traded and often difficult to mark to the market.\75\ In response to comments on the Notice, FINRA amended the proposed rule, in Amendment No. 1, to provide that the margin requirements would not apply to multifamily family housing and project loan securities, subject to the conditions described above.\76\ --------------------------------------------------------------------------- \72\ See Notice, supra note 3. \73\ See Order Instituting Proceedings, supra note 8. \74\ Id. \75\ See Order Instituting Proceedings, supra note 8. \76\ FINRA proposed in Amendment No. 1 to add to FINRA Rule 4210 new 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; see Exhibit 4 and Exhibit 5 in Amendment No. 1. Proposed Rule 4210(e)(2)(H)(ii)b. sets forth the proposed rule's requirements as to written risk limits. See also Order Instituting Proceedings, supra note 8. --------------------------------------------------------------------------- In response to the Order Instituting Proceedings, 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.\77\ Some 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.'' \78\ Other 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.\79\ In response to these comments, FINRA amended the proposed rule, as modified by Amendment No. 1, 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 . . .'' \80\ In Amendment No. 2, FINRA also proposed 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.'' \81\ --------------------------------------------------------------------------- \77\ See Order Instituting Proceedings, and Amendment No. 2 Notice, supra notes 8 and 12. \78\ Id. See also comment file, supra note 5. \79\ Id. \80\ See Amendment No. 2 Notice, supra note 12; see also, Exhibit 4 and Exhibit 5 in Amendment No. 2. \81\ Id. --------------------------------------------------------------------------- The Commission received one comment on this topic in response to the solicitation of comments on the Amendment No. 2 Notice.\82\ This commenter stated that it strongly supports the modifications in the Amendments as to multifamily housing securities and project loan program securities and that it appreciates FINRA's response to this issue.\83\ --------------------------------------------------------------------------- \82\ See MBA 3 Letter. \83\ Id. --------------------------------------------------------------------------- 2. Covered Agency Transactions Similar to comments received on the Notice and the Order Instituting Proceedings,\84\ in response to the solicitation of comments on the Amendment No. 2 Notice, one commenter stated the proposal should not include Specified Pool Transactions because these products do not share the same risk as other Covered Agency Transactions.\85\ This commenter stated that ``FINRA has not provided any evidence that transactions in specified pools that do not settle in one business day represent the same class of risk as TBA transactions.'' \86\ Another commenter stated that the proposed definition of Covered Agency Transactions should be revised to focus on long-dated settlements and that Specified Pool Transactions should not be included within the rule's scope.\87\ This commenter proffered a definition of Covered Agency Transactions.\88\ --------------------------------------------------------------------------- \84\ See supra notes 3, 8, and 12. \85\ See Coastal 3 Letter. \86\ Id. \87\ See BDA 3 Letter. \88\ Id. --------------------------------------------------------------------------- As discussed in more detail in Amendment Nos. 1 and 2, in response to these comments, FINRA stated it does not believe there is a compelling reason to revise the proposed definition and settlement scope of Covered Agency Transactions, nor except Specified Pool Transactions from the definition of Covered Agency Transactions.\89\ FINRA stated that it is mindful of the concerns of commenters, and is proposing in Amendment No. 3 to increase the $2.5 million gross open position exception to $10 million, which FINRA believes should benefit smaller firms and customers.\90\ --------------------------------------------------------------------------- \89\ See Amendment No. 3, supra note 14. See also supra notes 8 and 12. \90\ See Amendment No. 3, supra note 14. See also section II.D. above. --------------------------------------------------------------------------- B. General Comments on the Proposal and Its Impact Similar to comments received on the Notice and the Order Instituting Proceedings,\91\ in response to the solicitation of comments on the Amendment No. 2 Notice, FINRA stated that commenters expressed continued opposition to the proposal on account of its potential impact.\92\ One commenter stated that it believes there is a basic disagreement between FINRA and the industry as the cost and difficulties of the proposal.\93\ Another commenter stated that FINRA ``has failed to address recommendations to simplify the implementation of the TBA Margining proposal in a manner consistent with its intent to address systemic concerns in the TBA market.'' \94\ In a similar vein, one commenter stated that FINRA has not made any meaningful adjustments to the proposal and that it is not tailored to reduce counterparty risk without undue burdens on members and their clients.\95\ In addition, this commenter stated that the proposal fundamentally differs from the TMPG best practices, requirements that apply to other fixed income products under current Rule 4210, and requirements that apply to swaps under other regulatory regimes.\96\ This commenter also stated that the risk profile of Covered Agency Transactions is not greater than that of other fixed income transactions, but that Covered Agency Transactions are being treated under the proposal in a manner that is more burdensome than these other products.\97\ This commenter further stated that, based on conversations with its members, FINRA's estimates of the cost of implementing the proposal are at the low end and that smaller firms will need to decide whether they can remain in business involving Covered Agency Transactions.\98\ In a similar vein, another commenter stated that the proposal is anti-competitive and costly,\99\ and a different commenter said that the proposal would negatively [[Page 40372]] impact small-to medium-sized firms.\100\ This commenter stated that FINRA's estimates of the costs of implementing the rule are unfair and biased.\101\ One commenter stated the proposal would drive business away from introducing firms and toward larger firms.\102\ This commenter also stated that it has observed instances where larger firms are using margin to gain competitive advantage.\103\ --------------------------------------------------------------------------- \91\ See supra notes 3, 8, and 12. \92\ See SIFMA 3 Letter, Thomson Letter, Coastal 3 Letter, BDA 3 Letter, and Brean Capital 4 Letter. \93\ See SIFMA 3 Letter. \94\ See Thomson Letter. \95\ See SIFMA 3 Letter. \96\ Id. \97\ Id. \98\ Id. \99\ See Coastal 3 Letter. \100\ See BDA 3 Letter. \101\ See BDA 3 Letter. \102\ See Brean Capital 4 Letter. \103\ Id. --------------------------------------------------------------------------- In response to these comments, FINRA stated that it has actively sought input from the industry and other members of the public throughout the rulemaking process. In total, FINRA noted that there have been four opportunities to comment on the proposal, beginning with the comment on the proposal as originally published in Regulatory Notice 14-02.\104\ FINRA stated that it engaged in discussions with industry participants and analyzed the potential economic impact of the proposal, including the potential costs of implementation.\105\ In response to the input received from commenters, FINRA stated that it made several changes to the proposal, including the establishment of an exception for gross open positions for cash accounts, up to an aggregate specified amount, as specified by the rule,\106\ and an exception, again for cash accounts as specified by the rule, from the rule's maintenance margin requirements.\107\ --------------------------------------------------------------------------- \104\ See Amendment No. 3, supra note 14. See also, Regulatory Notice 14-02 (FINRA Requests Comment on Proposed Amendments to FINRA Rule 4210 for Transactions in the TBA Market) (January 2014). In the Notice, FINRA discussed comments received in response to Regulatory Notice 14-02. See Notice, supra note 3. \105\ See Amendment No. 3, supra note 14. See also supra notes 3, 8, and 12. \106\ See proposed paragraph (e)(2)(H)(ii)c.2. in Exhibit 4 and Exhibit 5 in Amendment No. 3. As discussed more fully in Amendment No. 3, in response to ongoing concerns expressed in comments about the rule's potential impact, FINRA is amending the exception from the proposed margin requirements for counterparties whose gross open positions in Covered Agency Transactions with the member amount to $2.5 million or less in aggregate, so as to increase the $2.5 million amount to $10 million. See also section II.D. above discussing proposed changes in Amendment No. 3. \107\ See Amendment No. 3, supra note 14. See also proposed paragraph (e)(2)(H)(ii)e. in Exhibit 5 in Amendment No. 3. --------------------------------------------------------------------------- FINRA stated that these measures were expressly intended to address the concerns of smaller participants in the TBA market. FINRA stated that with such concerns in mind, it included the $250,000 de minimis transfer amount.\108\ In arriving at this amount, FINRA stated it gave careful consideration to the needs of small firms that could otherwise potentially be at a disadvantage, if the de minimis amount were higher, vis-[agrave]-vis larger, more highly capitalized firms, while at the same time taking into account the need to reduce the risk of material credit exposure. In addition, FINRA stated that to address the rule's potential impact on mortgage bankers, the rule permits members to treat such market participants as exempt accounts, subject to specified conditions, and thereby not subject to the maintenance margin requirement.\109\ FINRA further stated that to address concerns regarding the rule's potential impact on the market for multifamily housing securities and project loan program securities, FINRA revised the proposal to expressly provide that members are not required to apply the rule's margin requirements to such securities, subject to specified conditions.\110\ FINRA stated that it does not believe that the commenters, in the most recent round of comment on the proposal in response to the Amendment No. 2 Notice, have raised new issues as to the rule's impact that have not been previously addressed. However, FINRA stated it is mindful of the concerns of market participants that believe smaller firms may be adversely affected by the proposal. To that end, FINRA stated that in Amendment No. 3, it proposed to increase the threshold exception from the proposed margin requirements \111\ from $2.5 million to $10 million in gross open positions in Covered Agency Transactions with the member. Further, FINRA noted that, if approved by the Commission, it will monitor the proposal's impact when the new rule takes effect and, if the requirements prove overly onerous or otherwise are shown to negatively impact the market, will consider revisiting such requirements as may be necessary to mitigate the rule's impact.\112\ --------------------------------------------------------------------------- \108\ See proposed paragraph (e)(2)(H)(ii)f. in Exhibit 5 in Amendment No. 3. \109\ See Amendment No. 3, supra note 14. See also proposed paragraph (e)(2)(H)(ii)d. and Supplementary Material .02 in Exhibit 5 in Amendment No. 3. \110\ See proposed paragraph (e)(2)(H)(ii)a.2. in Exhibit 5 in Amendment No. 3. \111\ In the interest of clarity, FINRA noted that 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, 2 and 3. Products or transactions that are outside the scope of Covered Agency Transactions are otherwise subject to the requirements of FINRA Rule 4210, as applicable. \112\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- C. ``Cash Account'' Exceptions As set forth more fully in the Notice,\113\ and revised in this Amendment No. 3, the proposed margin requirements would not apply to any counterparty that has gross open positions \114\ in Covered Agency Transactions with the FINRA member amounting to $10 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, for any size transaction, 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 proposed 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),\115\ or ``round robin'' \116\ trades, or that uses other financing techniques for its Covered Agency Transactions. FINRA noted that these exceptions are intended to address the concerns relating to smaller customers engaging in a non-margined, cash account business.\117\ --------------------------------------------------------------------------- \113\ See Notice, supra note 3. \114\ Paragraph (e)(2)(H)(i)e. of the proposed 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. 3, supra note 14. \115\ 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. \116\ 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 this Amendment No. 3. \117\ See Notice, supra note 3. --------------------------------------------------------------------------- Similar to comments received on the Notice and the Order Instituting Proceedings,\118\ in response to the Amendment No. 2 Notice, one commenter stated that it is concerned about implementing the cash account exceptions and that the proposed rule's [[Page 40373]] provisions as to dollar rolls and round robin trades are not feasible to implement.\119\ In response to the comment, FINRA noted that it previously addressed this issue in Amendment Nos. 1 and 2.\120\ FINRA stated that it believes that dollar roll and round robin provisions are appropriate given that these are types of financing techniques.\121\ As such, FINRA stated that it does not propose to modify the proposed requirements, other than, to increase the amount for the gross open position exception from $2.5 million or less to $10 million or less, as described above. --------------------------------------------------------------------------- \118\ See supra notes 3, 8, and 12. \119\ See Thomson Letter. \120\ See supra notes 8 and 12. \121\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- D. Timing of Margin Collection and Position Liquidation As set forth more fully in the Notice, and reiterated in the Order Instituting Proceedings and the Amendment No. 2 Notice,\122\ FINRA noted that 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,\123\ 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.\124\ Further, FINRA stated that unless FINRA has granted a member additional time to collect the mark to market loss or deficiency, 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.\125\ --------------------------------------------------------------------------- \122\ See supra notes 3, 8, and 12. \123\ The term ``deficiency'' means the amount of any required but uncollected maintenance margin and any required but uncollected mark to market loss. See proposed FINRA Rule 4210(e)(2)(H)(i)d. in Exhibit 5 to Amendment No. 3. \124\ See Amendment No. 3, supra note 14. \125\ See Amendment No. 3, supra note 14. See also Notice, supra note 3. --------------------------------------------------------------------------- Similar to comments received on the Notice and the Order Instituting Proceedings,\126\ in response to the solicitation of comment on the Amendment No. 2 Notice, one commenter stated that the proposed requirements are difficult to implement and are not compatible with existing systems and procedures for other fixed income products.\127\ A different commenter stated that these differences reduce the ability to leverage the functionality of existing systems.\128\ In response to these comments, FINRA stated that it does not propose to modify the proposed requirements. FINRA reiterated that the proposed language as to timing of margin collection is consistent with existing language under Rule 4210.\129\ With respect to the liquidation requirement, FINRA stated that it believes that the five business day period, along with the opportunity to seek an extension of time when circumstances warrant, should provide sufficient time for members to resolve issues.\130\ --------------------------------------------------------------------------- \126\ See supra notes 3, 8, and 12. \127\ See SIFMA 3 Letter. \128\ See Thomson Letter. \129\ See Amendment No. 3, supra note 14. See also FINRA Rule 4210(g)(10)(B). \130\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- E. Two-Way (Bilateral) Margin and Third Party Custodians Similar to comments received on the Notice and the Order Instituting Proceedings, in the comments in response to the Amendment No. 2 Notice, some commenters stated that they oppose the proposed rule change because it does not require two-way margin.\131\ These commenters stated that the TMPG best practices expressly calls for two- way margining to mitigate counterparty risk and requiring only one-way margin increases systemic risk.\132\ These commenters also stated that the proposal fails to recognize the counterparty credit risk to non- FINRA members, and that the prudential regulators have adopted two-way margining in the context of requirements for swaps.\133\ Finally, these commenters stated that providing for two- way margining and affording the counterparties the right to segregate, by means of third party custodian relationships, the margin they post to a FINRA member would provide heightened protection.\134\ --------------------------------------------------------------------------- \131\ See Sutherland 3 Letter and Sutherland 4 Letter. \132\ Id. \133\ Id. \134\ Id. --------------------------------------------------------------------------- In response to these comments, FINRA noted in the original filing, and Amendment Nos. 1 and 2, that though FINRA supports the use of two- way margining, FINRA does not propose to address such a requirement at this time as part of the proposed rule change.\135\ With respect to third party custodial arrangements, FINRA stated that these are best addressed in a separate rulemaking or guidance, as appropriate. FINRA reiterated that it is mindful of the concerns that commenters have expressed, and will revisit two-way margining and related issues when the Commission completes its rulemaking as to margin requirements for security-based swaps.\136\ FINRA noted that the proposed rule does not prevent parties from entering into agreements that provide for two-way margining should they wish to do so, provided those parties comply with all applicable requirements. --------------------------------------------------------------------------- \135\ See Amendment No. 3, supra note 14. \136\ See supra note 50. --------------------------------------------------------------------------- F. Scope of FINRA's Authority Similar to comments received on the Notice and the Order Instituting Proceedings,\137\ some commenters stated FINRA does not have authority to impose the proposed margin requirements, as it is not consistent with the intent of section 7 of the Exchange Act.\138\ Some commenters cited the Senate Report in connection with the adoption of the Secondary Mortgage Market Enhancement Act of 1984 (``SMMEA'') in support of this view.\139\ As discussed in more detail in the Order Instituting Proceedings and Amendment No. 2 Notice, FINRA stated that it believes the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Exchange Act.\140\ FINRA further stated 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.\141\ --------------------------------------------------------------------------- \137\ See supra notes 3, 8, and 12. \138\ See BDA 3 Letter and Coastal 3 Letter; see also supra note 12. \139\ Pub. L. 98-440, 98 Stat. 1689 (1984). \140\ See Notice, supra note 3. 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 8 and 12. See Amendment No. 3, supra note 14. \141\ See Order Instituting Proceedings, supra note 8. --------------------------------------------------------------------------- G. Cleared Covered Agency Transactions In response to the Amendment No. 2 Notice, one commenter expressed concern that the proposed rule would impose a double margin requirement on introducing firms that are already required to post margin pursuant to agreements with clearing firms.\142\ This commenter proffered language to exempt such transactions from the rule's margin requirements.\143\ Another commenter said that FINRA should coordinate with the Mortgage-Backed Securities Division (``MBSD'') of Fixed [[Page 40374]] Income Clearing Corporation to leverage MBSD's infrastructure.\144\ --------------------------------------------------------------------------- \142\ See Brean Capital 3 Letter. \143\ Id. \144\ See Thomson Letter. --------------------------------------------------------------------------- In response to these comments, FINRA stated that paragraph (e)(2)(H)(ii)c.1. of the proposed rule provides that the margin requirements of paragraph (e)(2)(H) do not apply to Covered Agency Transactions that are cleared through a registered clearing agency, as specified by the rule.\145\ Furthermore, FIRNA stated it is not the rule's intent to regulate the commercial agreements of members, provided the rule's requirements are met. As such, FINRA stated that it does not propose to adopt the proffered language. FINRA noted, that the MBSD infrastructure is outside the scope of the proposed rule change, which, is not intended to apply the proposed margin requirements to Covered Agency Transactions cleared through a registered clearing agency.\146\ --------------------------------------------------------------------------- \145\ See Exhibit 5 in Amendment No. 3. \146\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- H. Trading Activity and Alternative Requirements One commenter expressed a number of concerns with respect to trading activity under the proposed rule.\147\ This commenter proffered language to exempt from the rule's margin requirements transactions that are offset by bilateral transactions with investment companies, to amend the position liquidation requirements to apply solely to TBA transactions (as opposed to the other types of Covered Agency Transactions), to exclude from the margin requirements any mark to market losses that are offset by gains on a cleared trade, and to prescribe required procedures as to position marking that would require reference to a ``generally recognized source'' and agreement of the parties.\148\ Another commenter suggested the rule should permit members to take a capital charge as an alternative to collecting maintenance margin.\149\ --------------------------------------------------------------------------- \147\ See Brean Capital 3 Letter. \148\ Id. \149\ See Thomson Letter. --------------------------------------------------------------------------- In response to these comments, FINRA stated that it does not believe that the proffered language is consistent with the rule's purposes. FINRA also stated that it does not believe there is a public policy purpose in writing into the rule an exemption for offsets with investment companies or cleared trades, or to confine the liquidation requirements to TBA transactions only.\150\ FINRA stated that it does not propose to incorporate the proffered language as to position marking given that, for purposes of the rule, this is a matter to be addressed by the parties' commercial relations. Further, FINRA stated that it does not propose to revise the rule to permit members to take a capital charge as an alternative to the collection of maintenance margin from counterparties, as FINRA believes this would not protect members from the risk of counterparty default.\151\ --------------------------------------------------------------------------- \150\ See Amendment No. 3, supra note 14. \151\ Id. --------------------------------------------------------------------------- Moreover, FINRA stated that a capital charge in lieu of collecting maintenance margin could have the effect of disadvantaging small firms that are not in a position to absorb capital charges to the same extent as larger, more highly capitalized firms. As such, FINRA stated that it believes the rule as proposed puts all firms on an equal footing, leveling the playing field between large and small firms, since all firms can collect maintenance margin, but not all firms can absorb the same amount of capital charges.\152\ --------------------------------------------------------------------------- \152\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- IV. Discussion and Commission Findings The Commission has carefully considered the proposed rule change, as modified by Amendment Nos. 1, 2, and 3, the comments received, and FINRA's responses to the comments. Based on its review of the record, the Commission finds that the proposal is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities association.\153\ In particular, the Commission finds that the proposed rule change is consistent with section 15A(b)(6) of the Exchange Act, which requires, among other things, that FINRA rules 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.\154\ --------------------------------------------------------------------------- \153\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \154\ 15 U.S.C. 78o-3(b)(6). --------------------------------------------------------------------------- As discussed above, the proposed rule change would amend FINRA Rule 4210 to establish margin requirements for the TBA market that are designed to ``to reduce firm exposure to counterparty credit risk stemming from unsecured credit exposure that exists in the [TBA] market today.'' \155\ The Commission agrees with FINRA that ``[p]ermitting counterparties to participate in the TBA market without posting margin could facilitate increased leverage by customers, thereby potentially posing a risk to the broker-dealer extending credit and to the marketplace as a whole.'' \156\ The proposed rule change also is expected to ``enhance sound risk management practices'' for FINRA members and their counterparties involved in the TBA market.\157\ The stated goals of the proposal are consistent with the purposes of the Exchange Act and with FINRA's authority to impose margin requirements on its members.\158\ The proposed rule change will serve to promote consistent and transparent margin requirements for the TBA market for FINRA members and their counterparties. Moreover, the proposed rule change will mitigate the risk that FINRA members will compete by implementing lower margin levels for Covered Agency Transactions and will help ensure that margin levels are set at sufficiently prudent levels across FINRA members. --------------------------------------------------------------------------- \155\ See Notice, supra note 3. \156\ Id. \157\ Id. \158\ See, e.g., 12 CFR 220.1(b)(2). --------------------------------------------------------------------------- As outlined above, the Commission received 141 comment letters on the proposed rule change, as well as FINRA responses to these comments.\159\ The Commission notes that while commenters generally supported the goals of the proposed rule change ``of addressing the counterparty credit risk and systemic risk posed to broker-dealers by TBA Transactions,'' \160\ various commenters disagreed with FINRA over the proposed approach to achieve this goal and recommended changes to it.\161\ Other commenters requested that the Commission disapprove the proposed rule change.\162\ Finally, numerous commenters were concerned about the potential cost burden and competitive impact of the proposed rule change on FINRA members and other market participants.\163\ --------------------------------------------------------------------------- \159\ See comment file supra note 5. The 141 comment letters include the 54 Type A and B form letters that generally contain language opposing the inclusion of multifamily housing and project loan securities within the scope of the proposed rule change, as originally published in the Notice, and prior to the exclusion of these types of securities from the rule, as modified in Amendment Nos. 1 and 2. \160\ See, e.g., SIFMA 3 Letter. \161\ See comment file supra note 5. \162\ Id. \163\ See supra note 5. See also Notice, Order Instituting Proceedings, Amendment No. 2 Notice, and Amendment No. 3, supra notes 3, 8, 12, and 14. --------------------------------------------------------------------------- While the Commission appreciates the recommendations made by various commenters, and recognizes that new margin requirements for Covered Agency Transactions may result in increased costs for some FINRA [[Page 40375]] members and their counterparties, the Commission believes that FINRA responded appropriately to their concerns. Taking into consideration the comments and FINRA's responses, the Commission believes that the proposal is consistent with the Exchange Act. In structuring the proposed rule, FINRA has reasonably balanced the goal of reducing firm exposure to counterparty credit risk stemming from unsecured credit exposures in the TBA market, with the potential costs and competitive impacts that may result from the proposed rule change. Specifically, the Commission notes that FINRA has incorporated a number of exceptions into its proposal to mitigate the impact of the proposed rule change, particularly on smaller firms and counterparties. For example, in Amendment No. 3, FINRA proposed to increase the exception from the margin requirements for any counterparty with gross open positions of $2.5 million or less in aggregate to $10 million to ameliorate the proposed rule change's impact on the TBA market and to address the concerns of how the rule would impact small firms and customers that do not take large positions in Covered Agency Transactions.\164\ --------------------------------------------------------------------------- \164\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- In addition, FINRA has proposed an additional cash account exception available to FINRA members that would not require them to collect maintenance margin from counterparties that are non-exempt accounts, as well as a $250,000 de minimis transfer amount that would mitigate the need for counterparties to transfer small amounts of margin to a FINRA member. Moreover, under the proposed rule change, mortgage bankers may be treated as exempt accounts under specified conditions, resulting in these counterparties being subject only to the variation margin requirements under the proposal. In Amendment No. 3, FINRA also proposed to simplify new Supplementary Material .05 related to risk limit determinations at the investment adviser level to reduce regulatory burdens.\165\ These provisions, in totality, should lessen the competitive impact and compliance costs of the rule on FINRA members and their counterparties, while reducing the risk of uncollateralized credit exposures arising from Covered Agency Transactions given the size of the TBA market.\166\ Finally, the Commission notes that FINRA has stated that it will monitor the proposed rule's impact and, if the requirements prove overly onerous or otherwise are shown to negatively impact the TBA market, it will consider modifications to mitigate the rule's impact.\167\ --------------------------------------------------------------------------- \165\ See Amendment No. 3, supra note 14, and discussion in Section II.D. above. \166\ See Notice, supra note 3. \167\ See Amendment No. 3, supra note 14, and discussion in Section II.D. above. --------------------------------------------------------------------------- The Commission acknowledges that the requirements of FINRA's proposed rule change are more prescriptive than the TMPG best practices, including, for example, the proposed maintenance margin requirement for non-exempt accounts, as well as the timing of margin collection and mandatory liquidation requirements.\168\ The Commission notes FINRA's approach is generally consistent with the margining of other securities transactions under Rule 4210.\169\ For example, securities transactions margined under FINRA Rule 4210 are generally subject to maintenance margin, which is a ``mainstay of regimes in the securities industry.'' \170\ With respect to the maintenance margin requirement, the Commission agrees with FINRA that most accounts at broker-dealers engaging in Covered Agency Transactions likely will be exempt accounts, and therefore, only subject to the variation margin requirements under the rule.\171\ In the alternative, where maintenance margin requirements apply, FINRA has proposed specific exceptions which should mitigate the impact on a counterparty, including the cash account exceptions and the $250,000 de minimis transfer amount. Finally, with respect to the proposed mandatory five-business day liquidation time period, FINRA members may request and receive extensions from FINRA under its Regulatory Extension System and FINRA has stated it ``will consider additional guidance as needed.'' \172\ The Commission believes these proposed requirements are consistent with the Exchange Act and are appropriate ``in view of the potential counterparty risk in the TBA market.'' \173\ --------------------------------------------------------------------------- \168\ See TPMG best practices, supra note 21. The proposed rule provides for specific times by which margin must be collected, or an account liquidated unless FINRA specifically grants the member additional time (for the account liquidation purposes only). \169\ See FINRA Rule 4210. \170\ See FINRA Rule 4210. See also Amendment No. 2 Notice, supra note 12. \171\ See Notice, supra note 3. \172\ See Amendment No. 2 Notice, supra note 12. \173\ See Order Instituting Proceedings, supra note 8. --------------------------------------------------------------------------- FINRA's stated purposes for proposing margin requirements on Covered Agency Transactions is consistent with other regulatory efforts that have sought to address the risk of uncollateralized credit exposure arising in different types of bilateral credit transactions following the financial crisis, in particular, after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.\174\ The Commission agrees with FINRA that imposing mandatory margin requirements on FINRA members transacting business with counterparties in the TBA market addresses a gap between margining in the TBA market and margin practices and regulatory developments in other markets.\175\ Margin collateral collected by a FINRA member may mitigate a broker- dealer's financial losses in the event of a counterparty default, and, in turn, serve to protect the broker-dealer's other customers. Consequently, the Commission believes that the proposed rule change would further the purposes of the Exchange Act as it is reasonably designed to protect investors and the public interest.\176\ --------------------------------------------------------------------------- \174\ See Public Law 111-203, 124 Stat. 1376 (2010). See also TPMG best practices, supra note 21; see also Capital, Margin, and Segregation Requirements for Security- Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213, 70258 (Nov. 23, 2012) (``The Dodd-Frank Act seeks to address the risk of uncollateralized credit exposure arising from OTC derivatives by, among other things, mandating margin requirements for non-cleared security-based swaps and swaps.'') \175\ See Notice, supra note 3. \176\ See 15 U.S.C. 78o-3(b)(6). --------------------------------------------------------------------------- The Commission further believes that excluding multifamily and project loan program securities from the scope of the rule, if a FINRA member makes a written risk limit determination for a counterparty trading in such securities, is appropriate. While included in the scope of the TPMG best practices, these types of securities only are a small part of the overall TBA market, and may be difficult to mark to market because they are often backed by a single project or loan.\177\ Further, existing safeguards in the multi-family housing market, including the provision of good faith deposits by the borrower, may serve to mitigate the counterparty credit risk to a FINRA member with respect to a counterparty engaging trading in multifamily and project loan securities.\178\ --------------------------------------------------------------------------- \177\ See Order Instituting Proceedings, supra note 8. Commenters provided data with respect to the multifamily housing securities market in comparison to the overall TBA market, and FINRA conducted an analysis of transactional data. Id. \178\ Id. --------------------------------------------------------------------------- In addition to the exclusions for multifamily housing and project loan securities, the Commission notes that numerous commenters believed other product types should be excluded from [[Page 40376]] the scope of the rule, or that FINRA should revise the definition of Covered Agency Transaction to focus on long-dated settlements.\179\ The Commission agrees with FINRA that excluding additional products from the rule or modifying the settlement dates in the definition of Covered Agency Transactions potentially may ``undermine the effectiveness of the proposal'' if counterparties are permitted to maintain unsecured credit exposures on these positions.\180\ Furthermore, as described above, FINRA's rationale for excluding multifamily and project loan securities is distinct from the issues raised by commenters with respect to the other suggested modifications to the definition of Covered Agency Transaction under the rule, due, in part, to the unique characteristics of multi-family housing and project loan securities.\181\ The Commission believes that FINRA's proposed approach to establish a $10 million or less in aggregate per counterparty exception is appropriate in that it will continue to subject products with forward settlement dates to the rule's margin requirements, while reducing potential burdens on smaller FINRA member firms and counterparties that do not take on large positions in Covered Agency Transactions. --------------------------------------------------------------------------- \179\ See comment file supra note 5. See also Order Instituting Proceedings, supra note 8. \180\ See Notice, supra note 3. \181\ See Amendment No. 2 Notice, supra note 12. --------------------------------------------------------------------------- The Commission acknowledges the comments raised by market participants that the scope of the TPMG's best practices includes two- way variation margin, in contrast to the proposed rule change which would require FINRA members to collect margin from their counterparties (without a corresponding posting requirement). Current FINRA Rule 4210 is a collection rule and does not require broker-dealers to post margin to their customers for securities transactions margined under the rule.\182\ The Commission notes that the broker-dealer margin requirements have been in place for many years.\183\ In its response to comments, FINRA stated it supports two-way margining but does not propose to address two-way margining as part of the proposed rule change.\184\ However, FINRA indicated it would re-examine this issue ``when the Commission completes its rulemaking as to margin requirements for security-based swaps.'' \185\ The Commission believes FINRA's approach is appropriate.\186\ --------------------------------------------------------------------------- \182\ See FINRA Rule 4210. \183\ See Capital, Margin, and Segregation Requirements for Security- Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213, 70259 (Nov. 23, 2012) (``In the securities markets, margin rules have been set by relevant regulatory authorities (the Federal Reserve and the SROs) since the 1930s.'') \184\ See Amendment No. 3, supra note 14. \185\ See Amendment No. 3, supra note 14. See also Capital, Margin, and Segregation Requirements for Security- Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012) \186\ FINRA also noted ``that the proposed rule does not prevent parties from entering into agreements that provide for two-way margining should they wish to do so, provided those parties comply with all applicable requirements.'' See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- The Commission believes that FINRA's proposed implementation schedule is appropriate and consistent with the requirements of the Exchange Act. The Commission notes that FINRA proposed to extend the implementation timeframe in Amendment No. 1 in response to comments that considerable operational and systems work will be needed to comply with the proposed rule change.\187\ The Commission believes that the proposed six-month timeframe for the risk limit determination requirements \188\ and 18-month timeframe for implementation of the remainder of the rule should provide sufficient time for FINRA firms to comply with the rule's requirements.\189\ --------------------------------------------------------------------------- \187\ See Order Instituting Proceedings, supra note 8. \188\ See supra note 65 (clarifying the specific rule provisions related to the risk limit determinations that become effective six months after Commission approval of the proposed rule change). \189\ The Commission notes that this proposal has been noticed for comment three times. See Notice, Order Instituting Proceedings, and Amendment No. 2 Notice, supra notes 3, 8, and 12. In addition, FINRA originally sought comment on proposal prior to filing it with the Commission in in 2014 through publication of a Regulatory Notice. See Regulatory Notice 14-02 (FINRA Requests Comment on Proposed Amendments to FINRA Rule 4210 for Transactions in the TBA Market) (Jan. 2014). --------------------------------------------------------------------------- In conclusion, the Commission believes that the proposal will help protect investors and the public interest by establishing margin requirements for the TBA market to reduce the risk that unsecured credit exposures could potentially lead to losses by FINRA members, and by enhancing risk management practices at FINRA members that participate in the TBA market. The Commission also believes that FINRA gave due consideration to the proposal and met the requirements of the Exchange Act. For these reasons, the Commission finds that the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder. V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 3, 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 [email protected]. Please include File Number SR-FINRA-2015-036 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-FINRA-2015-036. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. 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 July 12, 2016. [[Page 40377]] VI. Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 The Commission finds good cause, pursuant to Section 19(b)(2) of the Exchange Act, to approve the proposed rule change, as modified by Amendment Nos. 1, 2, and 3, prior to the 30th day after the date of publication of Amendment No. 3 in the Federal Register. FINRA proposed the changes in Amendment No. 3 in response to issues raised by commenters.\190\ --------------------------------------------------------------------------- \190\ See Amendment No. 3, supra note 14. --------------------------------------------------------------------------- More specifically, Amendment No. 3 revised the proposal to increase the gross open position exception from $2.5 million or less to $10 million or less. Second, FINRA revised the proposed language in new Supplementary Material .05(a)(1) to delete the clause ``except with respect to any account or group of commonly controlled accounts whose assets managed by that investment adviser constitute more than 10 percent of the investment adviser's regulatory assets under management as reported on the investment adviser's most recent Form ADV.'' The Commission believes that the changes proposed in Amendment No. 3 do not raise any novel regulatory issues because they provide greater clarity with respect to the application of the proposed rule change and will reduce the regulatory burden on FINRA members, particularly smaller firms and counterparties. Therefore, the Commission finds that Amendment No. 3 is consistent with the protection of investors and the public interest. Amendment No. 3 also clarified which paragraphs related to the required written risk limit determinations become effective six months after Commission approval of the proposed rule change. The Commission believes that these are technical clarifications and do not change the substance of the proposed implementation timeframe as proposed in the Order Instituting Proceedings and the Amendment No. 2 Notice. Accordingly, the Commission finds good cause pursuant to Section 19(b)(2) of the Exchange Act,\191\ for approving the proposed rule change, as modified by Amendment Nos. 1, 2, and 3, on an accelerated basis. --------------------------------------------------------------------------- \191\ 15 U.S.C. 78s(b)(2). --------------------------------------------------------------------------- VII. Conclusion IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Exchange Act,\192\ that the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 (SR-FINRA-2015-036) be, and hereby is approved on an accelerated basis. --------------------------------------------------------------------------- \192\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\193\ --------------------------------------------------------------------------- \193\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-14561 Filed 6-20-16; 8:45 am] BILLING CODE 8011-01-P
![40364 Federal Register / Vol. 81, No. 119 / Tuesday, June 21, 2016 / Notices
II. Contents of Filing IV. Ordering Paragraphs Commission must approve the proposed
To accompany its Notice, the Postal It is ordered: rule change, disapprove the proposed
Service filed the following materials: 1. The Commission establishes Docket rule change, or institute proceedings to
• Attachment 1—an application for No. CP2016–207 for consideration of the determine whether to approve or
non-public treatment of materials filed matters raised by the Postal Service’s disapprove the proposed rule change to
under seal; Notice. January 15, 2016.4 The Commission
• Attachment 2—a redacted copy of received 109 comment letters, including
2. Pursuant to 39 U.S.C. 505, Katalin
Governors’ Decision No. 14–04; 50 Type A comment letters and four
K. Clendenin is appointed to serve as an
• Attachment 3—a redacted copy of officer of the Commission to represent
Type B comment letters, in response to
UPU International Bureau (IB) Circular the proposal.5 On January 13, 2016,
the interests of the general public in this
49, which contains the new rates; FINRA responded to the comments and
proceeding (Public Representative).
• Attachment 4—a copy of the 3. Comments are due no later than
filed Amendment No. 1 to the
certification required under 39 CFR proposal.6 On January 14, 2016, the
June 23, 2016.
3015.5(c)(2); and Commission issued an order instituting
4. The Secretary shall arrange for
• Attachment 5—documentation in publication of this order in the Federal
proceedings pursuant to Section
support of inflation-linked adjustment 19(b)(2)(B) of the Exchange Act 7 to
Register. determine whether to approve or
for inward land rates.
Id., Attachments 1–5. By the Commission. disapprove the proposed rule change, as
The Postal Service also filed Stacy L. Ruble, modified by Amendment No. 1.8 The
supporting financial workpapers, an Secretary. Order Instituting Proceedings was
unredacted copy of Governors’ Decision [FR Doc. 2016–14564 Filed 6–20–16; 8:45 am] published in the Federal Register on
14–04, an unredacted copy of the new BILLING CODE 7710–FW–P
January 21, 2016.9 The Commission
rates, and related financial information received 23 comment letters in response
under seal. Id. to the Order Instituting Proceedings.10
In accordance with Order Nos. 2102 2 SECURITIES AND EXCHANGE On March 21, 2016, FINRA responded
and 2310,3 the Postal Service has: (1) COMMISSION to the comments and filed Amendment
Provided documentation supporting the No. 2.11 On April 11, 2016, the
inflation-linked adjustment as [Release No. 34–78081; File No. SR–FINRA– Commission noticed Amendment No. 2
Attachment 5; (2) updated its advisory 2015–036] to the proposed rule change to solicit
delivery information in a timely manner comments from interested persons and
Self-Regulatory Organizations; designated a longer period for
in the UPU’s online compendium to
Financial Industry Regulatory
justify bonus payments; (3) provided the
Authority, Inc.; Notice of Filing of 4 See Extension No. 1, dated Nov. 10, 2015.
date that the UPU advised the United
Amendment No. 3 and Order Granting FINRA’s extension of time for Commission action,
States of the Inward Land Rate, and available at http://www.finra.org/sites/default/files/
Accelerated Approval to a Proposed
provided the calculation of the rate for rule_filing_file/SR-FINRA-2015-036-extension-
Rule Change To Amend FINRA Rule
the pertinent year, in the UPU IB 1.pdf.
4210 (Margin Requirements) To 5 The public comment file for the proposed rule
Circular 49 as Attachment 3; (4)
Establish Margin Requirements for the change is on the Commission’s Web site available
provided the special drawing rights
TBA Market, as Modified by at https://www.sec.gov/comments/sr-finra-2015-
(SDR) conversion rate of 1 SDR to 036/finra2015036.shtml. The Type A and B form
Amendment Nos. 1, 2, and 3
$1.41474 U.S. dollars used for the cost letters generally contain language opposing the
coverage analysis; and (5) provided the June 15, 2016. inclusion of multifamily housing and project loan
securities within the scope of the proposed rule
estimated cost coverage for Inbound change, as originally proposed in the Notice. See
Parcel Post (at UPU rates) for the I. Introduction
Notice, supra note 3. The Commission staff also
pertinent year. Notice at 3–4. On October 6, 2015, Financial participated in numerous meetings and conference
Industry Regulatory Authority, Inc. calls with certain commenters and other market
III. Commission Action participants.
(‘‘FINRA’’) filed with the Securities and 6 See Amendment No. 1 to the proposed rule
The Commission establishes Docket Exchange Commission (‘‘Commission’’), change, dated Jan. 13, 2016 (‘‘Amendment No. 1’’),
No. CP2016–207 for consideration of pursuant to section 19(b)(1) of the available at http://www.finra.org/sites/default/files/
matters raised by the Notice. Securities Exchange Act of 1934 rule_filing_file/SR-FINRA-2015-036-amendment-
The Commission invites comments on 1.pdf. FINRA’s responses to comments received on
(‘‘Exchange Act’’) 1 and Rule 19b–4 the Notice and proposed amendments in response
whether the Postal Service’s filing is thereunder,2 a proposed rule change to to those comments are included in Amendment No.
consistent with 39 U.S.C. 3632, 3633, amend FINRA Rule 4210 (Margin 1.
and 39 CFR part 3015. Comments are Requirements) to establish margin 7 15 U.S.C. 78s(b)(2)(B).
due no later than June 23, 2016. The requirements for covered agency
8 See Exchange Act Release No. 76908 (Jan. 14,
public portions of the filing can be 2016), 81 FR 3532 (Jan. 21, 2016) (Order Instituting
transactions, also referred to, for Proceedings To Determine Whether To Approve or
accessed via the Commission’s Web site purposes of this proposed rule change Disapprove Proposed Rule Change to Amend
(http://www.prc.gov). as the To Be Announced (‘‘TBA’’) FINRA Rule 4210 (Margin Requirements) to
The Commission appoints Katalin K. market. Establish Margin Requirements for the TBA Market,
Clendenin to serve as Public as Modified by Partial Amendment No. 1) (‘‘Order
The proposed rule change was Instituting Proceedings’’).
Representative in this docket. published for comment in the Federal 9 Id.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Register on October 20, 2015.3 On 10 See comment file, supra note 5.
Applicability for Inbound Parcel Post (at UPU November 10, 2015, FINRA extended 11 See Amendment No. 2 to proposed rule change,
Rates) and Application for Non-Public Treatment, dated Mar. 21, 2016 (‘‘Amendment No. 2’’),
June 14, 2016, at 1–2 (Notice). the time period in which the
available at http://www.finra.org/sites/default/files/
2 Docket No. CP2014–52, Order Accepting Price
rule_filing_file/SR-FINRA-2015-036-
1 15 U.S.C. 78s(b)(1).
Changes for Inbound Air Parcel Post (at UPU Rates), ammendment2.pdf. FINRA’s responses to
June 26, 2014, at 6 (Order No. 2102). 2 17 CFR 240.19b–4. comments received on the Order Instituting
3 Docket No. CP2015–24, Order Accepting 3 See Exchange Act Release No. 76148 (Oct. 14, Proceedings and proposed amendments in response
Changes in Rates for Inbound Parcel Post (at UPU 2015), 80 FR 63603 (Oct. 20, 2015) (File No. SR– to those comments are included in Amendment No.
Rates), December 29, 2014, at 4 (Order No. 2310). FINRA–2015–036) (‘‘Notice’’). 2.
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![Federal Register / Vol. 81, No. 119 / Tuesday, June 21, 2016 / Notices 40367
Exceptions From the Proposed Margin the mark to market loss, unless FINRA to any margin requirement, and as such
Requirements: (1) Registered Clearing has specifically granted the member need not be collected or charged to net
Agencies; (2) Gross Open Positions of additional time. Under the rule, capital, if the aggregate of such amounts
$2.5 Million or Less in Aggregate 25 members may treat mortgage bankers with such counterparty does not exceed
Paragraph (e)(2)(H)(ii)c. provides that that use Covered Agency Transactions $250,000 (‘‘the de minimis transfer
the margin requirements specified in to hedge their pipeline of mortgage amount’’).
paragraph (e)(2)(H) of the rule shall not commitments as exempt accounts for
purposes of paragraph (e)(2)(H) of this Unrealized Profits; Standbys
apply to:
Æ Covered Agency Transactions that Rule. Paragraph (e)(2)(H)(ii)g. of the rule
are cleared through a registered clearing provides that unrealized profits in one
Transactions With Non-Exempt
agency, as defined in FINRA Rule Covered Agency Transaction position
Accounts
4210(f)(2)(A)(xxviii), and are subject to may offset losses from other Covered
Paragraph (e)(2)(H)(ii)e. of the rule Agency Transaction positions in the
the margin requirements of that clearing provides that, on any net long or net
agency; and same counterparty’s account and the
short position, by CUSIP, resulting from amount of net unrealized profits may be
Æ any counterparty that has gross
bilateral transactions with a used to reduce margin requirements.
open positions in Covered Agency
counterparty that is not an exempt
Transactions with the member account, maintenance margin, plus any B. Conforming Amendments to FINRA
amounting to $2.5 million or less in net mark to market loss on such Rule 4210(e)(2)(F) (Transactions With
aggregate, if the original contractual transactions, shall be required margin, Exempt Accounts Involving Certain
settlement for all such transactions is in and the member shall collect the ‘‘Good Faith’’ Securities) and FINRA
the month of the trade date for such deficiency, as defined in paragraph Rule 4210(e)(2)(G) (Transactions With
transactions or in the month succeeding (e)(2)(H)(i)d. of the rule, unless Exempt Accounts Involving Highly
the trade date for such transactions and otherwise provided under paragraph Rated Foreign Sovereign Debt Securities
the counterparty regularly settles its (e)(2)(H)(ii)f. of the rule. The rule and Investment Grade Debt Securities)
Covered Agency Transactions on a provides that if the deficiency is not The proposed rule change makes a
Delivery Versus Payment (‘‘DVP’’) basis satisfied by the close of business on the number of revisions to paragraphs
or for cash; provided, however, that next business day after the business day (e)(2)(F) and (e)(2)(G) of FINRA Rule
such exception from the margin on which the deficiency arises, the 4210: 26
requirements shall not apply to a member shall be required to deduct the • The proposed rule change revises
counterparty that, in its transactions amount of the deficiency from net the opening sentence of paragraph
with the member, engages in dollar capital as provided in Exchange Act (e)(2)(F) to clarify that the paragraph’s
rolls, as defined in FINRA Rule 6710(z), Rule 15c3–1 until such time the scope does not apply to Covered Agency
or round robin trades, or that uses other deficiency is satisfied. Further, the rule Transactions as defined pursuant to new
financing techniques for its Covered provides that if such deficiency is not paragraph (e)(2)(H). Accordingly, as
Agency Transactions. satisfied within five business days from amended, paragraph (e)(2)(F) states:
Transactions With Exempt Accounts the date the deficiency was created, the ‘‘Other than for Covered Agency
member shall promptly liquidate Transactions as defined in paragraph
Paragraph (e)(2)(H)(ii)d. of the positions to satisfy the deficiency,
proposed rule provides that, on any net (e)(2)(H) of this Rule . . .’’ For similar
unless FINRA has specifically granted reasons, the proposed rule change
long or net short position, by CUSIP, the member additional time.
resulting from bilateral transactions revises paragraph (e)(2)(G) to clarify that
The rule provides that no the paragraph’s scope does not apply to
with a counterparty that is an exempt maintenance margin is required if the
account, no maintenance margin shall a position subject to new paragraph
original contractual settlement for the (e)(2)(H) in addition to paragraph
be required. However, the rule provides Covered Agency Transaction is in the
that such transactions must be marked (e)(2)(F) as the paragraph currently
month of the trade date for such states. As amended, the parenthetical in
to the market daily and the member transaction or in the month succeeding
must collect any net mark to market the opening sentence of the paragraph
the trade date for such transaction and states: ‘‘([O]ther than a position subject
loss, unless otherwise provided under the customer regularly settles its
paragraph (e)(2)(H)(ii)f. The rule to paragraph (e)(2)(F) or (e)(2)(H) of this
Covered Agency Transactions on a DVP Rule).’’
provides that if the mark to market loss basis or for cash; provided, however,
is not satisfied by the close of business • Current, pre-revision paragraph
that such exception from maintenance (e)(2)(H)(i) provides that members must
on the next business day after the margin requirement shall not apply to a
business day on which the mark to maintain a written risk analysis
non-exempt account that, in its methodology for assessing the amount
market loss arises, the member shall be transactions with the member, engages
required to deduct the amount of the of credit extended to exempt accounts
in dollar rolls, as defined in FINRA Rule pursuant to paragraphs (e)(2)(F) and
mark to market loss from net capital as 6710(z), or round robin trades, as
provided in Exchange Act Rule 15c3–1 (e)(2)(G) of the rule which shall be made
defined in proposed FINRA Rule available to FINRA upon request. The
until such time the mark to market loss 4210(e)(2)(H)(i)i., or that uses other
is satisfied. The rule requires that if proposed rule change places this
financing techniques for its Covered language in paragraphs (e)(2)(F) and
such mark to market loss is not satisfied
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Agency Transactions. (e)(2)(G) and deletes it from its current
within five business days from the date
the loss was created, the member must De Minimis Transfer Amounts location. Accordingly, FINRA proposes
promptly liquidate positions to satisfy to move to paragraphs (e)(2)(F) and
Paragraph (e)(2)(H)(ii)f. of the rule
(e)(2)(G): ‘‘Members shall maintain a
provides that any deficiency, as set forth
25 This section describes the proposed rule written risk analysis methodology for
in paragraph (e)(2)(H)(ii)e. of the rule, or
change prior to the proposed amendment to
increase the $2.5 million to $10.0 million in
mark to market losses, as set forth in 26 See supra notes 3, 8, and 12; see also Exhibit
Amendment No. 3, which is described in section paragraph (e)(2)(H)(ii)d. of the rule, with 5 in Amendment No. 2, text of proposed rule
II.D. below. a single counterparty shall not give rise change, as modified by Amendment Nos. 1 and 2.
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![40368 Federal Register / Vol. 81, No. 119 / Tuesday, June 21, 2016 / Notices
assessing the amount of credit extended under paragraphs (e)(2)(F) and (e)(2)(G) filed Amendment No. 3 to propose
to exempt accounts pursuant to [this of the rule (exclusive of the percentage revisions to paragraph (e)(2)(H)(ii)c.2.
paragraph], which shall be made requirements established thereunder), and Supplementary Material .05(a)(1).33
available to FINRA upon request.’’ plus any mark to market loss as set forth Specifically, in Amendment No. 3,
Further, FINRA proposes to add to each: under paragraph (e)(2)(H)(ii)d. of the FINRA proposes to increase the
‘‘The risk limit determination shall be rule and any deficiency as set forth specified amount for the gross open
made by a designated credit risk officer under paragraph (e)(2)(H)(ii)e. of the position exception from $2.5 million or
or credit risk committee in accordance rule, and inclusive of all amounts less in aggregate to $10 million and
with the member’s written risk policies excepted from margin requirements as amend new Supplementary Material
and procedures.’’ set forth under paragraph .05(a)(1) to revise the proposed language
• The proposed rule change revises (e)(2)(H)(ii)c.2. of the rule or any de to delete the clause that reads ‘‘except
the references in paragraphs (e)(2)(F) minimis transfer amount as set forth with respect to any account or group of
and (e)(2)(G) to the limits on net capital under paragraph (e)(2)(H)(ii)f. of the commonly controlled accounts whose
deductions as set forth in current rule, exceed: 28 assets managed by that investment
paragraph (e)(2)(H) to read ‘‘paragraph • For any one account or group of adviser constitute more than 10 percent
(e)(2)(I)’’ in conformity with that commonly controlled accounts, 5 of the investment adviser’s regulatory
paragraph’s redesignation pursuant to percent of the member’s tentative net assets under management as reported on
the rule change. capital (as such term is defined in the investment adviser’s most recent
C. Redesignated Paragraph (e)(2)(I) Exchange Act Rule 15c3–1), or Form ADV.’’ Finally, FINRA clarified
(Limits on Net Capital Deductions) 27 • for all accounts combined, 25 which provisions related to the risk
percent of the member’s tentative net limit determinations in the proposed
Under current paragraph (e)(2)(H) of capital (as such term is defined in rule change would become effective
FINRA Rule 4210, in brief, a member Exchange Act Rule 15c3–1), and, with regard to the six month
must provide prompt written notice to • such excess as calculated in implementation timeframe after the
FINRA and is prohibited from entering paragraphs (e)(2)(I)(i)a. or b. of the rule proposed rule change is approved by the
into any new transactions that could continues to exist on the fifth business Commission.
increase the member’s specified credit day after it was incurred,
exposure if net capital deductions taken 1. Gross Open Position Exception and
the member must give prompt written
by the member as a result of marked to the $250,000 De Minimis Transfer
notice to FINRA and shall not enter into
the market losses incurred under Amount
any new transaction(s) subject to the
paragraphs (e)(2)(F) and (e)(2)(G), over a As proposed in the Notice and
provisions of paragraphs (e)(2)(F),
five day business period, exceed: (1) For modified by Amendment Nos. 1 and 2,
a single account or group of commonly (e)(2)(G) or (e)(2)(H) of the rule that
would result in an increase in the the proposed rule would set forth an
controlled accounts, five percent of the exception from the proposed margin
member’s tentative net capital (as amount of such excess under, as
applicable, paragraph (e)(2)(I)(i) of the requirements for counterparties whose
defined in Exchange Act Rule 15c3–1); gross open positions in Covered Agency
or (2) for all accounts combined, 25 rule.
Transactions with the FINRA member
percent of the member’s tentative net Implementation Date 29 total $2.5 million or less in aggregate,
capital (again, as defined in Exchange subject to specified conditions.34 The
FINRA proposed that the risk limit
Act Rule 15c3–1). As discussed above, proposed rule also sets forth, for a single
determination requirements as set forth
the proposed rule change redesignates
in paragraphs (e)(2)(F), (e)(2)(G) and counterparty, a $250,000 de minimis
current paragraph (e)(2)(H) of the rule as
(e)(2)(H) of Rule 4210 and proposed transfer amount up to which margin
paragraph (e)(2)(I), deletes current
Supplementary Material .05 become need not be collected or charged to net
paragraph (e)(2)(H)(i), and makes
effective six months from the date the capital, subject to specified conditions.
conforming revisions to paragraph In response to the solicitation of
proposed rule change is approved by the
(e)(2)(I), as redesignated, for the purpose comments on the Amendment No. 2
Commission.30 FINRA proposed that the
of clarifying that the provisions of that Notice,35 and similar to comments
remainder of the proposed rule change
paragraph are meant to include Covered received on the Notice and the Order
become effective 18 months from the
Agency Transactions as set forth in new Instituting Proceedings,36 commenters
date the proposed rule change is
paragraph (e)(2)(H). In addition, the suggested increasing the $2.5 million
approved by the Commission.31
proposed rule change clarifies that de gross open position amount and the
minimis transfer amounts must be D. Amendment No. 3 $250,000 de minimis transfer amount.37
included toward the five percent and 25 In response to comments the Two commenters recommended that the
percent thresholds as specified in the Commission received on the $2.5 million be increased to $10
rule, as well as amounts pursuant to the Amendment No. 2 Notice,32 FINRA
specified exception under paragraph clarification of which provisions of the proposed
(e)(2)(H) for gross open positions of $2.5 28 See supra notes 3, 8, and 12; see also Exhibit rule change become effective six months after
million or less in aggregate. 5 in Amendment No. 2, text of proposed rule Commission approval of the proposed rule change,
Redesignated paragraph (e)(2)(I) of the change, as modified by Amendment Nos. 1 and 2. FINRA’s responses to comments received on the
29 See section II.D. below for a clarification in Amendment No. 2 Notice are discussed in section
rule provides that, in the event that the III. below.
Amendment No. 3 regarding the specific provisions
net capital deductions taken by a
asabaliauskas on DSK3SPTVN1PROD with NOTICES
33 See Amendment No. 3, supra note 14.
related to the risk limit determinations that become
member as a result of deficiencies or effective six months after Commission approval of 34 See supra notes 3, 8, and 12. See also
marked to the market losses incurred the proposed rule change. See Amendment No. 3, description of proposed rule change in section II.A.-
supra note 14. C. above.
27 This section describes the proposed rule 30 See supra notes 8 and 12. 35 See Amendment No. 2 Notice, supra note 12.
31 Id. 36 See discussion of comments received and
change prior to the proposed amendments in
Amendment No. 3 including increasing the $2.5 32 See supra note 12. With the exception of the FINRA’s responses in the Order Instituting
million cash account exception to $10.0 million. comments received on the gross open position Proceedings and the Amendment No. 2 Notice,
The proposed changes in Amendment No. 3 are exception, the $250,000 de minimis transfer supra notes 8 and 12.
described in section II.D. below. amount, new Supplementary Material .05, and the 37 See Brean Capital 4 Letter and Thomson Letter.
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![40374 Federal Register / Vol. 81, No. 119 / Tuesday, June 21, 2016 / Notices
Income Clearing Corporation to leverage that, for purposes of the rule, this is a risk to the broker-dealer extending
MBSD’s infrastructure.144 matter to be addressed by the parties’ credit and to the marketplace as a
In response to these comments, commercial relations. Further, FINRA whole.’’ 156 The proposed rule change
FINRA stated that paragraph stated that it does not propose to revise also is expected to ‘‘enhance sound risk
(e)(2)(H)(ii)c.1. of the proposed rule the rule to permit members to take a management practices’’ for FINRA
provides that the margin requirements capital charge as an alternative to the members and their counterparties
of paragraph (e)(2)(H) do not apply to collection of maintenance margin from involved in the TBA market.157 The
Covered Agency Transactions that are counterparties, as FINRA believes this stated goals of the proposal are
cleared through a registered clearing would not protect members from the consistent with the purposes of the
agency, as specified by the rule.145 risk of counterparty default.151 Exchange Act and with FINRA’s
Furthermore, FIRNA stated it is not the Moreover, FINRA stated that a capital authority to impose margin
rule’s intent to regulate the commercial charge in lieu of collecting maintenance requirements on its members.158 The
agreements of members, provided the margin could have the effect of proposed rule change will serve to
rule’s requirements are met. As such, disadvantaging small firms that are not promote consistent and transparent
FINRA stated that it does not propose to in a position to absorb capital charges to margin requirements for the TBA market
adopt the proffered language. FINRA the same extent as larger, more highly for FINRA members and their
noted, that the MBSD infrastructure is capitalized firms. As such, FINRA stated counterparties. Moreover, the proposed
outside the scope of the proposed rule that it believes the rule as proposed puts rule change will mitigate the risk that
change, which, is not intended to apply all firms on an equal footing, leveling FINRA members will compete by
the proposed margin requirements to the playing field between large and implementing lower margin levels for
Covered Agency Transactions cleared small firms, since all firms can collect Covered Agency Transactions and will
through a registered clearing agency.146 maintenance margin, but not all firms help ensure that margin levels are set at
can absorb the same amount of capital sufficiently prudent levels across FINRA
H. Trading Activity and Alternative charges.152 members.
Requirements As outlined above, the Commission
IV. Discussion and Commission
One commenter expressed a number received 141 comment letters on the
Findings
of concerns with respect to trading proposed rule change, as well as FINRA
activity under the proposed rule.147 The Commission has carefully responses to these comments.159 The
This commenter proffered language to considered the proposed rule change, as Commission notes that while
exempt from the rule’s margin modified by Amendment Nos. 1, 2, and commenters generally supported the
requirements transactions that are offset 3, the comments received, and FINRA’s goals of the proposed rule change ‘‘of
by bilateral transactions with responses to the comments. Based on its addressing the counterparty credit risk
review of the record, the Commission and systemic risk posed to broker-
investment companies, to amend the
finds that the proposal is consistent dealers by TBA Transactions,’’ 160
position liquidation requirements to
with the requirements of the Exchange various commenters disagreed with
apply solely to TBA transactions (as
Act and the rules and regulations FINRA over the proposed approach to
opposed to the other types of Covered
thereunder applicable to a national achieve this goal and recommended
Agency Transactions), to exclude from
securities association.153 In particular, changes to it.161 Other commenters
the margin requirements any mark to
the Commission finds that the proposed requested that the Commission
market losses that are offset by gains on
rule change is consistent with section disapprove the proposed rule change.162
a cleared trade, and to prescribe
15A(b)(6) of the Exchange Act, which Finally, numerous commenters were
required procedures as to position
requires, among other things, that concerned about the potential cost
marking that would require reference to FINRA rules be designed to prevent
a ‘‘generally recognized source’’ and burden and competitive impact of the
fraudulent and manipulative acts and proposed rule change on FINRA
agreement of the parties.148 Another practices, to promote just and equitable
commenter suggested the rule should members and other market
principles of trade, and, in general, to participants.163
permit members to take a capital charge protect investors and the public While the Commission appreciates
as an alternative to collecting interest.154 the recommendations made by various
maintenance margin.149 As discussed above, the proposed rule commenters, and recognizes that new
In response to these comments, change would amend FINRA Rule 4210 margin requirements for Covered
FINRA stated that it does not believe to establish margin requirements for the Agency Transactions may result in
that the proffered language is consistent TBA market that are designed to ‘‘to increased costs for some FINRA
with the rule’s purposes. FINRA also reduce firm exposure to counterparty
stated that it does not believe there is a credit risk stemming from unsecured 156 Id.
public policy purpose in writing into credit exposure that exists in the [TBA] 157 Id.
the rule an exemption for offsets with market today.’’ 155 The Commission 158 See, e.g., 12 CFR 220.1(b)(2).
investment companies or cleared trades, agrees with FINRA that ‘‘[p]ermitting
159 See comment file supra note 5. The 141
or to confine the liquidation comment letters include the 54 Type A and B form
counterparties to participate in the TBA letters that generally contain language opposing the
requirements to TBA transactions market without posting margin could inclusion of multifamily housing and project loan
only.150 FINRA stated that it does not facilitate increased leverage by securities within the scope of the proposed rule
propose to incorporate the proffered customers, thereby potentially posing a change, as originally published in the Notice, and
asabaliauskas on DSK3SPTVN1PROD with NOTICES
language as to position marking given prior to the exclusion of these types of securities
from the rule, as modified in Amendment Nos. 1
151 Id.
144 See
and 2.
Thomson Letter. 152 See Amendment No. 3, supra note 14. 160 See, e.g., SIFMA 3 Letter.
145 See Exhibit 5 in Amendment No. 3.
153 Inapproving this proposed rule change, the 161 See comment file supra note 5.
146 See Amendment No. 3, supra note 14.
Commission has considered the proposed rule’s 162 Id.
147 See Brean Capital 3 Letter.
impact on efficiency, competition, and capital 163 See supra note 5. See also Notice, Order
148 Id. formation. See 15 U.S.C. 78c(f). Instituting Proceedings, Amendment No. 2 Notice,
149 See Thomson Letter. 154 15 U.S.C. 78o–3(b)(6).
and Amendment No. 3, supra notes 3, 8, 12, and
150 See Amendment No. 3, supra note 14. 155 See Notice, supra note 3. 14.
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![Federal Register / Vol. 81, No. 119 / Tuesday, June 21, 2016 / Notices 40377
VI. Accelerated Approval of Proposed be, and hereby is approved on an within which to take action on the
Rule Change, as Modified by accelerated basis. proposed rule change so that it has
Amendment Nos. 1, 2, and 3 For the Commission, by the Division of sufficient time to consider the proposed
The Commission finds good cause, Trading and Markets, pursuant to delegated rule change. Accordingly, the
pursuant to Section 19(b)(2) of the authority.193 Commission, pursuant to section
Exchange Act, to approve the proposed Robert W. Errett, 19(b)(2) of the Act,5 designates August
rule change, as modified by Amendment Deputy Secretary. 10, 2016, as the date by which the
Nos. 1, 2, and 3, prior to the 30th day [FR Doc. 2016–14561 Filed 6–20–16; 8:45 am]
Commission should either approve or
after the date of publication of disapprove or institute proceedings to
BILLING CODE 8011–01–P
Amendment No. 3 in the Federal determine whether to disapprove the
Register. FINRA proposed the changes proposed rule change (File Number SR–
in Amendment No. 3 in response to SECURITIES AND EXCHANGE NASDAQ–2016–064).
issues raised by commenters.190 COMMISSION For the Commission, by the Division of
More specifically, Amendment No. 3 Trading and Markets, pursuant to delegated
[Release No. 34–78078; File No. SR– authority.6
revised the proposal to increase the
NASDAQ–2016–064]
gross open position exception from $2.5 Robert W. Errett,
million or less to $10 million or less. Self-Regulatory Organizations; The Deputy Secretary.
Second, FINRA revised the proposed NASDAQ Stock Market LLC; Notice of [FR Doc. 2016–14558 Filed 6–20–16; 8:45 am]
language in new Supplementary Designation of a Longer Period for BILLING CODE 8011–01–P
Material .05(a)(1) to delete the clause Commission Action on a Proposed
‘‘except with respect to any account or Rule Change Relating to the Listing
group of commonly controlled accounts and Trading of the Shares of the First SECURITIES AND EXCHANGE
whose assets managed by that Trust Strategic Mortgage REIT ETF of COMMISSION
investment adviser constitute more than First Trust Exchange-Traded Fund VIII [Release No. 34–78080; File No. SR–MIAX–
10 percent of the investment adviser’s 2016–16]
regulatory assets under management as June 15, 2016.
reported on the investment adviser’s On May 3, 2016, The NASDAQ Stock Self-Regulatory Organizations; Miami
most recent Form ADV.’’ The Market LLC (‘‘Nasdaq’’) filed with the International Securities Exchange LLC;
Commission believes that the changes Securities and Exchange Commission Notice of Filing and Immediate
proposed in Amendment No. 3 do not (‘‘Commission’’), pursuant to section Effectiveness of a Proposed Rule
raise any novel regulatory issues 19(b)(1) of the Securities Exchange Act Change To Amend Exchange Rule 510
because they provide greater clarity of 1934 (‘‘Act’’) 1 and Rule 19b–4 To Extend the Penny Pilot Program
with respect to the application of the thereunder,2 a proposed rule change to Until December 31, 2016
proposed rule change and will reduce list and trade shares of the First Trust
the regulatory burden on FINRA Strategic Mortgage REIT ETF of First June 15, 2016.
members, particularly smaller firms and Trust Exchange-Traded Fund VIII under Pursuant to the provisions of Section
counterparties. Therefore, the Nasdaq Rule 5735. The proposed rule 19(b)(1) of the Securities Exchange Act
Commission finds that Amendment No. change was published for comment in of 1934 (‘‘Act’’) 1 and Rule 19b–4
3 is consistent with the protection of the Federal Register on May 12, 2016.3 thereunder,2 notice is hereby given that
investors and the public interest. The Commission received no comments on June 13, 2016, Miami International
Amendment No. 3 also clarified on the proposed rule change. Securities Exchange LLC (‘‘MIAX’’ or
which paragraphs related to the Section 19(b)(2) of the Act 4 provides ‘‘Exchange’’) filed with the Securities
required written risk limit that, within 45 days of the publication and Exchange Commission
determinations become effective six of notice of the filing of a proposed rule (‘‘Commission’’) a proposed rule change
months after Commission approval of change, or within such longer period up as described in Items I and II below,
the proposed rule change. The to 90 days as the Commission may which Items have been prepared by the
Commission believes that these are designate if it finds such longer period Exchange. The Commission is
technical clarifications and do not to be appropriate and publishes its publishing this notice to solicit
change the substance of the proposed reasons for so finding or as to which the comments on the proposed rule change
implementation timeframe as proposed self-regulatory organization consents, from interested persons.
in the Order Instituting Proceedings and the Commission shall either approve the
the Amendment No. 2 Notice. I. Self-Regulatory Organization’s
proposed rule change, disapprove the Statement of the Terms of Substance of
Accordingly, the Commission finds proposed rule change, or institute
good cause pursuant to Section 19(b)(2) the Proposed Rule Change
proceedings to determine whether the
of the Exchange Act,191 for approving proposed rule change should be The Exchange is filing a proposal to
the proposed rule change, as modified disapproved. The 45th day after amend Exchange Rule 510,
by Amendment Nos. 1, 2, and 3, on an publication of the notice for this Interpretations and Policies .01 to
accelerated basis. proposed rule change is June 26, 2016. extend the pilot program for the quoting
The Commission is extending this 45- and trading of certain options in
VII. Conclusion
day time period. pennies (the ‘‘Penny Pilot Program’’).
asabaliauskas on DSK3SPTVN1PROD with NOTICES
IT IS THEREFORE ORDERED, The Commission finds that it is The text of the proposed rule change
pursuant to section 19(b)(2) of the appropriate to designate a longer period is available on the Exchange’s Web site
Exchange Act,192 that the proposed rule at http://www.miaxoptions.com/filter/
change, as modified by Amendment 193 17 CFR 200.30–3(a)(12). wotitle/rule_filing, at MIAX’s principal
Nos. 1, 2, and 3 (SR–FINRA–2015–036) 1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4. 5 15 U.S.C. 78s(b)(2).
190 See Amendment No. 3, supra note 14. 3 See Securities Exchange Act Release No. 77781 6 17 CFR 200.30–3(a)(31).
191 15 U.S.C. 78s(b)(2). (May 6, 2016), 81 FR 29590 (‘‘Notice’’). 1 15 U.S.C. 78s(b)(1).
192 15 U.S.C. 78s(b)(2). 4 15 U.S.C. 78s(b)(2). 2 17 CFR 240.19b–4.
VerDate Sep<11>2014 18:37 Jun 20, 2016 Jkt 238001 PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 E:\FR\FM\21JNN1.SGM 21JNN1](https://thefederalregister.org/doc/81_FR_40483/page/14.svg)
Document Created: 2016-06-21 01:30:52
Document Modified: 2016-06-21 01:30:52
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 40364 |
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