Based on federal securities laws and FINRA regulations, there are strict rules governing the conditions under which brokerage firms can offer investors loans for securities transactions. Current interpretation /01 of Rule 4210(e)(8)(B)(i) (which is superseded by this new interpretation /011) reads as follows: This video summary of the full webinar with Glen Corso, Executive Director of CAMT, and Phil Rasori, Chief Operating Officer at Mortgage Capital Trading, Inc. (MCT), helps explain what you need to know about this new rule. What this means for your business and what you can do to minimize the negative impact of the rule on your business. Paragraph (e)(8)(D) exempts from Rule 4210(e)(8) all securities that the Member could sell immediately and without restriction if the Client fails to make a margin call or is otherwise in default, whether or not the Client is an Affiliate. For example, Section 532.01 of the SEC`s Division of Corporate Finance (Compliance and Disclosure Interpretation) 532.01 provides that due to a sweeping regulatory change, brokerage firms must collect additional margins from certain counterparties. Some investors, particularly institutional investors, may be affected by the regulatory amendments. In particular, the new rule gives broker-dealers more options to force the liquidation of assets if their counterparties do not recognize sufficient margin, as required by FINRA regulations. FINRA Rule 4210(e)(8)(B) sets out the margin requirements generally applicable to controlled and restricted securities subject to Rule 144 or 145(c) of the Securities Act.1 Paragraph (e)(8)(D) provides an exemption from this general requirement for securities that are “then available for sale” under Rule 144(b)(1) or Rule 145(d)(2) of the Securities Act.
securities. The companies raised questions about the scope and application of this exemption, particularly with respect to securities held by an affiliate of the issuer. To clarify this exception, consistent with the intent of the 2000 amendments,2 FINRA replaces the /01 interpretation of Rule 4210(e)(8)(B)(i)3 with an amended version as Interpretation /011, publishes the following new interpretations of Rule 4210(e)(8)(D), and repeals interpretations /01 and /02 of Rule 4210(e)(8)(D). The exceptions referred to in this paragraph apply only to special margin requirements (Rule 4210(f)(8)) and margin requirements (Rule 4210(c)). They do not apply to the $2,000 minimum capital requirement under Rule 4210(b)(4). If a portfolio margin account has less than $5 million in equity, day trading may still take place, provided the member has the opportunity to apply the relevant day trading requirements under Rule 4210(f)(8). If the securities subject to day trading are part of a hedging strategy, FINRA does not consider collective transactions to be day transactions and would therefore not subject the client to day trading requirements. A hedging strategy, as defined by FINRA rules, is a transaction or series of transactions that reduce or offset a significant portion of the risk in a portfolio.
Upon (a) submitting this escrow agreement to the Bank at the address set out above, which is less than the payment order duly executed on your behalf at the Bank`s reasonable discretion, and (b) delivering to the Bank the securities underlying the option contracts described above on behalf of the Client that are in the form of ensuring proper delivery in accordance with the rules of the OCC, the bank will pay you from the deposit or the proceeds thereof; the amount of the exercise settlement for each of the option contracts described above, plus any applicable commissions and other fees due to you. If a Client is a typical day trader, day trading will be treated as if they had created a naked short option position and are therefore subject to the margin requirements set out in paragraph (f)(2)(E) of this rule. However, if the member can prove that the day trading on the long side took place before the sell side of the day trading, the margin required will be 100% of the premium for the “long” option. A written record of the time of each option transaction executed must be kept to prove that the purchase took place prior to the sale. If the option traded that day was part of an intraday hedging strategy currently recognized under Rule 4210(f), the margin required is 100% of the premium of the option transaction executed first if it was traded on the same day. A written record of the schedule of each executed transaction must be kept to prove that an intraday hedging strategy was created first. Contact us if you have further questions about navigating these complex markets or if you can learn more from the Mortgage Coverage Advisory Services page of our website. We can help you find cost-effective and efficient solutions for lenders of all sizes. Thank you for reading our FINRA 4210 rule changes blog. Trading in profitable options under Rule 4210(b)/03 is exempt from the special initial margin requirements. FINRA Rule 4210(f)(5) allows member firms to consolidate two or more accounts for a client (i.e., determine the margin required based on net positions in the accounts) if the client has agreed that the money and securities in each of these accounts may be used to charge or pay a deficit on all of these accounts. FINRA is issuing the following new interpretations to clarify that while Regulation T 220.4(a)(2) permits entities to maintain multiple margin accounts for a single client in only three specific circumstances, firms may maintain multiple sub-accounts of a client`s margin account as contemplated in the interpretations.
The Financial Sector Regulatory Authority has issued additional requirements under Rule 4210. Currently, these new rules are expected to enter into force on 25 June 2018. Under the new regulations, originally passed in 2016 and delayed to allow dealers to update their systems and policies to meet requirements, more transactions will be covered by Rule 4210. In particular, the following types of transactions are considered hedged agency transactions for purposes of FINRA`s margin requirement rules: FINRA Rule 4210 (Margin Requirements) sets out the margin requirements that apply to securities held in margin accounts, including strategy-based margin accounts and portfolio margin accounts. FINRA maintains its interpretation of FINRA Rule 4210. These interpretations are available on FINRA`s Margin Rule Interpretations website in a portable digital format (PDF) in which interpretations immediately follow the section of the rule to which they relate. This notice clarifies and updates the interpretations described below. Trading in profitable options is exempt from the maintenance margin requirements in effect under Rule 4210(b)/03.
In general, a security eligible for portfolio margin under FINRA rules may be considered eligible even if the OCC`s TIMS model does not recognize it. However, the broker-dealer must first contact the OCC to determine why the security is not recognized by the IMS. Depending on the outcome, the broker-dealer may also contact FINRA`s credit regulatory department to discuss the details of the security in question. The minimum capital requirement of $2,000 set out in paragraph (b)(4) does not apply to transactions in a cash account, including transactions in the issuance or distribution of securities to a cash account, although rule 4210(f)(3)(B) generally subjects cash account positions in these securities to the same margin requirements as in a margin account. According to FINRA Regulatory Notice 16-31, the amendments to Rule 4210 will establish margin requirements for hedged agency transactions, including TBA transactions, which are at the heart of MCT pipeline hedging strategies. FINRA members must collect the daily MTM margin from all counterparties in these transactions. However, the margin does not need to be collected or charged to net capital if the total MTM loss required but not recovered does not exceed $250,000. Failure to take reasonable precautions and initiate appropriate proceedings may result in violations of the Securities Act and Rule 4210. Members must have procedures in place that describe the identification and monitoring of concentrated positions in individual portfolio margin accounts and all portfolio margin accounts, including the department responsible for the day-to-day monitoring of such positions, what are the indexation procedures and a detailed description of additional margin requirements, where appropriate, which are applied to concentrated positions.
Where credit is granted under Rule 4210 for controlled or restricted titles, this rule requires the Member to have recourse to the Client in the event of late payment in accordance with the signed margin agreement; that credit was granted to the public customer with the legitimate expectation of reimbursement on the basis of that customer`s general creditworthiness; and that these securities will only be sold in the event of default on the margin loan. The sale (in writing) of listed call options for securities subject to Rules 144 and 145 of the Securities Act is permitted. However, any sale of securities subject to Rules 144 or 145 of the Securities Act by way of the sale of options requires that all the conditions of those rules be met both at the time of the sale of the option and at the time the underlying security is delivered pursuant to a notice of exercise. For transactions with reimbursement funds that are not eligible for this type of processing, see Rule 4210(c)/06. Any Member that extends or maintains credit in securities exempted from Rule 4210(e)(8) under subparagraph (e)(8)(D) shall continue to require “substantial additional margin” under paragraph (f)(1) if there is a concentration of such securities (whether in the account of the client concerned or in all margin accounts maintained by the firm); which, due to its size, cannot be liquidated immediately.