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Amendments to FINRA Rule 4210: Covered Agency Transactions

June 11, 2024

In late May, certain amendments to FINRA's margin rule, Rule 4210, went into effect to address a significant source of potential systemic risk and risk to FINRA member firms. The amendments introduced specific margin requirements related to covered agency transactions. 

On this episode, we talk to David Aman, senior advisor, and James Barry, director of Credit Regulation, both with FINRA's Office of Financial and Operational Risk Policy, and with Michael MacPherson, a senior advisor with Member Supervision’s Risk Monitoring team, to learn more about the purpose of the rule, which firms might be impacted by the change and what those firms need to think about to ensure compliance with the amended rule. 

Resources mentioned in this episode:

Contact: [email protected]

Key Topics: Margin 

FAQs Regarding Covered Agency Transaction Margin under FINRA Rule 4210

Reg Notice 23-14: Amendments to Covered Agency Transaction Requirements Under FINRA Rule 4210

Listen and subscribe to our podcast on Apple PodcastsGoogle PodcastsSpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 - 00:26

Kaitlyn Kiernan: In late May, certain amendments to FINRA's margin rule, Rule 4210, went into effect to address a significant source of potential systemic risk and risk to FINRA member firms. The amendments introduced specific margin requirements related to covered agency transactions. On this episode, we learn more about the purpose of the rule, which firms might be impacted by the change and what those firms need to think about to ensure compliance with the amended rule. 

00:26 – 00:34

Intro Music

00:35 - 01:05

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome three guests to today's show to talk about recent amendments to FINRA's Margin Rule on Covered Agency Transactions. Joining me are David Aman, a senior advisor, and James Barry, a director of Credit Regulation, both with FINRA's Office of Financial and Operational Risk Policy. And also joining me is Mike MacPherson, a senior advisor with Member Supervision’s Risk monitoring team. Mike, James and David, thanks for joining me. 

01:05 - 01:07

Michael MacPherson: Thank you, Kaitlyn. Pleasure to be here. 

01:07 - 01:07

James Barry: Thanks for having us. 

01:08 - 01:15

Kaitlyn Kiernan: So, to kick things off, can you each introduce yourselves and share a bit about your background and role within FINRA? David, let's start with you. 

01:16 - 01:32

David Aman: I am an attorney and senior advisor. I spent the first 20 years of my career as outside counsel to, among others, our member firms, and since 2017, I've been working with FINRA, working on rulemaking and interpretive issues. 

01:33 - 01:41

Kaitlyn Kiernan: And our listeners might recognize his voice from our episode on crypto asset firms applying for FINRA membership. And, James, how about you? 

01:42 - 02:02

James Barry: I have about 35 years in the securities industry, mostly working for member firms. In my career, I've covered risk management and margin and very much familiar with how this applies to FINRA Rule 4210, which of course is FINRA's margin rule. 

02:02 - 02:05

Kaitlyn Kiernan: Great. And Mike, last but not least.

02:05 - 02:23

Michael MacPherson: I'm a senior advisor in Member Supervision supporting risk monitoring. The financial operational policy type making decision runs through my group. Prior to that, I had a long career as an examination director here at FINRA, and prior to that worked in various regulatory capacities on the street. 

02:24 - 02:37

Kaitlyn Kiernan: And you'll recognize Mike and James's voices from our recent episode on T+1. But now to dig into the rule we're talking about today. What is this Rule 4210 and what changed? 

02:38 - 04:57

David Aman: So, Rule 4210 is FINRA's Margin Rule. It primarily sets maintenance margin requirements on all securities positions and transactions. What recently changed was an amendment to incorporate specific margin requirements relating to what we refer to as covered agency transactions. These are transactions To Be Announced, or TBA transactions, with settlement dates greater than the business day after the trade date, T+1, specified pool transactions, agency mortgage-backed securities with settlement dates after T+1, and transactions in collateralized mortgage obligations or CMOs issued in conformity with a program of an agency or government sponsored enterprise, with settlement dates later than T+3 or beyond three business days after the trade day. 

Effective on May 22nd, so just a little while ago, FINRA members became generally required to collect variation margin on those covered agency transactions. That is, margin that covers the counterparty’s mark-to-market losses. This requirement, however, is variation margin only, and it's subject to a quarter of $1 million threshold. Members are only required to collect margin for the counterparty’s net mark-to-market loss, to the extent that it exceeds a quarter of $1 million. So, if a counterparty has a net mark-to-market loss of $300,000, the member is generally required to collect $50,000 to cover that net mark-to-market loss. The amount by which the counterparties net mark-to-market loss exceeds $250,000 is defined in the rule as the “excess net mark-to-market loss,” and that's the target for margin. 

But there are some very important exceptions. For instance, there are exceptions for certain counterparties in certain transactions. So, the rule provides that members aren't required to collect margin or take capital charges in lieu of collecting margin from a counterparty that is a small cash counterparty, a registered clearing agency, federal banking agency, central bank, multinational central bank, foreign sovereign multilateral development bank or the Bank for International Settlements. 

04:57 - 07:39

David Aman: In addition to those exempted counterparties, members are also not required to include transactions in certain multifamily housing securities or project loan program securities. In addition to that counterparty and transactional exemptions, members also have a limited capacity to take capital charges in lieu of collecting margin. This was not a part of the rule originally. It was added to provide additional flexibility to our members, particularly to our smaller members. 

So, the limitations on taking a capital charge in lieu of margin, there's really three limitations. The first one is a policies and procedures of limitation. A FINRA member that has any of what we refer to as non-margin counterparties, must establish and enforce written policies and procedures that are reasonably designed to ensure that the member won't exceed limitations on capital charges in lieu of margin that are set forth in Rule 4210(e)(2)(I), and also that its capital charges for counterparties on margin excess net mark-to-market losses on covered agency transactions don't exceed $25 million. 

This limitation was designed to make sure that the large firms that had a lot of capital available would only be able to use a small part of their capital in order to take capital charges in lieu of margin, whereas this $25 million plus the other limitations should not be as restrictive for the smaller firms because the other limitation cited the ones set forth in Rule 4210(e)(2)(I). Those tend to limit the capital charge in lieu of margin to either 25 percent of the firm's tentative net capital across all counterparties, or 5 percent of their tentative net capital for a single counterparty or group of counterparties under common control. Again, we believe that it's going to target the relief primarily to the smaller firms. 

Now, I said that this policies and procedures limitation requirement applies if a member has any non-margin counterparties. A non-margin counterparty is any counterparty that's not one of the accepted counterparties I described earlier. And either the member doesn't have the right to collect margin for the counterparties excess net mark-to-market loss and to liquidate the counterparties transactions if they haven't margined or eliminated their excess net mark-to-market loss within five business days or the member in fact doesn't regularly collect margin for that counterparty’s excess net mark-to-market loss. So that's the first limitation, this policies and procedures requirement.

07:40 - 09:08

David Aman: The second limitation is a reporting requirement. If the member’s so-called specified net capital deductions exceed $25 million for five consecutive business days, the member has to give prompt written notice to FINRA. These specified net capital deductions are the net capital charges for unmargined excess net mark-to-market losses on covered agency transactions, but they exclude capital charges for counterparty losses that the member in good faith expects to be margins by the close of business on the fifth business day after they arise. And this notice that's required to be given using our FINRA Gateway.

The third limitation are some business limitations and a liquidation requirement at a higher threshold. If the member’s specified net capital deductions exceed the lesser of $30 million or 25 percent of the member's tentative net capital for five consecutive business days, then the member is not allowed to enter into new covered agency transactions with non-margin counterparties unless those transactions are risk-reducing transactions. And then also the member is required to enforce its rights to collect margin for each counterparties’ excess net mark-to-market loss, and to promptly liquidate any covered agency transactions of a counterparty whose net mark-to-market loss is not margined or eliminated within five business days from the date it arises. 

09:08 - 10:37

David Aman: A couple of notes there. First of all, the business limitation says that a member who's exceed this 25 percent TNC or $30 million threshold, can't enter into new covered agency transactions with non-margin counterparties unless those transactions are risk-reducing transactions. If the counterparty is a margin counterparty or not a non-margin counterparty, then the members can freely enter into new transactions with that counterparty. They don't need to be risk-reducing. 

And second, to emphasize, the obligation to promptly collect margin and liquidate transactions of a counterparty whose excess net mark-to-market loss have not been margined or eliminated within five business days is qualified in two important ways. First, the obligation is only to enforce the rights that the member has. So, if the member doesn't have rights to collect margin from a particular counterparty, then there's no obligation to collect margin from that counterparty. 

This, of course, will impact the procedures that the member will need to have to make sure that they are reasonably designed to keep them under the $25 million threshold. And the second, the obligation to liquidate is also qualified in that it only arises if the member doesn't obtain an extension from FINRA. Those extensions can be obtained in the same way that other margin or possession or control extensions are obtained through our regulatory extension system. 

10:38 - 11:37

David Aman: The fact that the obligations to collect margin and liquidate are qualified by the member's rights to do that means that the member doesn't have an absolute obligation to have an MSFTA, a Master Securities Forward Transaction Agreement, or any other margin agreement covering a counterparty’s covered agency transactions. Of course, there are consequences if the member doesn't have an agreement with the counterparty. That counterparty will be a non-margin counterparty. If not accepted, that would subject the firm to the risk management procedures requirements, and also would mean that the member is limited in their ability to do new transactions with that counterparty if they've been over the 25 percent tentative net capital, $30 million threshold for five consecutive business days. 

And then, of course, if you don't have a right to collect margin from a counterparty, that may mean you have on margin net mark-to-market losses from that counterparty that can cause capital charges and count toward the various thresholds. 

11:39 - 11:57

Kaitlyn Kiernan: It sounds very complicated, so we will definitely be linking to resources in our show notes as well, so our listeners can be sure to check that out. But James, can you give us some background here? This new rule covering covered agency transactions, why was it created and what risk does it look to mitigate? 

11:58 - 14:07

James Barry: A lot of rules came out of the financial crisis in 2008 and of course, Dodd-Frank in 2010, and the general acceptance that margin needs to be collected from counterparties, at very least, variation margin. And historically, our member firms were either not collecting margin and not taking capital charges for the appropriate amount, 100 percent of the potential loss. So that led FINRA to look at where the industry was. And starting in about 2012, we initiated a program of outreach to the industry and went through several iterations. 

We published a rule in 2016, and the members weren't comfortable with some aspects of that rule, particularly there was a piece requiring a 2 percent initial margin, as well as there were no exceptions for not collecting margins. So, the current version of the rule that went into effect on May 22nd, that addresses many of those issues to eliminate as much as possible counterparty failure as part of the member firms’ capital implications.

So, in other words, if a counterparty fails, that would directly impact the member firm's ability to perhaps continue in business for some of our smaller firms and we wanted to make sure that that did not happen. And we really wanted to make sure that firms can survive large swings in interest rates. These are interest rate sensitive products, and the activity in this marketplace doesn't move very quickly. But as we saw in March of 2020, you can have large movements, which can cause huge dislocations in the marketplace. And we wanted to make sure that firms have a cushion, the margin they've collected from their counterparties to absorb any losses that may occur in those markets. 

14:08 - 14:19

Kaitlyn Kiernan: Getting the rule to completion took a little bit of time but reflects the collaborative rulemaking process that FINRA has. Mike, what kind of firms are affected by this rule? 

14:20 - 14:59

Michael MacPherson: Everyone know I said to put it out there. We have introducing firms. We have self clearing firms, corresponding clearing firms, intro dealer brokers. Each one of these firms in those categories that are mentioned, this rule could impact them depending on if they do this business or not. We have firm groupings here at FINRA. It cuts across all firm groupings: diversified carrying, clearing, retail, capital markets, trading and execution. So, this is something that all members really need to be up to speed on. And if they are conducting these types of transactions, need to understand their roles and responsibilities within this rule. No group is excluded. 

15:00 - 15:52

David Aman: As a lawyer, I want to refer all answers to the text of the rule and the key term for determining whether you're subject to this rule is the term counterparty. If you have a counterparty on a covered agency transaction, that's any person, including any customer that is party to a covered agency transaction with you, the member firm, or where the member firm has guaranteed that is, become responsible for that person's obligations under a covered agency transaction, if they have a counterparty on an open covered agency transaction, then they need to review the rule. You do need to look very carefully, particularly at situations where you might have become responsible for your customer's obligations to a third party, because those customers would be treated as your counterparties and could make you subject to the rule. 

15:54 - 16:00

Kaitlyn Kiernan: Great. Thanks, David. And, Mike, if a firm doesn't have margin customers, can they just ignore the rule? 

16:01 - 16:18

Michael MacPherson: No. As David just explained it does get intricate and it does come down to the details and it does come down to that responsibility. So just because you don't have margin customers per say, it doesn't mean that this rule may not apply to you on that transaction type. It is based on that obligation. 

16:18 - 16:21

Kaitlyn Kiernan: What type of outreach are you doing on this topic? 

16:23 - 17:33

Michael MacPherson: James and David, their group has conducted webinars around this topic both internally and externally. We in risk monitoring are the liaison with the firms. So, what we did is we compiled data coming out of James's group for all firms that looked like they may be involved in these types of transactions. So, we wanted to understand the population that we could potentially be dealing with. And then from there, pick a good, targeted group of firms to go out and speak to and understand what they believe is their responsibility in this rule. So, we solicit a lot of feedback on this, 50 to 60 firms in total over about a month, and gathered all that feedback, circulated internally, met with our subject matter experts on this and if need be, talk to firms, walk them through the process, make them understand what they are responsible for in this. So, it was an outreach across our membership, across our firm groupings, but targeted in a sense that we wanted a variety. 

We wanted to say, okay, this firm is an introducing firm. Do they understand their relationship? This firm is self clearing firm. Do they understand what their roles and responsibilities are…corresponding clearing. And we try to cast that net so we can get a flavour of each type of firm and each type of transactions they were doing. 

17:34 - 17:42

Kaitlyn Kiernan: Great. Thanks Mike and David. Who is responsible for compliance? Is it the introducing broker or the clearing broker? 

17:43 - 21:15

David Aman: That's not a completely straightforward question. The rules obligations apply, as I mentioned earlier, to any member firm that has a counterparty on a covered agency transaction. And one of the things that was highlighted when we first did our outreach in the rulemaking process, starting back ten years ago, was the fact that the relationships between the introducing brokers, the clearing brokers and their clients, and for that matter, the relationships between prime brokers, executing brokers and their clients in this space are not or have not historically been as clear as I would like them to be. 

So to determine what the obligations are in the context of an introducing clearing arrangement, you need to look very closely at what the actual terms of that arrangement are and determine whether the client is a counterparty to the introducing broker, is a counterparty to the clearing broker, or potentially both. And that is not always easy to figure out we've been told by several of the major correspondent clearing firms in this area. Their role is generally limited to just being a settlement agent, where their obligations are only to make delivery against payment, or payment against delivery when, as in, if their client makes the relevant funds or securities available on the settlement date that they don't have, in their view, any responsibility for the settlement and no liability if there's non-performance. 

In that case, the transaction would then appear to remain outstanding between the so-called introducing broker, which is really acting as a small dealer in this case, and the third-party counterparty, with the clearing broker saying that they're not guaranteeing either the obligations of the introducing broker or of the introducing broker’s clients. And so it would be in that scenario, only the introducing broker who has margin obligations, unless, of course, the counterparty to the introducing brokers is also a FINRA member. And then they could have obligations too. But that's not the only arrangement because sometimes the clearing brokers in this space will take transactions and submit those transactions to the Fixed Income Clearing Corporation, the FICC. On FICC cleared transactions, even if the FINRA member submits that transaction as agent for the introducing broker or the introducing brokers client for that matter, the FICC rules provide that the clearing broker, the member of the FICC, is fully responsible for that transaction, and that in turn means for purposes of the covered agency margin requirements, the clearing broker is guaranteeing that transaction to the FICC, and that in turn means that the introducing broker or the client, depending on whose transaction it is that they're submitting, is considered a counterparty to the clearing broker on this transaction, which would mean that the clearing broker would have margin collection obligations from that counterparty. 

There is never going to be margin collection obligations from the FICC because one of the exclusions was registered clearing agencies. But there may be obligations for the clearing broker to collect margin on an FICC cleared transaction from the other party to that trade. 

21:16 - 21:26

Michael MacPherson: Now may be a good time to mention there are very detailed FAQs out there outlining these scenarios that David is talking about. I personally have read and reread those many times. 

21:28 - 21:39

Kaitlyn Kiernan: James, under certain circumstances, members can request additional time or an extension to collect margin. Can you give us some more details on this? When would a firm request an extension? 

21:41 - 23:39

James Barry: As David mentioned earlier, there are situations where margin counterparties are unable to post margin within five-day period. When your specified net capital deductions exceed 25 percent of your TNC or $30 million, then the firm has an option, and they have a legitimate reason as to why the customer is unable to meet the margin call within five days. Typically, we'd expect that reason to be there's a dispute on the valuation of the transaction to market dispute. In that case, we would allow the firm to request additional time. 

FINRA has an extension system set up for this. We currently do this for Regulation T as well as 15 C33N issues. So, it's part of that system. System is called REX. And in this case the firm would go into the system put in a request for additional time. You can request up to 14 days. One thing historically that we've seen, of course, is that the clearing firms would file for extensions of time, but in this case we now have what are not normally corresponding clearers, but firms acting on their own behalf. And in that case, they may not be familiar with filing extensions of time. 

We did provide a couple of webinars recently on how to file extensions of time, but if firms have more questions around how to file, when to file, or any other situations around filing extensions, they can contact [email protected]. Also, if a member firm has not previously filed extensions and they don't have anyone within their organization that is permitted to file an extension of time, they should contact their Super Account Administrator, the SAA assigned to their firm. That's going to be somebody within the firm who can grant them the appropriate access to the extension system. 

23:39 - 23:48

Kaitlyn Kiernan: Great. Thanks, James. So, Mike, this rule has some notification requirements for covered agency transactions. Can you tell us what those are? 

23:49 - 24:57

Michael MacPherson: The requirement to notify is new, and it will be a suite of financial notifications on the Firm Gateway. It will be in one of the links, where you will see the two new notifications at the bottom of the chart. You'll see the notification for the covered agency TNC threshold greater than 25 million, and you'll also see the TNC threshold greater than the 5 percent or greater than the 25 percent. Once you get to the Gateway, you will see the dropdowns and what you have to plug in—date of occurrence, the amount is spelled out for you. 

What I will say though, is that because these are new notifications and certain people in the firms may or may not have access to our Firm Gateway, make sure that whoever is responsible for filing these notifications does have access to the Gateway. So, if your margin people are responsible for this, they may not have filed the notification before and therefore may not have access to that. So, you may want to inquire and make sure that they have access to it. If you do have any questions on this in terms of filing or anything, you can always reach out to your risk monitoring analyst. They can walk you through it as well. They're there to help you through this process. 

24:58 - 25:26

James Barry: When a firm does file, there's a field that the firm can fill in for the contact person responsible for answering questions from FINRA. So, if a team is doing the reporting to FINRA, they can still put in the person who the FINRA risk monitoring analyst should contact. So, it doesn't have to be they will reach out to the person filing. They can put in a separate contact for that to make life easier for the filer. 

25:26 - 25:27

Michael MacPherson: Great point, James. Thank you. 

25:28 - 25:43

Kaitlyn Kiernan: So, this new rule has a lot of different components that touch on a lot of different pieces of the firm. Where else can listeners learn more on this topic? We've mentioned the FAQs. James, you mentioned the webinars. Is there anything else you want to call out? 

25:43 - 26:06

James Barry: We're here to help. The email address [email protected]. Also, all of our materials can be linked off of So, everything about filing extensions, how to contact your SAA, everything like that is all there available for members to review. And we're here to help. 

26:06 - 26:14

Kaitlyn Kiernan: Great. Thanks, James. Just to wrap up, this rule was a long time in the making. Any final thoughts any of you want to share? 

26:15 - 26:53

Michael MacPherson: As you mentioned, it is a long time in the making. I can remember sitting in meetings way back when listening to this, wondering if and when it was ever going to happen. And I think along with that, I won't say surprising, but it is interesting to hear that there is still some confusion out there in terms of roles, responsibilities, and if this applies to them, which is why we're taking this rule with such care, coming into it, going live, which is why we're doing a lot of this outreach—the webinars James mentioned, the emails, making ourselves available to our membership so they understand and put them in the right place. So interesting that it's almost a decade in the making, and there's still a lot of questions out there. 

26:54 - 27:20

Kaitlyn Kiernan: Great. Well, that's it for today's episode. Thank you, James, Mike and David, for joining me to share the importance of paying attention to this new rule on covered agency transactions. Listeners, if you don't already, be sure to subscribe to FINRA Unscripted on Apple Podcasts, Spotify, or wherever you listen to podcasts. Today's episode was produced and coordinated by me, Kaitlyn Kiernan, and edited and engineered by John Williams. Until next time. 

27:20 – 27:25

Outro Music

27:26 - 27:54

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