[Federal Register Volume 87, Number 17 (Wednesday, January 26, 2022)]
[Notices]
[Pages 4076-4090]
[FR Doc No: 2022-01471]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94013; File No. SR-FINRA-2021-010]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of a Proposed Rule Change, as
Modified by Amendment No. 1, To Amend the Requirements for Covered
Agency Transactions Under FINRA Rule 4210 (Margin Requirements) as
Approved Pursuant to SR-FINRA-2015-036

January 20, 2022.

I. Introduction

    On May 7, 2021, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to amend the
requirements for covered agency transactions under FINRA Rule 4210.\3\
The proposed rule change was published for comment in the Federal
Register on May 25, 2021.\4\ The Commission received comments in
response to the Notice.\5\ On June 30, 2021, 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
August 23, 2021.\6\ On August 9, 2021, FINRA responded to the comments
and submitted Amendment No. 1 to the proposed rule change.\7\ The
Commission subsequently issued an Order Instituting Proceedings
(``OIP'') to determine whether to approve or disapprove the proposed
rule change, as modified by Amendment No. 1.\8\ The Commission received
additional comment letters in response to the OIP.\9\ On September 16,
2021, FINRA responded to these additional comment letters.\10\ On
October 26, 2021, FINRA extended the time period in which the
Commission must approve or disapprove the proposed rule change to
January 20, 2022.\11\ This order approves the proposed rule change, as
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The full text of the proposed rule change and the exhibits
filed by FINRA (collectively referred to as the ``Proposal'') are
available at: https://www.finra.org/sites/default/files/2021-05/sr-finra-2021-010.pdf.
    \4\ See Exchange Act Release No. 91937 (May 19, 2021), 86 FR
28167 (``Notice'').
    \5\ Comments received on the Notice are available at: https://www.sec.gov/comments/sr-finra-2021-010/srfinra2021010.htm.
    \6\ See Extension No. 1, available at: https://www.finra.org/sites/default/files/2021-06/SR-FINRA-2021-010-extension1.pdf.
    \7\ See Amendment No. 1 to the proposed rule change, dated
August 9, 2021 (``Amendment No. 1''). The full text of Amendment No.
1 is available on the Commission's website at: https://www.sec.gov/comments/sr-finra-2021-010/srfinra2021010-9147461-247526.pdf.
    \8\ See Notice of Filing of Amendment No. 1 and Order
Instituting Proceedings to Determine Whether to Approve or
Disapprove a Proposed Rule Change, as Modified by Amendment No. 1,
to Amend the Requirements for Covered Agency Transactions under
FINRA Rule 4210 (Margin Requirements) as Approved Pursuant to SR-
FINRA-2015-036, Exchange Act Release No. 92713 (Aug. 20, 2021), 86
FR 47655 (Aug. 26, 2021).
    \9\ Comments received on the OIP are available on the
Commission's website at: https://www.sec.gov/comments/sr-finra-2021-010/srfinra2021010.htm.
    \10\ See Letter to Vanessa Countryman, Secretary, Commission,
from Adam Arkel, Associate General Counsel, Office of General
Counsel, FINRA (Sep. 16, 2021) (``FINRA Letter''), available at:
https://www.sec.gov/comments/sr-finra-2021-010/srfinra2021010-9244962-250787.pdf.
    \11\ See Extension No. 2, available at https://www.finra.org/sites/default/files/2021-10/sr-finra-2021-010-extension2.pdf.
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II. Description of the Proposed Rule Change

A. Summary of Proposed Amendments

    FINRA has proposed revisions to the Covered Agency Transaction \12\
requirements as approved pursuant to SR-FINRA-2015-036.\13\ Broadly,
FINRA has proposed:
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    \12\ Covered Agency Transactions are: (1) To Be Announced
(``TBA'') transactions, inclusive of adjustable rate mortgage
(``ARM'') transactions; (2) Specified Pool Transactions; and (3)
transactions in Collateralized Mortgage Obligations (``CMOs''),
issued in conformity with a program of an agency or Government-
Sponsored Enterprise (``GSE''), with forward settlement dates
transactions''). The proposed rule change would re-designate the
current definition of Covered Agency Transactions, as set forth in
paragraph (e)(2)(H)(i)c., as paragraph (e)(2)(H)(i)b., without any
change. See Exhibit 5 to the Proposal. See also Notice, 86 FR 28161-
62.
    \13\ See Exchange Act Release No. 78081 (June 15, 2016), 81 FR
40364 (June 21, 2016) (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; File No. SR-FINRA-2015-036) (approving SR-FINRA-2015-036,
referred to as the ``2016 Approval Order''). The rule text as
approved in the 2016 Approval Order is referred to in this order as
the ``current rule'' or ``original rulemaking.'' The proposed rule
change, as described in Section II.A. and B., is excerpted, in part,
from the Notice, which was substantially prepared by FINRA.
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     To eliminate the two percent maintenance margin
requirement that applies to non-exempt \14\ accounts pursuant to
paragraph (e)(2)(H)(ii)e. under FINRA Rule 4210. This would eliminate
the need for members to distinguish exempt account customers from other
customers (``non-exempt accounts'') for purposes of Covered Agency
Transaction margin. As such, without regard to a counterparty's exempt
or non-exempt account status, members would collect margin for each
counterparty's excess mark to market loss, as discussed in further
detail

below, unless otherwise provided by the rule;
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    \14\ 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 Exchange Act Section 3(a)(6), 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), (e)(2)(G) and (e)(2)(H) of the
rule, as set forth under paragraph (a)(13)(B)(i) of FINRA Rule 4210,
and meets specified conditions as set forth under paragraph
(a)(13)(B)(ii). See Notice, 86 FR 28163, n.18.
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     Subject to specified conditions and limitations, to permit
members to take a capital charge in lieu of collecting margin for
excess net mark to market losses on Covered Agency Transactions. FINRA
has designed these conditions and limitations to help protect the
financial stability of members that opt to take capital charges while
restricting the ability of the larger members to use their capital in
lieu of collecting margin to compete unfairly with smaller members;
\15\ and
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    \15\ See Notice, 86 FR 28163.
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     To make revisions designed to streamline, consolidate and
clarify the Covered Agency Transaction rule language. FINRA believes
these revisions will preserve and clarify key exceptions to the
requirements, including for example the $250,000 de minimis transfer
exception \16\ and the $10 million gross open position exception \17\
established pursuant to SR-FINRA-2015-036.\18\
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    \16\ See Notice, 86 FR 28163. Subject to specified conditions,
the current rule provides for an aggregate $250,000 de minimis
transfer amount with a single counterparty, so that if the aggregate
required but uncollected maintenance margin or mark to market loss
does not exceed that amount, the margin need not be collected or
charged to net capital. See 2016 Approval Order, 81 FR 40367; see
also paragraph (e)(2)(H)(ii)f. of the current rule in Exhibit 5 to
the Proposal.
    \17\ The current rule provides that the margin requirements for
Covered Agency Transactions do not apply to a counterparty that has
gross open positions in Covered Agency Transactions with the member
amounting to $10 million or less if the counterparty regularly
settles its Covered Agency Transactions on a Delivery Versus Payment
(``DVP'') basis or for cash and meets other specified conditions.
See paragraph (e)(2)(H)(ii)c. of the current rule in Exhibit 5 to
the Proposal.
    \18\ See Notice, 86 FR 28163.
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    The proposed amendments are discussed in detail below.\19\
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    \19\ Section II.B. describes the proposed rule change prior to
the proposed amendments in Amendment No. 1, which are summarized in
Section II.C. below.
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B. Detailed Discussion of Proposed Amendments

1. Elimination of Maintenance Margin Requirement; Application of Mark
to Market Loss to Both Exempt and Non-Exempt Accounts
    Paragraph (e)(2)(H)(ii)e. of current FINRA Rule 4210 addresses
Covered Agency Transactions with counterparties that are non-exempt
accounts and broadly provides that maintenance margin, defined under
the current rule to mean margin equal to two percent of the contract
value of the net long or net short position, by CUSIP, with the
counterparty, plus any net mark to market loss on such transactions,
shall be required margin, subject to specified exceptions under the
rule.\20\ By contrast, paragraph (e)(2)(H)(ii)d. of the current rule
broadly provides that on transactions with counterparties that are
exempt accounts no maintenance margin shall be required. Such
transactions must be marked to the market daily and the member must
collect any net mark to market loss, subject to specified exceptions
under the current rule.\21\
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    \20\ See 2016 Approval Order, 81 FR 40367; see also paragraph
(e)(2)(H)(ii)e. of the current rule in Exhibit 5. The rule further
sets forth specified requirements for net capital deductions and the
liquidation of positions in the event the uncollected maintenance
margin and mark to market loss (defined together under paragraph
(e)(2)(H)(i)d. of the current rule as the ``deficiency'') is not
satisfied. In short, 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; under the rule, if such deficiency is not satisfied
within five business days from the date the deficiency was created,
the member must promptly liquidate positions to satisfy the
deficiency, unless FINRA has specifically granted the member
additional time. As discussed in further detail below, the proposed
rule change would eliminate current paragraph (e)(2)(H)(ii)e. in its
entirety.
    \21\ See 2016 Approval Order, 81 FR 40367; see also paragraph
(e)(2)(H)(ii)d. of the current rule in Exhibit 5 to the Proposal.
Similar to paragraph (e)(2)(H)(ii)e., the current 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 is 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; 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. Again, as
discussed in further detail below, the proposed rule change would
eliminate current paragraph (e)(2)(H)(ii)d. in its entirety.
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    According to FINRA, member firms expressed concern that the two-
track treatment of exempt versus non-exempt accounts is burdensome
because members are obliged under the current rule to obtain and assess
the financial information needed to determine which counterparties must
be treated as non-exempt accounts.\22\ Further, based on feedback from
members since the approval date and additional observation of market
conditions, FINRA believes that the potential risk that the maintenance
margin requirement was intended to address when originally proposed is
not significant enough to warrant the burdens and competitive
disadvantage that the requirement imposes.\23\ According to FINRA,
members pointed out that, in practice, the maintenance margin
requirement would apply to relatively few accounts that participate in
the Covered Agency Transaction market. Yet, FINRA believes that
monitoring and collecting maintenance margin for such accounts is
operationally burdensome and out of proportion with the number and size
of the affected accounts.\24\ Further, according to FINRA, bank dealers
are not subject to the requirement to collect maintenance margin from
their customers, which would significantly disadvantage FINRA members
in competition with bank dealers.\25\ To address these concerns, FINRA
is proposing to eliminate paragraph (e)(2)(H)(ii)d. and paragraph
(e)(2)(H)(ii)e. of FINRA Rule 4210 as established pursuant to the 2016
Approval Order, and to adopt in lieu new paragraph (e)(2)(H)(ii)c.,
which provides that members shall collect margin for each
counterparty's \26\ excess net mark to market loss,\27\ unless

otherwise provided under proposed new paragraph (e)(2)(H)(ii)d. of the
rule, as discussed further below. As such, both exempt and non-exempt
accounts would receive the same margin treatment for purposes of
Covered Agency Transactions under paragraph (e)(2)(H).\28\
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    \22\ See Notice, 86 FR 28163. Further, members expressed concern
that some asset manager counterparties face constraints with regard
to custody of assets at broker-dealers and that, because of these
constraints, some members need to enter into separate custodial
agreements with third party banks to hold the maintenance margin
that they collect from these asset managers. Members expressed
concern that this imposes operational burdens both on themselves and
their client counterparties, who may, as a consequence, choose to
limit their dealings with smaller broker-dealers. Id., at n.23.
    \23\ See Notice, 86 FR 28163.
    \24\ Id.
    \25\ Id.
    \26\ Current paragraph (e)(2)(H)(i)b. defines the term
``counterparty'' to mean any person that enters into a Covered
Agency Transaction with a member and includes a ``customer'' as
defined in paragraph (a)(3) under FINRA Rule 4210. The proposed rule
change would redesignate the definition of counterparty as paragraph
(e)(2)(H)(i)a. under the rule and revise the definition to provide
that the term ``counterparty'' means any person, including any
``customer'' as defined in paragraph (a)(3) of the rule, that is a
party to a Covered Agency Transaction with, or guaranteed by, a
member. FINRA believes that including transactions guaranteed by a
member is a useful clarifying change in the context of Covered
Agency Transactions. In connection with this change, FINRA proposes
to add new Supplemental Material .02, which would provide that, for
purposes of paragraph (e)(2)(H), a member is deemed to have
``guaranteed'' a transaction if the member has become liable for the
performance of either party's obligations under the transaction. See
proposed new Supplemental Material .02 in Exhibit 5 to the Proposal.
Accordingly, if a clearing broker were to guarantee to an introduced
customer an introducing broker's obligations under a Covered Agency
Transaction between that introducing firm and customer, the
introducing broker would be considered a ``counterparty'' of the
clearing broker for purposes of paragraph (e)(2)(H). See also
Notice, 86 FR 28163-64, n.25.
    \27\ FINRA proposes to delete the current definition of ``mark
to market loss'' under paragraph (e)(2)(H)(i)g. as adopted pursuant
to the 2016 Approval Order and to replace it with a definition of
``net mark to market loss'' under proposed new paragraph
(e)(2)(H)(i)d. Under the new definition, a counterparty's ``net mark
to market loss'' means (1) the sum of such counterparty's losses, if
any, resulting from marking to market the counterparty's Covered
Agency Transactions with the member, or guaranteed to a third party
by the member, reduced to the extent of the member's legally
enforceable right of offset or security by (2) the sum of such
counterparty's gains, if any, resulting from: (a) marking to market
the counterparty's Covered Agency Transactions with the member,
guaranteed to the counterparty by the member, cleared by the member
through a registered clearing agency, or in which the member has a
first-priority perfected security interest; and (b) any ``in the
money,'' as defined in paragraph (f)(2)(E)(iii) of FINRA Rule 4210,
amounts of the counterparty's long standby transactions written by
the member, guaranteed to the counterparty by the member, cleared by
the member through a registered clearing agency, or in which the
member has a first-priority perfected security interest. Under
proposed new paragraph (e)(2)(H)(i)c., a counterparty's ``excess''
net mark to market loss is defined to mean such counterparty's net
mark to market loss to the extent it exceeds $250,000. As such, by
specifying excess net mark to market loss, FINRA stated that the
proposed rule preserves the $250,000 de minimis transfer exception
set forth under paragraph (e)(2)(H)(ii)f. as adopted pursuant to the
2016 Approval Order. Further, FINRA stated that, in the interest of
clarity, proposed new paragraph (e)(2)(H)(ii)c. expressly provides
that members would not be required to collect margin, or take
capital charges, for counterparties' mark to market losses on
Covered Agency Transactions other than excess net mark to market
losses. Last, as discussed further below, the proposed rule change
would delete paragraph (e)(2)(H)(ii)f. in the interest of
consolidating the rule language. See Notice, 86 FR 28164, n.26.
    \28\ Current paragraph (e)(2)(H)(ii)d. of the rule contains
provisions designed to permit members to treat mortgage bankers, as
defined pursuant to current paragraph (e)(2)(H)(i)h. of the rule, as
exempt accounts under specified conditions. Because the proposed
rule change eliminates the distinction between exempt and non-exempt
accounts for purposes of Covered Agency Transactions, FINRA believes
this language is no longer needed and will be deleted. See Notice,
86 FR 28164, n.27.
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2. Option for Capital Charge in Lieu of Mark to Market Margin
    Proposed new paragraph (e)(2)(H)(ii)d. of the rule is designed,
subject to specified conditions and limitations, to permit members the
option to take a capital charge in lieu of collecting margin for a
counterparty's excess net mark to market loss (that is, as discussed
above, the net mark to market loss to the extent it exceeds $250,000).
Informed by FINRA's engagement with members, FINRA believes this
approach is appropriate because it would help alleviate the competitive
disadvantage of smaller firms vis-[agrave]-vis larger firms.\29\
According to FINRA, smaller firms expressed concern that larger firms
can leverage their greater size and scale in obtaining margining
agreements with their counterparties, and that counterparties would
prefer to transact with larger firms with which margining agreements
can more readily be obtained, or with banks that are not subject to
margin requirements under FINRA Rule 4210. Smaller firms told FINRA
that having the option to take a capital charge, in lieu of collecting
margin, would help alleviate the competitive disadvantage of needing to
obtain margining agreements with such counterparties because there
would be an alternative to collecting margin.\30\ To this end, as
stated above, the proposed rule change includes conditions and
limitations that FINRA believes are designed to help protect the
financial stability of members that opt to take capital charges while
restricting the ability of the larger members to use their capital to
compete unfairly with smaller members.\31\ Specifically, the proposed
new paragraph provides that a member need not collect margin for a
counterparty's excess net mark to market loss under paragraph
(e)(2)(H)(ii)c. of the rule, provided that:
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    \29\ See Notice, 86 FR 28164.
    \30\ See Notice, 86 FR 28164.
    \31\ See Notice, 86 FR 28164.
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     The member must deduct the amount of the counterparty's
unmargined excess net mark to market loss from the member's net capital
computed as provided in Exchange Act Rule 15c3-1, if the counterparty
is a non-margin counterparty \32\ or if the excess net mark to market
loss has not been margined or eliminated by the close of business on
the next business day after the business day on which such excess net
mark to market loss arises; \33\
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    \32\ Proposed new paragraph (e)(2)(H)(i)e. defines a
counterparty as a ``non-margin counterparty'' if the member: (1)
Does not have a right under a written agreement or otherwise to
collect margin for such counterparty's excess net mark to market
loss and to liquidate such counterparty's Covered Agency
Transactions if any such excess net mark to market loss is not
margined or eliminated within five business days from the date it
arises; or (2) does not regularly collect margin for such
counterparty's excess net mark to market loss. See Amendment No. 1
discussed in Section II.C. below for discussions of modification to
proposed definition of non-margin counterparty.
    \33\ See proposed paragraph (e)(2)(H)(ii)d.1. in Exhibit 5 to
the Proposal.
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     If the member has any non-margin counterparties, the
member must establish and enforce risk management procedures reasonably
designed to ensure that the member would not exceed either of the
limits specified in paragraph (e)(2)(I)(i) of the rule, as proposed to
be revised pursuant to this rule change,\34\ and that the member's net
capital deductions under proposed paragraph (e)(2)(H)(ii)d.1. of the
rule for all accounts combined will not exceed $25 million; \35\
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    \34\ Current paragraph (e)(2)(I) sets forth specified
concentration thresholds. As discussed further below, the rule
change would make conforming revisions to the rule.
    \35\ See proposed paragraph (e)(2)(H)(ii)d.2. in Exhibit 5 to
the Proposal.
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     If the member's net capital deductions under paragraph
(e)(2)(H)(ii)d.1. of the rule for all accounts combined exceed $25
million for five consecutive business days, the member must give prompt
written notice to FINRA. If the member's net capital deductions under
paragraph (e)(2)(H)(ii)d.1. of the rule for all accounts combined
exceed the lesser of $30 million or 25% of the member's tentative net
capital, as such term is defined in Exchange Act Rule 15c3-1, for five
consecutive business days, the member may not enter into any new
Covered Agency Transactions with any non-margin counterparty other than
risk-reducing transactions, and must also, to the extent of its rights,
promptly collect margin for each counterparty's excess net mark to
market loss and promptly liquidate the Covered Agency transactions of
any counterparty whose excess net mark to market loss is not margined
or eliminated within five business days from the date it arises, unless
FINRA has specifically granted the member additional time; \36\ and
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    \36\ See proposed paragraph (e)(2)(H)(ii)d.3. in Exhibit 5 to
the Proposal.
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     The member must submit to FINRA such information regarding
its unmargined net mark to market losses, non-margin counterparties and
related capital charges, in such form and manner, as FINRA shall
prescribe by Regulatory Notice or similar communication.\37\
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    \37\ See Notice, 86 FR 28164. See also proposed paragraph
(e)(2)(H)(ii)d.4. in Exhibit 5 to the Proposal.
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3. Streamlining and Consolidation of Rule Language; Conforming
Revisions
    In support of the amendments discussed above, FINRA has proposed
several amendments to the current rule designed to streamline and
consolidate the rule language and otherwise make conforming revisions:
     The rule change consolidates language related to the
$250,000 de minimis transfer exception and the $10 million gross open
position exception while, as discussed above, preserving these
exceptions in substance. The $250,000 de minimis transfer exception is
preserved because paragraph (e)(2)(H)(ii)c. under the revised rule

specifies that the members shall collect margin for each counterparty's
excess net mark to margin loss, unless otherwise provided under
paragraph (e)(2)(H)(ii)d. of the rule (that is, as discussed above, the
provisions under the proposed rule change that permit a member to take
a capital charge in lieu of collecting margin, subject to specified
conditions).\38\ The proposed rule change deletes paragraph
(e)(2)(H)(ii)f., which currently addresses the de minimis exception and
would be rendered redundant. With respect to the current $10 million
gross open position exception, FINRA proposes to revise paragraph
(e)(2)(H)(ii)a. of the rule, which specifies counterparties that are
excepted from the rule's margin requirements, to include a ``small cash
counterparty'' among the enumerated entities included in the exception.
Proposed new paragraph (e)(2)(H)(i)h. would provide that a counterparty
is a ``small cash counterparty'' if:
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    \38\ See Notice, 86 FR 28165.
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    [cir] The absolute dollar value of all of such counterparty's open
Covered Agency Transactions with, or guaranteed by, the member is $10
million or less in the aggregate, when computed net of any settled
position of the counterparty held at the member that is deliverable
under such open Covered Agency Transactions and which the counterparty
intends to deliver; \39\
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    \39\ See proposed paragraph (e)(2)(H)(i)h.1. in Exhibit 5 to the
Proposal.
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    [cir] The original contractual settlement date for all such open
Covered Agency Transactions is in the month of the trade date for such
transactions or in the month succeeding the trade date for such
transactions; \40\
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    \40\ See proposed paragraph (e)(2)(H)(i)h.2. in Exhibit 5 to the
Proposal.
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    [cir] The counterparty regularly settles its Covered Agency
Transactions on a DVP basis or for cash; \41\ and
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    \41\ See proposed paragraph (e)(2)(H)(i)h.3. in Exhibit 5 to the
Proposal.
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    [cir] The counterparty does not, in connection with its Covered
Agency Transactions with, or guaranteed by, the member, engage in
dollar rolls, as defined in Rule 6710(z), or round robin trades,\42\ or
use other financing techniques.\43\
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    \42\ The term ``round robin'' is defined under current paragraph
(e)(2)(H)(i)i. of the rule and, pursuant to the rule change, would
be redesignated as paragraph (e)(2)(H)(i)g., without any change.
    \43\ See proposed paragraph (e)(2)(H)(i)h.4. in Exhibit 5 to the
Proposal.
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    The above elements, according to FINRA, are substantially similar
to the elements that are currently associated with the exception as set
forth under current paragraph (e)(2)(H)(ii)c.2., which would be
deleted, along with the definition of ``gross open position'' under
paragraph (e)(2)(H)(i)e., which would be rendered redundant.\44\ The
new proposed language reflects that the scope of transactions addressed
by the rule include Covered Agency Transactions with a counterparty
that are guaranteed by the member.
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    \44\ See Notice, 86 FR 28165.
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     FINRA proposes to delete the definition of ``bilateral
transaction'' set forth in current paragraph (e)(2)(H)(i)a. The
definition is in connection with the provisions under the current rule
relating to margin treatment for exempt accounts under paragraph
(e)(2)(H)(ii)d. and for non-exempt accounts under paragraph
(e)(2)(H)(ii)e., both of which paragraphs, as discussed above, FINRA
proposes to delete pursuant to the rule change. Further, FINRA notes
that the term ``bilateral transaction'' is unduly narrow given that the
proposed revised definition of ``counterparty,'' as discussed above,
would have the effect of clarifying that the rule's scope includes
transactions guaranteed by the member.\45\
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    \45\ See Notice, 86 FR 28165.
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     FINRA proposes to delete the definition of the term
``deficiency'' set forth in current paragraph (e)(2)(H)(i)d. Under the
current rule, the term is designed in part to reference required but
uncollected maintenance margin for Covered Agency Transactions. Because
the rule change proposes to eliminate such maintenance margin, FINRA
believes that the term is not needed.\46\
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    \46\ See Notice, 86 FR 28165.
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     Current paragraph (e)(2)(H)(ii)a. addresses the scope of
paragraph (e)(2)(H) and certain types of counterparties that are
excepted from the rule, provided the member makes and enforces written
risk limits pursuant to paragraph (e)(2)(H)(ii)b. Current paragraph
(e)(2)(H)(ii)b. contains the core language under the rule relating to
risk limits. FINRA is proposing to revise both paragraphs so as to
conform with the rule change and to consolidate the language relating
to written risk limits in these paragraphs within paragraph
(e)(2)(H)(ii)b. Paragraph (e)(2)(H)(ii)a.1. would be revised to read:
``1. a member is not required to collect margin, or to take capital
charges in lieu of collecting such margin, for a counterparty's excess
net mark to market loss if such counterparty is a small cash
counterparty, registered clearing agency, Federal banking agency, as
defined in 12 U.S.C. 1813(z), central bank, multinational central bank,
foreign sovereign, multilateral development bank, or the Bank for
International Settlements; and . . .'' \47\ Paragraph (e)(2)(H)(ii)a.2.
would be revised to read: ``2. a member is not required to include a
counterparty's Covered Agency Transactions in multifamily housing
securities or project loan program securities in the computation of
such counterparty's net mark to market loss, provided . . .'' \48\
Paragraph (e)(2)(H)(ii)a.2.A. would not be changed, other than to be
redesignated as part of part of (e)(2)(H)(ii)a.2. Paragraph
(e)(2)(H)(ii)a.2.B. would be eliminated as redundant \49\ because,
correspondingly, paragraph (e)(2)(H)(ii)b. would be revised to read:
``A member that engages in Covered Agency Transactions with any
counterparty shall make a determination in writing of a risk limit for
each such counterparty, including any counterparty specified in
paragraph (e)(2)(H)(ii)a.1. of this Rule, that the member shall
enforce. The risk limit for a counterparty shall cover all of the
counterparty's Covered Agency Transactions with the member or
guaranteed to a third party by the member, including Covered Agency
Transactions specified in paragraph (e)(2)(H)(ii)a.2. of this Rule. 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.'' \50\
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    \47\ The proposed new term ``small cash counterparty'' is
discussed above. The proposed language in the paragraph reflects
FINRA's proposed establishment of the option to take a net capital
charge in lieu of collecting margin. Further, FINRA stated that, for
clarity, the proposed rule change adds registered clearing agencies
to the types of counterparties that are within the exception
pursuant to paragraph (e)(2)(H)(ii)a. as revised. FINRA believes
that this preserves the treatment of registered clearing agencies
under the rule in light of the proposed deletion of current
paragraph (e)(2)(H)(ii)c. In this regard, also in the interest of
clarity, FINRA proposes to add new paragraph (e)(2)(H)(i)f. by way
of defining the term ``registered clearing agency.'' See Notice, 86
FR 28165, n.39.
    \48\ Under current paragraph (e)(2)(H)(ii)a.2., a member is not
required to apply the margin requirements of paragraph (e)(2)(H) to
Covered Agency Transactions with a counterparty in multifamily
housing securities or project loan program securities, provided the
securities meet the specified conditions under the rule and the
member makes and enforces the written risk limit determinations as
specified under the rule. FINRA stated that the proposed rule change
does not change the treatment of multifamily housing securities or
project loan program securities under the current rule other than to
clarify, in express terms, that a member is not required to include
a counterparty's Covered Agency Transactions in multifamily housing
securities or project loan program securities in the computation of
such counterparty's net mark to market loss. See Notice, 86 FR
28165, n.40.
    \49\ See proposed paragraph (e)(2)(H)(ii)a. in Exhibit 5 to the
Proposal.
    \50\ See proposed paragraph (e)(2)(H)(ii)b. in Exhibit 5 to the
Proposal.
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     Paragraph (e)(2)(I) under FINRA Rule 4210 addresses
concentration thresholds. FINRA is proposing to make revisions to align
the paragraph with the proposed new language as to paragraph (e)(2)(H),
in particular the elimination of the maintenance margin requirement and
the introduction of the proposed new term ``small cash counterparty.''
Specifically, FINRA proposes to revise the opening sentence of the
paragraph to read: ``In the event that (i) the net capital deductions
taken by a member as a result of marked to the market losses incurred
under paragraphs (e)(2)(F), (e)(2)(G) (exclusive of the percentage
requirements established thereunder), or (e)(2)(H)(ii)d.1. of this
Rule, plus any unmargined net mark to market losses below $250,000 or
of small cash counterparties exceed . . .'' \51\ Current paragraph
(e)(2)(I)(i)c. would be redesignated as (e)(2)(I)(ii) and would read:
``(ii) such excess as calculated in paragraph (e)(2)(I)(i) of this Rule
continues to exist on the fifth business day after it was incurred . .
.'' The final clause of the paragraph would be revised to read: `` . .
. the member shall 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 this Rule that would
result in an increase in the amount of such excess.''
---------------------------------------------------------------------------

    \51\ See proposed paragraph (e)(2)(I) in Exhibit 5 to the
Proposal.
---------------------------------------------------------------------------

     Paragraph (f)(6) under FINRA Rule 4210 addresses the time
within which margin or ``mark to market'' must be obtained. FINRA
proposes to delete the phrase ``other than that required under
paragraph (e)(2)(H) of this Rule,'' so the rule, as revised, would
read: ``The amount of margin or `mark to market' required by any
provision of this Rule shall be obtained as promptly as possible and in
any event within 15 business days from the date such deficiency
occurred, unless FINRA has specifically granted the member additional
time.'' FINRA believes this is appropriate given the proposed
elimination of current paragraph (e)(2)(H)(ii)d. and paragraph
(e)(2)(H)(ii)e. of the rule, both of which set forth, among other
things, specified time frames for collection of mark to market losses
or deficiencies, as appropriate, and liquidation of positions that are
specific to Covered Agency Transactions.\52\
---------------------------------------------------------------------------

    \52\ See Notice, 86 FR 28166.
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     Current Supplemental Material .02 addresses the
requirement for monitoring procedures with respect to mortgage bankers,
for purposes of treating them as exempt accounts pursuant to current
paragraph (e)(2)(H)(ii)d. Current Supplemental Material .03 addresses
how the cure of mark to market loss or deficiency, as defined under the
current rule, may cure the need to liquidate positions. Current
Supplemental Material .04 addresses determining whether an account
qualifies as an exempt account. The proposed rule change would render
each of these provisions unnecessary, given that the rule change
eliminates the need to distinguish exempt versus non-exempt accounts,
including, as discussed above, the language targeted toward mortgage
bankers, and eliminates the liquidation provisions under current
paragraph (e)(2)(H)(ii)d. and paragraph (e)(2)(H)(ii)e. of the
rule.\53\ FINRA proposes to redesignate current Supplemental Material
.05 as Supplemental Material .03.\54\
---------------------------------------------------------------------------

    \53\ See Notice, 86 FR 28166.
    \54\ See Supplemental Material provisions in Exhibit 5 to the
Proposal.
---------------------------------------------------------------------------

    Subject to Commission approval of the proposed rule change, FINRA
proposed it would announce the effective date of the proposed rule
change in a Regulatory Notice to be published no later than 60 days
following Commission approval. FINRA states that the effective date
will be no later than 120 days following publication of the Regulatory
Notice announcing Commission approval.\55\
---------------------------------------------------------------------------

    \55\ See discussion of Amendment No. 1 in Sections II.C. and
III.B.12. below for discussion of the proposed adjustment of the
implementation date. See also Amendment No. 1 at 20. FINRA stated
that the proposed rule change would not impact members that are
funding portals or that have elected to be treated as capital
acquisition brokers (``CABs''), given that such members are not
subject to FINRA Rule 4210. See Notice, 86 FR 28166, n.45.
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C. Summary of Amendment No. 1

    In Amendment No. 1, FINRA proposed the following modifications to
the proposed rule change: (1) Modify the definition of ``non-margin
counterparty'' to exclude small cash counterparties and other exempted
counterparties; and (2) define a FINRA member's ``specified net capital
deductions'' as the net capital deductions required by paragraph
(e)(2)(H)(ii)d.1. of FINRA Rule 4210 with respect to all unmargined
excess net mark to market losses of its counterparties, except to the
extent that the member, in good faith, expects such excess net mark to
market losses to be margined by the close of business on the fifth
business day after they arose.\56\ In addition, Amendment No. 1 states
that, if the Commission approves the proposed rule change, as modified
by Amendment No. 1, FINRA will announce the effective date of the
proposed rule change, as modified by Amendment No. 1, in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date would be between nine and ten months
following the Commission's approval.\57\
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    \56\ Amendment No. 1 also contains several conforming changes to
paragraph numbering to accommodate the proposed modifications to the
rule text. See Exhibit 4 to Amendment No. 1.
    \57\ See Amendment No. 1. See also OIP, 86 FR 47665.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by
Amendment No. 1, comment letters, and FINRA's responses to the
comments, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities association.\58\ Specifically, the Commission finds
that the proposed rule change, as modified by Amendment No. 1, is
consistent with Section 15A(b)(6) of the Exchange Act,\59\ 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, to facilitate transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------

    \58\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f). See, e.g., Section III.A.
(discussing competitive concerns raised by commenters regarding
smaller firms exiting the market resulting in a concentration of
larger firms, and enhancements in efficiency in streamlining and
consolidating the rule text).
    \59\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

A. Elimination of Maintenance Margin Requirement; Capital in Lieu of
Margin Charges; and Streamlining of Rule Text

    As discussed above in Section II, FINRA has proposed: (1) To
eliminate the two percent maintenance margin requirement that would
apply to non-exempt accounts under current FINRA Rule 4210; (2) subject
to specified conditions and limitations, to permit FINRA members to
take a capital charge in lieu of collecting margin for excess net mark
to market losses on Covered

Agency Transactions; and (3) to make revisions designed to streamline,
consolidate and clarify the Covered Agency Transaction rule language.
    Some commenters stated that they appreciated the efforts that FINRA
made to modify the Covered Agency Transaction margin requirements,\60\
and acknowledged the substantial efforts FINRA made to engage with
industry participants and to adjust the Covered Agency Transaction
margin requirements to address concerns about competitive equality,
cost, and the impact on the market for mortgage securities.\61\ One
commenter expressed support for the proposed change eliminating the
maintenance margin requirement.\62\
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    \60\ See Letter from Chris Melton, to Commission (Aug. 2, 2021)
(``Melton Letter'').
    \61\ See Letter from Christopher B. Killian, Managing Director,
Securitization, Corporate Credit, Libor, Securities Industry and
Financial Markets Association, to J. Matthew DeLesDernier, Assistant
Secretary, Commission (June 15, 2021) (``SIFMA Letter'') at 1.
    \62\ See Letter from Christopher B. Killian, Managing Director,
Securitization, Corporate Credit, Libor, Asset Management Group of
SIFMA, to Secretary, Commission (June 15, 2021) (``SIFMA AMG
Letter'') at 1.
---------------------------------------------------------------------------

    Some commenters, however, raised concerns or objected to the
proposed rule change on the grounds that imposing margin requirements
with regard to Covered Agency Transactions would cause smaller and mid-
sized firms to exit the Covered Agency Transaction market, thereby
causing greater concentration among fewer market participants, reducing
access to the Covered Agency Transaction market or negatively affecting
market liquidity.\63\ These commenters expressed concerns that
customers would not be inclined to transact with smaller and mid-sized
broker-dealers and would prefer to transact with banks that are not
subject to margin requirements, that many customers would be unwilling
to enter into margin agreements, that the costs of engaging in Covered
Agency Transactions would increase significantly and excessive margin
requirements and capital charges would be involved, or that the
proposed requirements, either in whole or in part, are not suitable for
Specified Pool Transactions and CMOs.\64\ Further, in response to the
OIP, one commenter reiterated its position that the amendments that are
the subject of the proposed rule change are unnecessary and an abuse of
discretion in that they are unworkable, increase systemic risk, and
will have a catastrophic effect on regional broker-dealers, and that
the proposed rule change will impose burdens on competition that are
neither necessary nor appropriate.\65\
---------------------------------------------------------------------------

    \63\ See SIFMA Letter at 2-3; Letter from Michael Decker, Senior
Vice President, Public Policy, Bond Dealers of America, to Vanessa
Countryman, Secretary, Commission (June 15, 2021) (``BDA Letter'')
at 2-5; Letter from Thomas J. Fleming & Adrienne M. Ward, Olshan, on
behalf of Brean Capital, LLC, to Vanessa Countryman, Secretary,
Commission (June 15, 2021) (``Brean Capital Letter'') at 10-21. See
also Letter from Kirk R. Malmberg, President and Chief Executive
Officer, Federal Home Loan Bank of Atlanta, to Vanessa Countryman,
Secretary, Commission at 1-2 (Jan. 18, 2022); Letter from Senator
John Boozman, Senator Thom Tillis, and Senator Cynthia M. Lummis, to
Gary Gensler, Chairman, Commission (Jan. 10, 2022) (``Boozman et al
Letter'') at 1-2.
    \64\ Id. See also Melton Letter at 1 (stating Specified Pools do
not represent systemic risk in and among themselves and should not
be included in the definition of ``Covered Agency Transaction'').
    \65\ See Letter from Thomas J. Fleming and Adrienne M. Ward,
Olshan, and David H. Thompson and Harold Reeves, Cooper & Kirk, PLLC
on behalf of Brean Capital, LLC, and the Bond Dealers of America,
Inc. to Vanessa Countryman, Secretary, Commission (Sep. 10, 2021)
(``BDA and Brean Capital Letter'') at 20-42. The BDA and Brean
Capital Letter appears twice in the comment file.
---------------------------------------------------------------------------

    In response to the comments to the Notice, FINRA stated that it has
engaged with industry participants extensively on these concerns, and
has addressed them on multiple occasions, since the process of
soliciting comment on requirements for Covered Agency Transactions
began in January 2014 with the publication of Regulatory Notice 14-02
and in 2015 with FINRA's original rulemaking for Covered Agency
Transactions.\66\ FINRA also stated that it believes that the
rulemaking is necessary because of the risks posed by unsecured credit
exposures in the Covered Agency Transactions market.\67\ FINRA also
stated that it has addressed, on multiple occasions, the need to
include Specified Pool Transactions and CMOs within the scope of the
requirements,\68\ and stated that it made key revisions in finalizing
the original rulemaking expressly to mitigate any potential impact on
smaller firms and on activity in the Covered Agency Transaction market,
including the following:
---------------------------------------------------------------------------

    \66\ See Exchange Act Release No. 76148 (Oct. 14, 2015), 80 FR
63603 (Oct. 20, 2015) (Notice of Filing of a Proposed Rule Change to
Amend FINRA Rule 4210 (Margin Requirements) to Establish Margin
Requirements for the TBA Market; File No. SR-FINRA-2015-036) (``2015
Notice''); see also Regulatory Notice 14-02 (Jan. 2014). Even before
the publication of these materials, as discussed in SR-FINRA-2015-
036, FINRA highlighted that it had engaged in extensive outreach and
consultation with market participants and staff of the Federal
Reserve Bank of New York and the Commission staff. See 2015 Notice,
80 FR, at 63604-05. In Partial Amendment No. 3 to SR-FINRA-2015-036,
FINRA stated that up to that point there had been four opportunities
for public comment on the original rulemaking, beginning with
Regulatory Notice 14-02, available at: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2015-036. See also Amendment No. 1 at
4.
    \67\ See, e.g., 2015 Notice, 80 FR 63615-16. See also Amendment
No. 1 at 4-5.
    \68\ See 2016 Approval Order, 81 FR 40371.
---------------------------------------------------------------------------

     FINRA initially proposed an exception in the original
rulemaking pursuant to which the new margin requirements would not
apply to a counterparty if its gross open positions in Covered Agency
Transactions with a FINRA member is $2.5 million or less, subject to
specified conditions. In response to commenters on the original
rulemaking, and to ensure that a greater number of smaller firms and
counterparties would benefit from the exception, FINRA increased the
amount from $2.5 million to $10 million; \69\
---------------------------------------------------------------------------

    \69\ See Partial Amendment No. 3 to SR-FINRA-2015-036, available
at: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2015-036.
---------------------------------------------------------------------------

     FINRA modified the two percent maintenance margin
requirement, as adopted pursuant to the original rulemaking, to create
an exception for cash investors that otherwise, by virtue of not being
``exempt accounts'' as defined under FINRA's margin rules, would have
been subject to the requirement.\70\ FINRA also made an exception from
the maintenance margin requirements available to mortgage bankers in
the original rulemaking;
---------------------------------------------------------------------------

    \70\ See 2015 Notice, 80 FR 63608.
---------------------------------------------------------------------------

     FINRA excepted multifamily housing securities and project
loan program securities from the new margin requirements; \71\
---------------------------------------------------------------------------

    \71\ See Partial Amendment No. 1 to SR-FINRA-2015-036, available
at: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2015-036.
---------------------------------------------------------------------------

     FINRA established a $250,000 de minimis transfer amount,
for a single counterparty, subject to specified conditions, up to which
members would not need to collect margin or take a charge to their net
capital.\72\
---------------------------------------------------------------------------

    \72\ See 2016 Approval Order, 81 FR 40368. See also Amendment
No. 1 at 5-6.
---------------------------------------------------------------------------

    Additionally, FINRA stated that the 2016 Approval Order was issued
for the original rulemaking on June 15, 2016, and FINRA stated that,
upon the Commission's approval (of the original rulemaking), FINRA
would monitor the impact of the new requirements and, if the
requirements prove overly onerous or otherwise are shown to negatively
impact the market, would consider revisiting such requirements as may
be necessary to mitigate the rule's impact.\73\ Industry participants
requested that FINRA reconsider the potential impact of the
requirements pursuant to SR-FINRA-2015-036 on smaller and mid-sized
firms, and that FINRA extend the implementation date of the
requirements pending such reconsideration. In response to the

concerns of industry participants, FINRA engaged in extensive dialogue,
both with industry participants and other regulators, including staff
of Commission and the Federal Reserve System, for the purpose of
reconsidering the requirements.\74\ Further, FINRA has extended the
implementation date of the margin collection requirements pursuant to
SR-FINRA-2015-036 on multiple occasions.\75\
---------------------------------------------------------------------------

    \73\ See Partial Amendment No. 3 to SR-FINRA-2015-036. See also
Amendment No. 1 at 6.
    \74\ See Amendment No. 1 at 6.
    \75\ See Notice, 86 FR 28162. See also Amendment No. 1 at 6.
---------------------------------------------------------------------------

    FINRA stated that it developed the proposed rule change in direct
response to the concerns of industry participants, and in citing the
risks posed by unsecured credit exposures that exist in the Covered
Agency Transaction market, stated that it has proposed two key
revisions designed to afford relief to industry participants.\76\
Specifically, FINRA proposed to eliminate the two percent maintenance
margin requirement with respect to non-exempt accounts for purposes of
their Covered Agency Transactions and, subject to specified conditions
and limits, to permit members to take a capital charge in lieu of
collecting margin for each counterparty's excess mark to market
loss.\77\ FINRA believes that, over the course of prolonged engagement
with industry participants, and in light of the multiple rounds of
responding to concerns already expressed, and answered, in connection
with the original rulemaking, and as further addressed in the proposed
rule change, it does not serve the public interest to further delay the
proposed rule change. FINRA believes the revisions to the original
rulemaking as set forth more fully in the proposed rule change, with
the additional clarifications provided to commenters, afford industry
participants appropriate relief and clarity, and that the rulemaking
should proceed.\78\
---------------------------------------------------------------------------

    \76\ See Notice, 86 FR 28162-63. See also Amendment No. 1 at 6.
    \77\ See Amendment No. 1 at 6-7.
    \78\ See Amendment No. 1 at 7.
---------------------------------------------------------------------------

    Further, in response to the additional comments received in
response to the OIP, FINRA stated that commenters have expressed these
same points repeatedly, including during the original rulemaking. FINRA
further stated these concerns have repeatedly been addressed.\79\ FINRA
also stated that the rulemaking is necessary because of the risk posed
by unsecured credit exposures in the Covered Agency Transaction market,
and that FINRA has addressed concerns of industry participants in
finalizing the original rulemaking, as well as through this proposed
rule change.\80\ FINRA also stated that events in connection with
market volatility and other stress stemming from the COVID-19 pandemic
have once again illustrated the importance of risk and exposure
limits.\81\ FINRA stated that the recent default of Archegos Capital
Management, and related multi-billion dollar losses incurred by Credit
Suisse, is yet another case in point. FINRA stated that these events
reinforce that FINRA's attention to unsecured exposures in the Covered
Agency Transaction market, in view of its significance to the U.S.
mortgage market and financial system generally, is rationally founded.
FINRA stated that the Covered Agency Transaction market today is
substantial. As of the second quarter of 2021, FINRA stated that total
average daily dollar trading volume for these types of products as
reflected in FINRA Trade Reporting and Compliance Engine (``TRACE'')
data was approximately $300 billion.\82\ FINRA stated that the
regulatory need for attention to this area is no less than when FINRA
initiated the original rulemaking.\83\
---------------------------------------------------------------------------

    \79\ See FINRA Letter at 3.
    \80\ See FINRA Letter at 4-7.
    \81\ See FINRA Letter at 5.
    \82\ See FINRA Letter at 5-6.
    \83\ See FINRA Letter at 6.
---------------------------------------------------------------------------

    In the proposed rule change, FINRA has reasonably balanced the goal
of reducing firm exposure to counterparty credit risk stemming from
unsecured credit exposures in the Covered Agency Transaction market,
with the potential competitive impacts and costs on smaller and medium-
sized broker-dealers. The risks posed by unsecured credit exposures in
the Covered Agency Transaction market justify the imposition of margin
requirements on Covered Agency Transactions. Further, as highlighted by
FINRA above, the current rule, as approved in the 2016 Approval Order,
already incorporates a number of exceptions designed to alleviate the
impact of the Covered Agency Margin requirements on smaller firms and
counterparties, including the small cash counterparty exception.\84\
These exceptions remain in the rule as modified by the proposed rule
change.
---------------------------------------------------------------------------

    \84\ See 2016 Approval Order, 81 FR 40375.
---------------------------------------------------------------------------

    Moreover, while the proposed rule change will not fully resolve the
disparity that results from being subject to FINRA Rule 4210, when non-
FINRA member banks are not, the proposed rule change to eliminate the
maintenance margin requirement and the option to take a capital charge
in lieu of margin should help to alleviate this disparity. The
continued requirement to collect mark to market losses or take a
capital charge in lieu of collecting margin 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.
    The Commission agrees with FINRA that some comments have been
previously addressed in the original rulemaking, including whether to
impose any margin requirements on Covered Agency Transactions or
exclude certain products from the scope of the rule, such as Specified
Pools and CMOs.\85\ These commenters provided comments about the rules
that the Commission has previously approved, but those rules are not
before the Commission in this filing.\86\ As described above, the only
amendments to the current rule before the Commission under the proposed
rule change are to eliminate the maintenance margin requirement, permit
capital in lieu of margin charges subject to a cap, and to reorganize
and streamline the rule text. Because the margin requirements set forth
in the original rulemaking were approved in the 2016 Approval Order,
without this proposed rule change, the margin collection requirements
in the original rule would become effective in 2022.
---------------------------------------------------------------------------

    \85\ See, e.g., 2016 Approval Order, 81 FR 40375-76
(``[E]xcluding 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'').
    \86\ See 2016 Approval Order.
---------------------------------------------------------------------------

    Further, the Commission agrees with FINRA that the regulatory need
for attention to this area is no less than when FINRA initiated the
original rulemaking. Recent events have reinforced the need to address
unsecured exposures in the Covered Agency Transaction market, in view
of its significance to the U.S. mortgage market and the financial
system, more generally. Moreover, permitting counterparties to
participate in the Covered Agency Transaction market without posting
variation margin could facilitate increased leverage by customers,
thereby posing a risk to the broker-dealer engaging in an unsecured
transaction with a counterparty, and to the marketplace as a whole. The
imposition of margin requirements on Covered Agency Transactions also
is consistent with other regulatory efforts that have sought to address
the risk of uncollateralized exposures arising from

different types of bilateral transactions with counterparties.\87\
---------------------------------------------------------------------------

    \87\ See, e.g., Exchange Act Rule 18a-3 (imposing margin
requirements on non-cleared security-based swap transactions for
security-based swap dealers and major security-based swap
participants).
---------------------------------------------------------------------------

    Eliminating the two percent maintenance margin requirement will
reduce operational burdens on FINRA member firms by eliminating the
need to obtain and assess information regarding a counterparty's exempt
or non-exempt status. Further, FINRA member firms will continue to be
required to collect variation margin under the proposed rule change
from a counterparty or take a capital charge, subject to a cap. This
requirement will further the goal of reducing firm exposure to
counterparty credit risk stemming from unsecured credit exposures in
the Covered Agency Transaction market. The elimination of the two
percent maintenance margin charge also reduces potential competitive
disparities between FINRA broker-dealers and large bank dealers that
are not subject to a maintenance margin requirement.\88\
---------------------------------------------------------------------------

    \88\ See 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 (``TMPG Report''). The TMPG report
recommends the exchange of variation margin for dealer banks. The
TMPG is a group of market professionals that participate in the
Covered Agency Transaction market and is sponsored by the Federal
Reserve Bank of New York.
---------------------------------------------------------------------------

    The proposed rule change to permit FINRA members to take a capital
charge in lieu of collecting margin, subject to a cap, will provide an
alternative for firms that are concerned, due to their size, about
facing competitive disadvantages. For example, to the extent smaller
broker-dealers face difficulties obtaining margin agreements with
counterparties, the capital charge provides an alternative. The capital
in lieu of margin charges under the proposed rule change will require a
broker-dealer to set aside net capital to address the risk of unsecured
exposures in the Covered Agency Transaction market that can otherwise
be mitigated through the collection of variation margin. The set aside
of net capital will serve as an alternative to obtaining margin
collateral for this purpose.
    Additionally, the proposed caps and concentration limits on the
proposed capital in lieu of margin charges will permit smaller broker-
dealers to utilize the capital charge alternative, while limiting the
amount of capital charges that large firms would be able to take under
the proposed rule change. This will prohibit larger broker-dealers from
using their size advantage (and larger capital base) to compete with
smaller firms by using the capital charge in lieu of margin charge.
Moreover, by providing the choice of either the collection of variation
margin or a capital charge for the amount of the variation margin, the
proposed rule change provides alternatives to broker-dealers with
respect to their counterparties, while also protecting FINRA members
from risks of unsecured credit exposures to Covered Agency
Transactions.
    Some commenters stated that a member with a Covered Agency
Transaction position that is hedged from a market risk perspective, but
is unhedged from a credit risk perspective, would have significantly
higher capital charges or margin requirements under the proposed rule
change than they would otherwise have absent the rule. The commenters
described scenarios to illustrate this result.\89\ FINRA stated that
some of the scenarios involve firms that are fully hedged from a market
risk perspective, like a firm that purchases a TBA, Specified Pool, or
CMO from one party and enters into an offsetting sale transaction with
another party, with the same settlement date. Commenters described
these transactions as ``riskless,'' but FINRA stated that it disagrees
with such characterization. FINRA stated that such a firm is exposed to
the credit risk of both the buyer and seller, and the offsetting
transactions provide no protection against those risks. FINRA stated
that paragraph (e)(2)(H) of FINRA Rule 4210 requires members to protect
themselves against that counterparty credit risk by collecting margin
for their counterparties' excess net mark to market losses or taking
capital charges in lieu of such collection.\90\
---------------------------------------------------------------------------

    \89\ See BDA Letter at 2-4; Brean Capital Letter at 15-18.
    \90\ See Amendment No. 1 at 7.
---------------------------------------------------------------------------

    According to FINRA, in some of these scenarios, commenters
attributed the higher margin or capital requirements to the fact that
the transactions (termed ``non-netting'' by one commenter and ``non-
nettable'' by another) will not net under the proposed rule change.
Under the proposed rule change, however, FINRA stated there is no
category of transactions that cannot be netted in the determination of
a counterparty's ``net mark to market loss.'' According to FINRA, the
only requirement is that the member have a legal right to offset losses
on one transaction against gains on the other (or a security interest
that would allow it to apply gains on one transaction to the
counterparty's losses on the other).\91\
---------------------------------------------------------------------------

    \91\ See Amendment No. 1 at 7-8.
---------------------------------------------------------------------------

    FINRA stated that the ``non-netting'' or ``non-nettable''
transactions, as referenced by the commenters, appear to be
transactions that are not eligible to be cleared by the Mortgage-Backed
Securities Division of the Fixed Income Clearing Corporation
(``MBSD''). However, FINRA stated that when an eligible transaction is
submitted to the MBSD for clearing, that transaction is novated to the
MBSD, so that instead of a transaction between the original buyer and
seller, there are two mirror transactions: One in which the original
buyer is buying from the MBSD; and one in which the original seller is
selling to the MBSD. Accordingly, FINRA stated that when a firm
executes with a single counterparty an MBSD-eligible transaction and a
transaction that is not MBSD-eligible, and the eligible transaction is
submitted for clearing (but the non-eligible transaction is not), the
firm ends up with two transactions with two separate counterparties.
These transactions cannot be netted against each other, according to
FINRA, because they are with separate counterparties, rather than
because of FINRA's proposed rule change, which in fact would allow
gains and losses on the transactions to be netted to the extent of a
perfected, first priority, security interest in the transaction with
the gain.\92\
---------------------------------------------------------------------------

    \92\ See Amendment No. 1 at 8.
---------------------------------------------------------------------------

    Further, according to FINRA, the current rule, as approved under
the 2016 Approval Order, would, subject to specified exceptions,
require members to collect margin whenever their counterparties' mark
to market losses (and two percent maintenance margin deficiency, where
applicable) exceeds $250,000, and would require them to take a capital
charge to the extent such margin is not collected by the close of
business on the business day after such mark to market loss (or
maintenance margin deficiency) arose.\93\ FINRA stated that the
proposed rule change preserves all of the exceptions in the current
rule, eliminates the two percent maintenance margin requirement,
provides an option, subject to specified conditions, to take capital
charges in lieu of collecting margin for net mark to market losses in
excess of $250,000, and requires a capital charge to the extent margin
for excess net mark to mark losses has not been collected by the close
of business on the business day after such mark to market losses arose.
Because the proposed rule change

eliminates the two percent maintenance margin requirement (and as such
eliminates the related capital charges for uncollected maintenance
margin), FINRA stated that the margin requirements and capital charges
under the proposed rule change are less than the requirements under the
current rule.\94\
---------------------------------------------------------------------------

    \93\ See Amendment No. 1 at 8.
    \94\ See Amendment No. 1 at 8.
---------------------------------------------------------------------------

    The Commission agrees with FINRA's analysis. The proposed rule
change will reduce the current rule's requirements by permitting
capital charges in lieu of margin and eliminating the two percent
maintenance margin requirement. In addition, all of the exceptions in
the current rule are preserved in the proposed rule change. Further,
the proposed rule change allows a FINRA member to offset transactions
where the member has a legal right to offset losses on one transaction
against gains on the other. This permits a member the flexibility to
net certain transactions, while protecting broker-dealers against
counterparty credit risk by requiring them to collect margin for each
counterparty's excess net mark to market losses or taking capital
charges in lieu of such collection when transactions cannot be netted.
Where transactions cannot be legally netted, the broker-dealer would be
exposed to counterparty credit risk and, consequently, should collect
variation margin from its counterparty or take a capital charge in lieu
of collecting margin, unless an exception applies.
    FINRA acknowledged that the margin requirements and capital charges
under both the proposed rule change and the current rule are higher in
certain scenarios (and lower in others) than they would be under a
commenter's suggestion that (1) there should be no margin requirements
applicable to Covered Agency Transactions (up to the second monthly
SIFMA settlement date), and (2) members should be required to take
capital charges for only ten percent of their counterparties'
unmargined mark to market losses.\95\ FINRA stated that it believes
that this suggestion would significantly undercut the objective of the
rule.\96\ FINRA also stated that a proposed alternative approach a
commenter suggested that would not require margin to be posted until
the next two ``SIFMA good day settlements'' and apply capital charges
for 10 percent of the mark to market loss, instead of the 100 percent
of the mark to market loss set forth in the proposed rule change, would
significantly undercut the objective of the Covered Agency Transaction
margin requirements.\97\
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    \95\ According to FINRA, under the current rule and the proposed
rule change, members are not required to collect margin, or take
capital charges in lieu of collecting margin, to cover the net mark
to market losses of small cash counterparties, registered clearing
agencies, Federal banking agencies (as defined in 12 U.S.C.
1813(z)), central banks, multinational central banks, foreign
sovereigns, multilateral development banks, or the Bank for
International Settlements. FINRA stated that these exceptions mean
that some members engaging in Covered Agency Transactions with these
counterparties may have lower margin and capital requirements under
the current rule and the proposed rule change than they would under
the commenter's suggestion. See Amendment No. 1 at 9.
    \96\ See Amendment No. 1 at 9.
    \97\ See Amendment No. 1 at 8-9.
---------------------------------------------------------------------------

    The Commission agrees with FINRA's analysis regarding the proposed
capital charges or margin requirements. Reducing the proposed capital
charges or margin requirements, or extending the time under which
margin would not need to be collected until the next two good
settlement dates would undermine the purposes of the rule to reduce the
risk of unsecured exposures from Covered Agency Transactions. The
proposed rule change will require a broker-dealer to collect variation
margin from a customer or take a dollar-for-dollar capital charge for
variation margin that is not collected from a counterparty, unless an
exception applies. This requirement addresses the risk of a broker-
dealer's unsecured exposures in the Covered Agency Transaction market
that can be mitigated through the collection of variation margin or the
set aside of net capital.
    Some commenters raised concerns that FINRA and the Commission lack
the authority to prescribe margin requirements for Covered Agency
Transactions.\98\ The commenters argued that Section 7 of the Exchange
Act identifies the Board of Governors of the Federal Reserve System
(``Federal Reserve Board'') as the entity responsible for regulating
margin, and that Congress never intended the Commission to administer
margin regimes.\99\ Further, one commenter stated that Section 3(a)(12)
of the Exchange Act defines Covered Agency Transactions as ``exempted
securities'' and, therefore, not subject to the authority of the
Federal Reserve Board or the Commission.\100\ Another commenter stated
that Senate Report in connection with the adoption of the Secondary
Mortgage Market Enhancement Act of 1984 (including Section 7(g) of the
Exchange Act) supports the view that the Federal Reserve Board has sole
authority, and that Congress did not intend to grant FINRA authority to
require margin for trades in exempt securities.\101\
---------------------------------------------------------------------------

    \98\ See Brean Capital Letter at 21-23; Melton Letter; BDA and
Brean Capital Letter at 20-25. See also Boozman et al Letter at 2.
    \99\ See Brean Capital Letter at 22-23; Melton Letter.
    \100\ See Brean Capital Letter at 22.
    \101\ See Melton Letter; BDA and Brean Capital Letter at 21-22.
---------------------------------------------------------------------------

    FINRA addressed this assertion in the original rulemaking, and
stated that the requirements are consistent with the provisions of
Section 15A(b)(6) of the Securities Exchange Act.\102\ FINRA stated
that Section 7 of Securities Exchange Act sets forth the parameters of
the margin setting authority of the Federal Reserve Board and does not
bar action by FINRA.\103\ The Commission agrees with FINRA that it is
within FINRA's authority to impose margin requirements on its
members.\104\
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    \102\ See 2016 Approval Order, 81 FR 40373.
    \103\ See Amendment No. 1 at 7.
    \104\ See 12 CFR 220.1(b)(2) (``This [Regulation T] . . . does
not preclude any exchange, national securities association, or
creditor from imposing additional requirements or taking action for
its own protection.''); See also 2016 Approval Order, 81 FR 40374
(``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.''); paragraphs (e)(2)(A), (B), and (F)
of FINRA Rule 4210 (imposing maintenance margin requirements on
exempted securities, and requirements on transactions with exempt
accounts involving certain good faith securities); and Federal
Reserve Board Ruling (June 28, 1972), FRRS 5-622 (``Although the
Board does not have authority to set margin requirements on exempted
securities (FNMA stock is an exempted security), brokers and
national securities exchanges can establish margin requirements more
restrictive than those of the Board.'').
---------------------------------------------------------------------------

    The Commission agrees with FINRA that the proposed rule change
relating to streamlining and reorganizing the current rule enhances the
transparency of the Covered Agency Transaction margin requirements. The
consolidation of the rule text and deletion of unnecessary language may
reduce costs and enhance efficiencies for broker-dealers, while
preserving the exceptions in the current rule, such as the exception
from collecting variation margin for net mark to market losses below
$250,000 and the small cash counterparty exception. For example, the
proposed rule change streamlines the language regarding the $250,000
exception making it easier to determine the applicable margin, which in
turn, may reduce costs associated with calculating margin requirements
when establishing trading relationships.

B. Other Comments, Clarifications; Technical Revisions to the Proposed
Rule Change

    In response to the Notice and the OIP, commenters raised additional
issues regarding other aspects of the proposed

rule change or requested clarifications or technical revisions to the
proposed rule change. These comments are discussed in the following
sections below.
1. Concerns Regarding Liquidation
    Commenters expressed concern about requirements to liquidate
Covered Agency Transactions stating that market participants often
engage in long ``chains'' of Specified Pool or CMO transactions, where
the initial seller contracts to sell a Specified Pool or CMO to the
initial buyer, the initial buyer contracts to sell the Specified Pool
or CMO to a second buyer, who contracts to sell it to a third buyer,
who contracts to sell it to a fourth buyer, etc.\105\ The commenters
stated that if any party in the chain (except for the last buyer)
terminates its purchase or sale transaction, the buyer in the
terminated transaction is unlikely to be able to buy the Specified Pool
or CMO elsewhere, and therefore will be unable to perform on its sale
transaction--and so will every subsequent buyer and seller in the
chain. These commenters stated that FINRA should eliminate or suspend
the liquidation requirement under the proposed rule change to avoid the
prospect of a ``daisy chain'' of fails.
---------------------------------------------------------------------------

    \105\ See Brean Capital Letter at 12-13, 20; SIFMA Letter at 3.
---------------------------------------------------------------------------

    FINRA responded that, under the current rule, if a counterparty's
unmargined mark to market loss (and two percent maintenance margin
deficiency, where applicable) exceeds $250,000 and is not margined or
eliminated within five business days from the date it arises, the
member is required to liquidate the counterparty's positions to satisfy
the mark to market loss (and two percent maintenance margin deficiency
where applicable), unless FINRA specifically grants additional time.
FINRA also stated that the proposed rule change has eliminated this
liquidation requirement.\106\
---------------------------------------------------------------------------

    \106\ See Amendment No. 1 at 9.
---------------------------------------------------------------------------

    In addition, FINRA stated that, under the proposed rule change, a
member can opt to take a capital charge in lieu of collecting margin to
cover a counterparty's excess net mark to market loss. FINRA stated
that if these capital charges \107\ exceed the lesser of 25 percent of
the member's tentative net capital or $30 million \108\ for five
consecutive business days, then the member:
---------------------------------------------------------------------------

    \107\ As discussed in more detail in Section II.C. above, FINRA
stated that it is modifying the proposed rule change so that capital
charges for a counterparty's unmargined excess net mark to market
loss do not count toward this threshold to the extent that the
member, in good faith, expects such excess net mark to market loss
to be margined by the close of business on the fifth business day
after it arose. See Amendment No. 1 at 10.
    \108\ Collectively referred to as the ``25% TNC/$30MM
Threshold''.
---------------------------------------------------------------------------

     May not enter into new Covered Agency Transactions with
non-margin counterparties other than risk reducing transactions;
     Must, to the extent of its rights, promptly collect margin
for each counterparty's excess net mark to market loss; and
     Must, to the extent of its rights, promptly liquidate the
Covered Agency Transactions of any counterparty whose excess net mark
to market loss is not margined or eliminated within five business days
from the date it arises, unless FINRA has specifically granted the
member additional time.\109\
---------------------------------------------------------------------------

    \109\ See Amendment No. 1 at 10.
---------------------------------------------------------------------------

    Moreover, FINRA stated that if the member does not have the right
to liquidate a counterparty's Covered Agency Transactions, the proposed
rule change does not require the member to liquidate those
transactions, even after the member has exceeded the threshold for five
business days.\110\ However, according to FINRA, if the member has
exceeded the threshold for five business days and the member does have
a right to liquidate a counterparty's Covered Agency Transactions and
the counterparty's excess mark to market loss has not been margined or
eliminated within five business days, only then would a member be
required to enforce its liquidation right or obtain an extension from
FINRA.\111\
---------------------------------------------------------------------------

    \110\ FINRA stated that a member is not required to have a right
to liquidate a counterparty's Covered Agency Transactions. However,
if the member does not have that right, the counterparty would be a
``non-margin counterparty,'' and paragraph (e)(2)(H)(ii)d.1. under
the proposed rule change would require the member to establish and
enforce risk management procedures reasonably designed to ensure
that the member would not exceed either of the limits specified in
paragraph (e)(2)(I)(i) of the rule as amended by the proposed rule
change and that the member's capital charges in lieu of margin on
Covered Agency Transactions for all accounts combined will not
exceed $25 million. These procedures would likely involve
limitations on the extent of the member's business with such non-
margin counterparties. FINRA stated that when the firm's risk
management procedures function as they are required to be designed,
the member will rarely cross the 25% TNC/$30MM Threshold, much less
exceed it for five consecutive business days. See Amendment No. 1 at
10.
    \111\ See Amendment No. 1 at 10.
---------------------------------------------------------------------------

    The Commission agrees with FINRA that the changes described above
provide for greater flexibility with respect to the liquidation
requirement, and also provide an appropriate amount of time, via the
ability take a capital charge in lieu of margin and to obtain an
extension from FINRA, to permit firms to adequately address unmargined
positions without requiring an immediate liquidation of positions. The
proposed rule change eliminates the liquidation requirement under the
current rule and replaces it with a requirement to liquidate a
counterparty's Covered Agency Transactions in limited circumstances
(e.g., only if the broker-dealer has a right to liquidate the
transaction and only if certain conditions are met, including exceeding
the specified cap on net capital deductions).
    FINRA has also stated that this limited liquidation obligation
should not lead to a daisy chain of fails, except possibly in
circumstances where a counterparty's unwillingness or inability to
perform its undisputed obligations makes it equally likely that a daisy
chain or fails will occur whether or not the member liquidates a
transaction with the counterparty.\112\ According to FINRA, there are
four categories of reasons why a counterparty would fail to margin its
excess net mark to market loss by the fifth business day after it
arises, and FINRA stated that it believes only one of them has any
prospect of leading to a liquidation requirement under the proposed
rule change:
---------------------------------------------------------------------------

    \112\ See Amendment No. 1 at 10-11.
---------------------------------------------------------------------------

     First Category--The counterparty may not have an
obligation, under an agreement or otherwise, to margin its excess net
mark to market losses within five business days after they arise. In
this case, the member would not have a right to liquidate the
counterparty's Covered Agency Transactions when excess net mark to
market losses are not margined or eliminated within five business days
after they arise, and so would have no obligation under the proposed
rule change to liquidate the counterparty's Covered Agency
Transactions.
     Second Category--An operational issue may cause the
counterparty to fail to satisfy its obligation to margin its excess net
mark to market losses. FINRA believes that five business days should be
more than enough time to resolve any operational issue. However, in the
event an extended operational issue, or series of operational issues,
prevents a counterparty from providing margin for its excess net mark
to market loss within five business days after it arises, a 14-day
extension can be obtained from FINRA if the member has exceeded the 25%
TNC/$30MM Threshold for five consecutive business days and would
otherwise be under an obligation to enforce a right to liquidate the
counterparty's Covered Agency

Transactions. FINRA expects that an operational issue should not
continue long enough to prevent a counterparty from satisfying its
margin obligation past the expiration of a 14-day extension.\113\
---------------------------------------------------------------------------

    \113\ See Amendment No. 1 at 11.
---------------------------------------------------------------------------

     Third Category--There may be a disagreement over the
amount of the counterparty's excess mark to market loss, leading the
counterparty to believe that it has satisfied its obligation to provide
margin but the firm to believe that it has not. Commenters suggested
that relatively unique assets, like Specified Pools and CMOs, are more
likely to be the subject of valuation disputes. FINRA stated that five
business days should be more than enough time to resolve any valuation
dispute. Firms whose business involves a significant volume of
transactions that are prone to operational disputes should analyze
whether their risk management procedures should require their contracts
for such transactions to include or incorporate a procedure for the
prompt resolution of valuation disputes.\114\ FINRA stated that if an
extended valuation dispute leads a counterparty to fail to provide
margin for its excess net mark to market loss within five business days
after it arises, a 14-day extension can be obtained from FINRA if the
member has exceeded the 25% TNC/$30MM Threshold for five consecutive
business days and would otherwise be under an obligation to enforce a
right to liquidate the counterparty's Covered Agency Transactions.
FINRA stated that a margin valuation dispute should not continue past
the expiration of a 14-day extension.
---------------------------------------------------------------------------

    \114\ FINRA stated, by way of example, the current Credit
Support Annex to the ISDA Master Agreement contains a provision
under which the parties generally agree to resolve disputes over the
valuation of over-the-counter derivatives for margin purposes by
seeking four actual quotations at mid-market from third parties and
taking the average of those obtained. FINRA stated that the OTC
derivatives documented under ISDA Master Agreements can be much more
difficult to value than any Specified Pool or CMO transaction. See
Amendment No. 1 at 11-12.
---------------------------------------------------------------------------

     Fourth Category--The counterparty may be unwilling or
unable to satisfy an undisputed obligation to margin its excess net
mark to market loss. FINRA believes that, when a counterparty is
unwilling or unable to satisfy its undisputed margin obligations, there
is also reason for significant doubt that the counterparty would be
willing and able to satisfy its obligations to pay or deliver on the
settlement date of the transaction. When facing such an unreliable
counterparty, FINRA stated that it believes it is possible the daisy
chain of fails may occur even if the member does not liquidate. FINRA
further stated that this could be just as easily triggered by the
counterparty's unwillingness or inability to perform its obligations as
by the member's liquidation of its transaction.\115\
---------------------------------------------------------------------------

    \115\ See Amendment No. 1 at 12.
---------------------------------------------------------------------------

    According to FINRA, with regard to this fourth category, to the
extent feasible, members should terminate transactions with such
counterparties in order to protect themselves against further exposure.
However, FINRA stated that if a member believes that it would not be
feasible to terminate a transaction with such a counterparty, or that
such termination would be unduly disruptive to the member's business or
the market, extensions may be available from FINRA if the member has
exceeded the 25% TNC/$30MM Threshold for five consecutive business days
and would otherwise be under an obligation to enforce a right to
liquidate the counterparty's Covered Agency Transactions.\116\
---------------------------------------------------------------------------

    \116\ FINRA stated that although an initial 14-day extension
will be granted upon application citing the applicable
circumstances, any application for a lengthy extension, or series of
extensions, must describe the reason for the request and the
member's plans for protecting itself (now and in the future) against
the risk posed by a counterparty that has demonstrated itself to be
unwilling or unable to perform its undisputed obligations. See
Amendment No. 1 at 12.
---------------------------------------------------------------------------

    According to FINRA, as described above, in the first category,
members have no liquidation obligation under the proposed rule change.
In the second and third categories, FINRA believes that the reason why
the counterparty has not margined its excess net mark to market loss
should be eliminated before the five business day period has ended, and
generally before the expiration of a 14-day extension from FINRA. FINRA
stated that only in the fourth category, where the counterparty is
demonstrably unwilling or unable to perform its obligations to the
member, should liquidation of counterparty's Covered Agency
Transactions be required under the proposed rule change, provided that
the member has exceeded the 25% TNC/$30MM Threshold for five
consecutive business days--and, even in that case, extensions may be
available if liquidation is infeasible or would unduly disrupt the
member's business or the market.\117\
---------------------------------------------------------------------------

    \117\ See Amendment No. 1 at 12-13.
---------------------------------------------------------------------------

    The Commission agrees that the responses provided by FINRA
appropriately address the concerns raised by commenters concerning the
potential for daisy chain fails. As described above, the requirement to
liquidate a counterparty's position is limited under the proposed rule
change to instances where the member has the right to liquidate a
counterparty's Covered Agency Transactions. Otherwise, the proposed
rule change does not require the member to liquidate those transactions
where the member does not have a right to liquidate, even after the
member has exceeded the 25% TNC/$30MM Threshold for five consecutive
business days. Further, FINRA members may apply to FINRA to receive an
extension of time beyond the five business day period. The ability to
receive extensions of time beyond the five business day period will
help to protect broker-dealers where liquidation is infeasible or would
unduly disrupt the FINRA member's business or the market. Finally, in
cases where a counterparty is unlikely or unwilling to satisfy a
variation margin requirement, the broker-dealer's counterparty credit
risk to its counterparty may increase, as well as the risk that the
counterparty may be unable or unwilling to settle the transaction. In
such cases, the likelihood of counterparty default may occur even if
the broker-dealer does not liquidate the Covered Agency position or if
it is not part of a chain of transactions.
2. Definition of ``Excess Net Mark to Market Loss''
    Some commenters requested confirmation that, under the proposed
rule change, members would only be required to collect margin (or take
capital charges for uncollected margin) to cover the amount by which a
counterparty's net mark to market loss exceeds the $250,000
threshold.\118\
---------------------------------------------------------------------------

    \118\ See SIFMA Letter at 4; SIFMA AMG Letter at 4.
---------------------------------------------------------------------------

    In response, FINRA stated that this is correct. According to FINRA,
under the proposed rule change, paragraph (e)(2)(H)(ii)c. of FINRA Rule
4210 states that members are not required by the rule ``to collect
margin, or take capital charges, for counterparties' mark to market
losses on Covered Agency Transactions other than excess net mark to
market losses'' and a counterparty's ``excess net mark to market
losses'' are defined in paragraph (e)(2)(H)(i)c. as ``such
counterparty's net mark to market loss to the extent it exceeds
$250,000.'' \119\ FINRA stated that, for example, if a member's
counterparty has a net mark to market loss of $300,000, its excess net
mark to market loss is $50,000, which would be the amount of margin the
proposed rule change would require the member to collect, or take a

capital charge in lieu of collecting (unless there is an applicable
exemption). FINRA stated that the counterparty's excess net mark to
market loss is the minimum amount of margin that (subject to the
exceptions set forth in the proposed rule change) the member must
collect (or take a capital charge in lieu of collecting). According to
FINRA, the proposed rule change does not prevent members and their
counterparties from agreeing that the counterparty will transfer
additional margin. For example, FINRA stated that a member and its
counterparty could agree that, when the counterparty's net mark to
market loss exceeds $250,000, the counterparty will transfer to the
member margin that covers the counterparty's entire mark to market
loss, rather than only enough to cover its excess net mark to market
loss. Similarly, FINRA stated that a member may exclude a
counterparty's in the money amounts on long standby positions from its
computation of net mark to market.\120\
---------------------------------------------------------------------------

    \119\ See Amendment No. 1 at 13.
    \120\ See Amendment No. 1 at 13-14.
---------------------------------------------------------------------------

    FINRA's response appropriately responds to the commenters' request
for confirmation by specifically confirming that under the proposed
rule change members would only be required to collect margin to cover
the amount by which a counterparty's net mark to market loss exceeds
the $250,000. Also, FINRA's response is consistent with the definition
of the term excess net mark to market losses under the proposed rule
change.
3. Definition of ``Net Mark to Market Loss''
    A commenter requested confirmation that the definition of ``net
mark to market loss'' would include the calculations used under the
form of Master Securities Forward Transaction Agreement (``MSFTA'')
published by SIFMA.\121\ In response, FINRA stated that it does not
require or endorse any particular form of agreement for margining
Covered Agency Transactions, and as such declines to provide the
requested confirmation, as this relates to what is a commercial matter
among the parties.\122\
---------------------------------------------------------------------------

    \121\ See SIFMA Letter at 4.
    \122\ See Amendment No. 1 at 14. Similarly, FINRA stated that it
also declines a commenter's request to confirm that an MSFTA with a
cure period (or similar provision after the expiration of which
liquidating action may be taken) of less than or equal to five
business days would provide the rights described in the definition
of ``non-margin counterparty'' under paragraph (e)(2)(H)(i)e. under
the proposed rule change. See Amendment No. 1 at 14 and SIFMA AMG
Letter at 4.
---------------------------------------------------------------------------

    A commenter also suggested that FINRA should remove the phrase
``legally enforceable right of offset or security'' from the definition
of ``net mark to market loss.'' \123\ In response, FINRA stated that
this phrase is necessary.\124\ According to FINRA, if the phrase is
removed, then the amount of the counterparty's mark to market losses
which are subject to margining would be reduced by the counterparty's
mark to market gains on other transactions, without regard to whether
the member has any legally enforceable right to apply those gains to
cover the counterparty's losses. FINRA stated, for example, that if a
counterparty defaults when it has a mark to market loss of $10 million
on one transaction and a mark to market gain of $10 million on another
transaction, having a legally enforceable right of offset would allow
the member to apply the counterparty's gains to cover its losses. In
the absence of a legally enforceable right of offset or security,
however, FINRA stated that the member could face the prospect of having
an obligation to pay the counterparty $10 million for its gains,
without any guaranty of collecting the full amount of the
counterparty's $10 million loss. According to FINRA, if the
counterparty enters insolvency proceedings, the lack of a legally
enforceable right of offset or security could result in the member
being obliged to pay the full $10 million of the defaulted
counterparty's gains and being only able to collect cents on the dollar
for the counterparty's losses.\125\
---------------------------------------------------------------------------

    \123\ See SIFMA Letter at 4.
    \124\ See Amendment No. 1 at 14.
    \125\ See Amendment No. 1 at 14. In response to a commenter,
FINRA stated that the phrase ``first-priority perfected security
interest'' in paragraph (e)(2)(H)(i)d.2. under the proposed rule
change only applies to pledges of a counterparty's rights under
Covered Agency Transactions with third parties. See Amendment No. 1
at 14-15 and SIFMA Letter at 4.
---------------------------------------------------------------------------

    The Commission agrees that FINRA's response to the commenter's
request for confirmation regarding the MSFTA as the proposed rule
change does not require any particular form of agreement or contract.
Further, the Commission agrees with FINRA that including the phrase
``legally enforceable right of offset or security'' in the definition
of net mark to market loss is appropriate because it will allow a FINRA
member to apply the counterparty's gains to cover its losses, which
will reduce a broker-dealer's financial exposure to a counterparty in
the event the counterparty enters insolvency.
4. Definition of ``Non-Margin Counterparty''
    With respect to the five business day period, paragraph
(e)(2)(h)(i)e.1. under FINRA Rule 4210 under the proposed rule change
provides in part that a counterparty is a non-margin counterparty if
the member ``does not have a right under a written agreement or
otherwise to collect margin for such counterparty's excess net mark to
market loss and to liquidate such counterparty's Covered Agency
Transactions if any such excess net mark to market loss is not margined
or eliminated within five business days from the date it arises.''
\126\ A commenter stated that this effectively requires imposing a
margin collection timing which is stricter than required under other
rules or the standard under FINRA Rule 4210(f)(6).\127\
---------------------------------------------------------------------------

    \126\ In response to a commenter, FINRA stated that if a member
has a right under a written agreement to collect margin for a
counterparty's entire net mark to market loss whenever the amount of
that loss exceeds $250,000. FINRA stated that, for purposes of the
proposed rule change, it would view this as a right under a written
agreement to collect margin for such counterparty's excess net mark
to market loss, since the counterparty's excess net mark to market
loss is $250,000 less than the counterparty's entire net mark to
market loss (or zero if the net mark to market loss does not exceed
$250,000). See Amendment No. 1 at 15 and SIFMA AMG Letter at 4.
    \127\ See SIFMA Letter at 4.
---------------------------------------------------------------------------

    In response, FINRA stated that it disagrees for several reasons.
First, FINRA stated that current rule requires members to liquidate
positions whenever a mark to market loss (or maintenance deficiency) on
Covered Agency Transactions is not margined or otherwise eliminated
within five business days (and no extension has been obtained).
According to FINRA, the proposed rule change uses a five business day
period but, as discussed above, applies it more flexibly than the
current rule.\128\ FINRA stated that if the member lacks a right to
liquidate a counterparty's Covered Agency Transactions if the
counterparty's excess net mark to market loss is not margined or
eliminated within five business days, that counterparty is a ``non-
margin counterparty.'' As consequence, the member would become subject
to the risk management requirements under paragraph (e)(2)(H)(ii)d.2.
of the rule as modified by the proposed rule change (if not already
subject to that requirement); and if the member's specified net capital
deductions \129\ exceed the 25% TNC/$30MM Threshold for five
consecutive business days, FINRA stated that the member would not be
able to enter into transactions with the non- margin counterparty,
other than risk reducing transactions, while those net capital
deductions continue to exceed the 25% TNC/

$30MM Threshold.\130\ According to FINRA, if the member has a right to
liquidate a counterparty's Covered Agency Transactions if the
counterparty's excess net mark to market loss is not margined or
eliminated within five business days, the member is not required to
enforce that right (that is, not required to liquidate the
counterparty's Covered Agency Transactions if the counterparty's excess
net mark to market loss has not been margined or eliminated within five
business days), unless and until the member's specified net capital
deductions exceed the 25% TNC/$30MM Threshold for five consecutive
business days (and the member has not obtained an extension from
FINRA).\131\
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    \128\ See Amendment No. 1 at 15.
    \129\ See infra note 143.
    \130\ See Amendment No. 1 at 16.
    \131\ See Amendment No. 1 at 16. In response to a commenter,
FINRA stated that classification of a counterparty as a non-margin
counterparty depends on (a) whether the member has the right to
collect margin for the counterparty's excess net mark to market
loss, (b) whether the member regularly collects margin for the
counterparty's excess net mark to market loss, and (c) whether the
member has the right to liquidate such counterparty's Covered Agency
Transactions if the counterparty's excess net mark to market loss is
not margined or eliminated within five business days from the date
it arises. According to FINRA, classification of a counterparty as a
margin counterparty (that is, as not a non-margin counterparty) does
not require the member to exercise the right to liquidate whenever
that counterparty's excess net mark to market loss is not margined
or eliminate within five business days. However, FINRA stated that
the counterparty would need to be reclassified as a non-margin
counterparty if the member does not regularly collect margin for the
counterparty's excess net mark to market loss. FINRA stated that the
exercise of the right to liquidate is only required by the proposed
rule change if the member's capital charges have exceeded the 25%
TNC/$30MM Threshold for five consecutive business days (and the
member has not obtained an extension from FINRA). See Amendment No.
1 at 16 and SIFMA Letter at 4-5.
---------------------------------------------------------------------------

    Second, FINRA also stated that even if members were required to
have a contractual right to liquidate when margin is not collected
within five business days, that would not, in the commenter's terms,
``impos[e] a margin collection timing that is stricter than that which
is required under the rules (or other aspects of FINRA Rule 4210
generally).'' Further, FINRA stated that FINRA Rule 4210(f)(6) requires
margin to be collected ``as promptly as possible,'' and the rule as
approved pursuant to the original rulemaking (as stated above) requires
liquidation when a mark to market or maintenance deficiency has not
been margined or eliminated within five business days (unless an
extension has been obtained).\132\
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    \132\ See Amendment No. 1 at 16-17.
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    The Commission agrees with FINRA's response to a comment that the
reference to a five business day requirement in the definition of non-
margin counterparty effectively imposes a margin collection timing
requirement that is stricter than under current rules. A counterparty
is a non-margin counterparty under the proposed rule change if the
broker-dealer does not have a right under a written agreement or
otherwise to collect margin for such counterparty's excess net mark to
market loss and to liquidate such counterparty's Covered Agency
Transactions if any such excess net mark to market loss is not margined
or eliminated within five business days from the date it arises. The
five business day reference in the definition of non-margin
counterparty is used to classify counterparties as non-margin
counterparties and does not impose a five-day margin collection
requirement.
    Further, the current rule contains a liquidation requirement if a
mark to market loss (or maintenance deficiency) on Covered Agency
Transactions is not margined or otherwise eliminated within five
business days (and no extension has been obtained). The proposed rule
eliminates this requirement and provides for more flexibility with
respect to whether a broker-dealer must liquidate a counterparty's
positions if it has a right to do so, (i.e., only after certain
conditions occur and only if no extensions of time have been granted).
Therefore, the proposed rule changes does not effectively impose a
margin collection or liquidation requirement whenever that
counterparty's excess net mark to market loss is not margined or
eliminated within five business days.
5. Exempted Counterparties
    A commenter suggested that FINRA should explicitly exclude small
cash counterparties and other counterparties covered by paragraph
(e)(2)(H)(ii)a.1. under the proposed rule change from the definition of
``non- margin counterparty.'' \133\ FINRA stated that this request is
consistent with the purpose of paragraph (e)(2)(H)(ii)a.1. and has
modified the definition of ``non-margin counterparty'' to implement the
requested exclusion.\134\
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    \133\ See SIFMA Letter at 5.
    \134\ See Amendment No. 1 at 17 and Exhibit 4 to Amendment No.
1.
---------------------------------------------------------------------------

    Modifying the definition of ``non-margin counterparty'' is
appropriate as it enhances transparency of the scope of the term to
specifically exclude small cash counterparties.
6. Exemption for Certain Counterparties
    A commenter suggested that the exceptions in paragraph
(e)(2)(H)(ii)a.1. be expanded to encompass the U.S. Federal Home Loan
Banks.\135\ FINRA responded that it does not propose to make the
suggested modification because it would undermine the rule's purpose of
reducing risk.\136\ The Commission agrees with FINRA's response
regarding the expansion of the exceptions in paragraph
(e)(2)(H)(ii)a.1., as including U.S. Federal Home Loan Banks in the
exceptions would undermine the effectiveness of the proposed rule
change, and would not be consistent with the purpose of the proposed
rule change of reducing risk of unsecured exposures to Covered Agency
Transactions.\137\
---------------------------------------------------------------------------

    \135\ See SIFMA Letter at 6.
    \136\ See Amendment No. 1 at 17.
    \137\ See also 2016 Approval Order, 81 FR 40375-76 (discussion
scope of exemptions under the current rule).
---------------------------------------------------------------------------

7. The 25% TNC/$30 MM Threshold
    Regarding small cash counterparties, a commenter requested
confirmation that margin not collected from small cash counterparties
does not count toward the 25% TNC/$30MM Threshold.\138\ In response,
FINRA stated that margin not collected from small cash counterparties
does not count toward the 25% TNC/$30MM Threshold.\139\ Further FINRA
stated that paragraph (e)(2)(H)(ii)d.3. only counts capital charges
under paragraph (e)(2)(H)(ii)d.1. toward the 25% TNC/$30MM Threshold.
And, pursuant to paragraph (e)(2)(H)(ii)a.1., FINRA stated that members
are not required under the proposed rule change ``to collect margin, or
to take capital charges in lieu of collecting such margin, for a
counterparty's excess net mark to market loss if such counterparty is a
small cash counterparty, registered clearing agency, Federal banking
agency, as defined in 12 U.S.C. 1813(z), central bank, multinational
central bank, foreign sovereign, multilateral development bank, or the
Bank for International Settlements.'' FINRA stated that because the
proposed rule change does not require members to take capital charges
for these counterparties' unmargined excess net mark to market losses,
they do not count toward the 25% TNC/$30MM Threshold.\140\
---------------------------------------------------------------------------

    \138\ See SIFMA Letter at 5.
    \139\ See Amendment No. 1 at 17.
    \140\ See Amendment No. 1 at 17.
---------------------------------------------------------------------------

    The Commission agrees with FINRA's response to the commenter's
request for confirmation regarding whether margin not collected from
small cash

counterparties counts toward the 25% TNC/$30MM Threshold. FINRA's
response appropriately addresses the commenter's concerns and is
consistent with the purposes of the proposed rule change, because the
proposed rule change also prescribes overall concentration thresholds
under paragraph (e)(2)(I) of FINRA Rule 4210.\141\
---------------------------------------------------------------------------

    \141\ See Section II.B. above (discussing paragraph (e)(2)(I) of
FINRA Rule 4210 under the proposed rule change).
---------------------------------------------------------------------------

    With respect to counterparties yet to post margin, a commenter
suggested that the proposed rule change be modified so that any capital
charge under paragraph (e)(2)(H)(ii)d.1. of FINRA Rule 4210 not count
toward the 25% TNC/$30MM Threshold until the fifth business day after
the relevant excess net mark to market loss arose. The capital charge
is required whenever a counterparty's excess net mark to market loss is
not margined or eliminated by the close of business on the business day
after the business day on which it arises. The commenter stated that
many counterparties that are regularly margined are unable to post
margin on a consistent T+1 basis due, for example, to those
counterparties being in an overseas jurisdiction or to operational or
custodial issues. Moreover, the commenter stated good faith disputes
over the amount of margin to be posted may mean that a counterparty
does not post margin by T+1 even when the counterparty is ready,
willing, and able to post margin promptly after the proper amount is
determined. Finally, the commenter stated that, without the grace
period the commenter is requesting, members may be continuously over
the 25% TNC/$30MM Threshold solely based on ordinary course levels of
margin not yet collected from counterparties who are expected to post
required margin.\142\
---------------------------------------------------------------------------

    \142\ See SIFMA Letter at 5-6.
---------------------------------------------------------------------------

    In response, FINRA stated that it agrees that the purpose of the
proposed rule change does not require counting toward the 25% TNC/$30MM
Threshold capital charges taken for excess net mark to market losses
that the member in good faith expects to be margined by the fifth
business day after they arise. Accordingly, FINRA revised paragraph
(e)(2)(H)(ii)d.3. so that capital charges under paragraph
(e)(2)(H)(ii)d.1. with respect to a counterparty's unmargined excess
net mark to market loss do not count towards the thresholds in
paragraph (e)(2)(H)(ii)d.3. to the extent that the member, in good
faith, expects such unmargined excess net mark to market losses to be
margined within five business days.\143\ According to FINRA, members
would still be required to protect themselves by taking net capital
deductions while the excess net mark to market losses are unmargined,
but, under the proposed rule change, as modified by Amendment No.1,
will have more flexibility to address operational issues and valuation
disputes before they impact the 25% TNC/$30MM Threshold.\144\
---------------------------------------------------------------------------

    \143\ See Amendment No. 1 at 18. More specifically, FINRA has
revised paragraph (e)(2)(H)(ii)d.3. of FINRA Rule 4210 to refer to a
member's ``specified net capital deductions'' (rather than to all
net capital deductions under paragraph (e)(2)(H)(ii)d.1.) and
inserted the following definition into paragraph (e)(2)(H)(i): i. A
member's ``specified net capital deductions'' are the net capital
deductions required by paragraph (e)(2)(H)(ii)d.1. of this Rule with
respect to all unmargined excess net mark to market losses of its
counterparties, except to the extent that the member, in good faith,
expects such excess net mark to market losses to be margined by the
close of business on the fifth business day after they arose. Id.
    \144\ See Amendment No. 1 at 18.
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    The proposed change related to the 25% TNC/$30 MM Threshold is
appropriate as it provides additional time and flexibility for member
firms to address operational and related issues related to the
collection of margin, thereby avoiding unnecessary disruptions to the
Covered Agency Transaction market. The proposed change related to the
25% TNC/$30 MM Threshold also enhances transparency with respect to the
scope of transactions which count toward such threshold.
8. Requirement To Enforce Rights To Collect Margin and Liquidate
Covered Agency Transactions
    A commenter requested clarification with respect to the scope of
the requirement under paragraph (e)(2)(H)(ii)d.3. of the proposed rule
change, which provides that a member whose specified net capital
deductions \145\ exceed the 25% TNC/$30MM Threshold for five
consecutive business days ``shall also, to the extent of its rights,
promptly collect margin for each counterparty's excess net mark to
market loss and promptly liquidate the Covered Agency Transactions of
any counterparty whose excess net mark to market loss is not margined
or eliminated within five business days from the date it arises, unless
FINRA has specifically granted the member additional time.'' \146\
---------------------------------------------------------------------------

    \145\ See supra note 143.
    \146\ See SIFMA Letter at 5-6.
---------------------------------------------------------------------------

    According to FINRA, these requirements begin to apply once the
member's specified net capital deductions exceed the 25% TNC/$30MM
Threshold for five consecutive business days and cease to apply as soon
as those capital charges fall below that threshold. Accordingly, FINRA
stated, once the member's specified net capital deductions fall below
that threshold (for example, because of market movements, or because
the member collects enough margin from some, but not all, of its
counterparties), the member is under no further obligation to enforce
its contractual rights to collect margin or liquidate Covered Agency
Transactions (and could, if it chooses, rescind outstanding margin
calls and halt any liquidations of its counterparties' Covered Agency
Transactions).\147\
---------------------------------------------------------------------------

    \147\ See Amendment No. 1 at 19. FINRA also stated that a
member, so long as it acts promptly to bring itself below the 25%
TNC/$30MM Threshold, may choose the manner and order in which it
enforces its rights to collect margin or liquidate Covered Agency
Transactions, and may halt those actions once its specified net
capital deductions fall below the 25% TNC/$30MM Threshold. Id.
---------------------------------------------------------------------------

    FINRA's clarification relating to requirement to enforce rights to
collect margin and liquidate Covered Agency Transactions appropriately
addresses the commenter's request for clarification and enhances
transparency with respect to the application of the proposed rule
change as to when a FINRA member is under no further obligation to
enforce its contractual rights to collect margin or liquidate
positions.
9. Reporting by Members With Non-Margin Counterparties
    FINRA stated that, pursuant to paragraph (e)(2)(H)(ii)d.4. under
the proposed rule change, members with non-margin counterparties would
be required to ``submit to FINRA such information regarding its
unmargined net mark to market losses, non-margin counterparties and
related capital charges, in such form and manner, as FINRA shall
prescribe by Regulatory Notice or similar communication.'' A commenter
stated that the building of systems and information tracking is a
significant build for many firms and requested FINRA to clarify in
advance what information may be required.\148\ FINRA stated that it is
considering what information will be required to be submitted and
expects to engage members and industry participants in developing
appropriately tailored reporting pursuant to this provision.\149\
---------------------------------------------------------------------------

    \148\ See SIFMA Letter at 6.
    \149\ See Amendment No. 1 at 19.
---------------------------------------------------------------------------

    The Commission believes that FINRA's response is appropriate. FINRA
is currently considering what information will be required and FINRA
expects to engage with member firms and industry participants in
developing

tailored reporting requirements. This engagement will provide industry
participants the opportunity to provide input into the reporting
requirements.
10. Introducing and Clearing Firm Issues
    A commenter stated said that the proposed rule change does not
address the role of the clearing broker or reflect that FINRA has
considered the actual way in which introducing brokers clear
trades.\150\ Another commenter suggested that FINRA should continue to
facilitate dialogue among introducing and clearing firms to facilitate
the implementation of the proposed rule change.\151\
---------------------------------------------------------------------------

    \150\ See Brean Capital Letter at 13.
    \151\ See SIFMA Letter at 3.
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    FINRA responded by stating that it has conducted extensive dialogue
with introducing and clearing firms regarding the requirements of the
current rule and the proposed rule change in the context of introducing
and clearing arrangements, and several of the proposed rule change's
clarifying changes to the original rulemaking were informed by such
dialogue.\152\ Further, FINRA stated that it intends to continue to
discuss the proposed rule change and its implementation with clearing
and introducing firms, and to facilitate dialogue among them as the
Covered Agency Transaction margin requirements are implemented.\153\
---------------------------------------------------------------------------

    \152\ See Amendment No. 1 at 20.
    \153\ Id.
---------------------------------------------------------------------------

    FINRA's response regarding issues involving clearing and
introducing firms appropriately addresses the commenters' concerns.
Specifically, FINRA has engaged in extensive dialogue with introducing
and clearing firms regarding the requirements of the original
rulemaking and with respect to the proposed rule change. Further, FINRA
has indicated it will continue to facilitate dialogue with introducing
and clearing firms as the margin requirements for Covered Agency
Transactions are implemented.
11. Status of Published Frequently Asked Questions (``FAQs'')
    A commenter requested confirmation as to whether the FAQs regarding
Covered Agency Transactions, maintained on FINRA's website,\154\ will
apply in the event the proposed rule change is approved.\155\ FINRA
stated that if the Commission approves the proposed rule change, FINRA
will revisit the FAQs with Commission staff, members, and industry
participants as appropriate.\156\ The Commission agrees that FINRA's
response to the status of the FAQs appropriately addresses the
commenter's request for confirmation with respect to the application of
the FAQs under the proposed rule change.