[Federal Register Volume 88, Number 146 (Tuesday, August 1, 2023)]
[Notices]
[Pages 50205-50231]
[FR Doc No: 2023-16267]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98003; File No. SR-FINRA-2021-010]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Setting Aside Action by Delegated Authority and
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

July 27, 2023.

I. Introduction

A. Overview

1. Rulemaking by Self-Regulatory Organizations
    The Financial Industry Regulatory Authority, Inc. (``FINRA'') is
registered with the Securities and Exchange Commission (``Commission''
or ``SEC'') as a national securities association under the Securities
Exchange Act of 1934 (``Exchange Act'' or ``Act'').\1\ Under the
Exchange Act, the rules of a national securities association for its
broker-dealer members \2\ must, among other things, be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling, or
processing information with respect to (and facilitating transactions
in) securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.\3\ Further, under the
Exchange Act, the rules of a national securities association must not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\4\
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    \1\ See 15 U.S.C. 78o-3(a).
    \2\ See 15 U.S.C. 78c(a)(3)(B) (defining the term ``member''
when used with respect to a registered securities association to
mean any broker or dealer who agrees to be regulated by such
association and with respect to whom the association undertakes to
enforce compliance with the Exchange Act, the rules and regulations
thereunder, and its own rules).
    \3\ See 15 U.S.C. 78o-3(b)(6).
    \4\ See 15 U.S.C. 78o-3(b)(9).
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    FINRA, as a national securities association, also is a self-
regulatory organization (``SRO'') under the Exchange Act and its
proposed rules are subject to Commission review and published for
notice and comment.\5\ While certain types of proposed rules are
effective upon filing, others are subject to Commission approval before
they can go into effect.\6\ Under the Exchange Act, the Commission must
approve an SRO's proposed rule if the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the applicable rules and regulations thereunder; if it does not make
such a finding, the Commission must disapprove the proposed rule.\7\
The SRO has the burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder.\8\
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    \5\ See 15 U.S.C. 78s(a) and (b).
    \6\ See 15 U.S.C. 78s(b).
    \7\ See 15 U.S.C. 78s(b)(2)(C).
    \8\ 17 CFR 201.700(b)(3).
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    The Exchange Act sets forth timeframes in which the Commission must
either approve, disapprove, or institute proceedings to determine
whether to approve or disapprove an SRO's proposed rule.\9\ If the
Commission institutes proceedings, the Exchange Act sets forth
timeframes in which the Commission must complete the proceedings and
either approve or disapprove the SRO's proposed rule.\10\
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    \9\ See 15 U.S.C. 78s(b)(2).
    \10\ See 15 U.S.C. 78s(b)(2)(B).
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    The Commission has delegated authority to the staff of its Division
of Trading and Markets (``Division'') to publish notice of an SRO's
proposed rule for comment and to approve, disapprove, or institute
proceedings to determine whether to approve or disapprove the proposed
rule.\11\ Under the Commission's Rules of Practice, any person
aggrieved by the Division's exercise of delegated authority may seek
Commission review of the action by filing with the Commission: (1) a
notice of intention to petition for review; and (2) a subsequent
petition for review containing a clear and concise statement of the
issues to be reviewed and the reasons why review is appropriate.\12\
The notice must be filed within fifteen days of the publication in the
Federal Register of the action taken by the Division pursuant to
delegated authority (e.g., publication of an order approving an SRO
proposed rule) and the petition must be filed within five days after
the filing of the notice.\13\ The Commission

may grant or deny the petition for review.\14\ If the petition for
review is granted, the Commission may affirm, reverse, modify, set
aside, or remand for further proceedings, in whole or in part, the
action made by the Division pursuant to delegated authority (e.g., the
approval of an SRO proposed rule).\15\
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    \11\ See 17 CFR 200.30-3(a)(12) and (57).
    \12\ See 17 CFR 201.430(b)(1) and (2). The petition must include
exceptions to any findings of fact or conclusions of law made,
together with supporting reasons for such exceptions based on
appropriate citations to such record as may exist. 17 CFR
201.430(b)(2).
    \13\ See 17 CFR 201.430(b)(1) and (2).
    \14\ See 17 CFR 201.431(b).
    \15\ See 17 CFR 201.431(a).
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2. FINRA's Amendments to Rule 4210
    Most residential mortgages in the United States are securitized,
with the underlying loans pooled into a separate legal trust, which
issues mortgage-backed securities and passes on mortgage payments to
investors after deducting mortgage servicing fees and other
expenses.\16\ In the agency market, each mortgage-backed security
carries a credit guarantee from Fannie Mae, Freddie Mac, or Ginnie
Mae.\17\ Most agency mortgaged-backed security trading is conducted in
the To-Be-Announced (``TBA'') market, with defined settlement dates for
each month in the future.\18\ Most TBA transactions are nettable and
clear through the Mortgage-Backed Securities Division of the Fixed
Income Clearing Corporation (``MBSD'').\19\ Mortgage bankers may enter
into a TBA transaction with a forward settlement date to hedge their
mortgage pipeline.\20\ Agency mortgage-backed securities are debt
instruments and may qualify as exempted securities under Section
3(a)(12)(A) of the Exchange Act.\21\ Investors in the TBA market
include, for example, banks, investment companies, investment funds,
insurance companies, real estate investment trusts, and mortgage
originators.\22\
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    \16\ See James Vickery & Joshua Wright, TBA Trading and
Liquidity in the Agency MBS Market, Federal Reserve Bank of New
York, Economic Policy Review (May 2013) at 2 (cited in Letter to
Vanessa Countryman, Commission, from David H. Thompson. et al., at
6-7 (Feb. 3, 2022) (``Petition for Review'')), available at https://www.sec.gov/rules/sro/finra/2022/34-94013-petn-cooper-kirk-020322.pdf).
    \17\ See Petition for Review at 7; U.S. Credit Markets:
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 2020) at 62, available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf (``DERA Report'') (cited in Exchange Act
Release No. 91937 (May 19, 2021), 86 FR 28161, 28162, n.17 (May 25,
2021) (``Notice'')).
    \18\ See Petition for Review at 9; DERA Report at 62; SIFMA TBA
Market Fact Sheet (2015) at 2 (cited in Petition for Review at 9,
n.10).
    \19\ See Petition for Review at 9.
    \20\ See Letter from Pete Mills, Senior Vice President,
Residential Policy and Strategic Industry Engagement, Mortgage
Bankers Association (May 10, 2022) (``MBA Letter'') at 1-2.
    \21\ 15 U.S.C. 78c(a)(12)(A). Exempted securities include U.S.
Treasury securities or other securities which are direct obligations
of, or obligations guaranteed as to principal or interest by, the
United States or securities which are issued or guaranteed by
corporations in which the United States has a direct or indirect
interest (such as Fannie Mae and Freddie Mac).
    \22\ See DERA Report at 63.
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    Broker-dealers often require customers to post collateral or
``margin'' to them in the form of cash or other securities in
connection with the purchase and sale of securities. The requirement to
post margin to a broker-dealer can be mandated by laws or regulations
or agreed to by contract (provided the contract complies with minimum
regulatory requirements). Broker-dealers may collect margin from
customers for several purposes including, for the initial purchase of
securities (``initial margin''), to maintain a minimum equity in the
customer's account (``maintenance margin''), or to cover changes in the
market value (or mark to market value) of the securities in the account
(``variation margin''). In the securities markets, the Board of
Governors of the Federal Reserve System (``Federal Reserve Board'') and
SROs have set margin rules since the 1930s. The Federal Reserve Board
generally sets initial margin requirements for broker-dealers in
Regulation T.\23\ For example, Regulation T prescribes a 50% initial
margin requirement for listed equity securities (meaning the customer
must pay at least 50% of the market value of a listed equity security
when purchasing it in a transaction financed by the broker-dealer).
Regulation T also provides that the initial margin requirement for good
faith securities--which includes exempted securities and non-equity
securities (e.g., debt securities)--is the greater of the margin the
broker-dealer requires in good faith or the amount an SRO requires.\24\
Agency securities (such as TBA securities) are good faith securities
under Regulation T because they are debt securities, exempted
securities, or both. SROs, such as FINRA, generally set maintenance
margin requirements for their broker-dealer members. FINRA's primary
margin rule for its broker-dealer members is FINRA Rule 4210 (Margin
Requirements) (``Rule 4210''). For example, FINRA Rule 4210 prescribes
a 25% maintenance margin requirement for listed equity securities
(meaning the customer must maintain equity of at least 25% of the
market value of the security). Consistent with the margin requirements
for good faith securities under Regulation T, FINRA Rule 4210 also
prescribes margin requirements for exempted securities (such as U.S.
Treasury securities and agency securities), as well as transactions in
exempted securities, mortgage related securities, or major foreign
sovereign debt securities in an exempt account.\25\
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    \23\ See 12 CFR 220.1, et. seq.
    \24\ See 12 CFR 220.6(a)(2) and 220.12(b).
    \25\ See FINRA Rule 4210(e)(2)(A), (B) and (F). See also infra
note 86 (defining ``exempt account'' under FINRA Rule 4210(a)(13)).
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    Prior to 2016, however, FINRA Rule 4210 did not specifically
address the market for TBAs and other similar agency forward-settling
transactions. In 2015, FINRA filed a proposed rule change under SR-
FINRA-2015-036 to amend FINRA Rule 4210 to establish requirements for:
(1) TBA transactions,\26\ inclusive of adjustable rate mortgage
(``ARM'') transactions; (2) Specified Pool Transactions; \27\ and (3)
transactions in Collateralized Mortgage Obligations (``CMOs'') \28\
issued in conformity with a program of an agency \29\ or Government-
Sponsored Enterprise (``GSE''),\30\ with forward

settlement dates (collectively, ``Covered Agency Transactions,'' also
referred to, for purposes of this order, as the ``TBA market'').
Broadly, the amendments required FINRA's broker-dealer members to: (1)
perform credit risk determinations for counterparties with whom the
broker-dealer engages in Covered Agency Transactions; and (2) collect
margin from counterparties with respect to their Covered Agency
Transactions with the broker-dealer.
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    \26\ See FINRA Rule 6710(u) defining TBA to mean a transaction
in an Agency Pass-Through mortgage-backed security or a Small
Business Administration (``SBA'')-Backed Asset-Backed Security
(``ABS'') where the parties agree that the seller will deliver to
the buyer a pool or pools of mortgages of a specified face amount
and meeting certain other criteria but the specific pool or pools to
be delivered at settlement is not specified at the Time of
Execution, and includes TBA transactions for good delivery and TBA
transactions not for good delivery.
    \27\ See FINRA Rule 6710(x) defining Specified Pool Transaction
to mean a transaction in an Agency Pass-Through mortgage-backed
security or an SBA-Backed ABS requiring the delivery at settlement
of a pool or pools that is identified by a unique pool
identification number at the Time of Execution.
    \28\ See FINRA Rule 6710(dd) defining ``CMO'' to mean a type of
Securitized Product backed by Agency Pass-Through mortgage-backed
securities, mortgage loans, certificates backed by project loans or
construction loans, other types of mortgage-backed securities or
assets derivative of mortgage-backed securities, structured in
multiple classes or tranches with each class or tranche entitled to
receive distributions of principal or interest according to the
requirements adopted for the specific class or tranche, and includes
a real estate mortgage investment conduit (``REMIC'').
    \29\ See FINRA Rule 6710(k) defining ``agency'' to mean a United
States executive agency as defined in 5 U.S.C. 105 that is
authorized to issue debt directly or through a related entity, such
as a government corporation, or to guarantee the repayment of
principal or interest of a debt security issued by another entity.
The term excludes the U.S. Department of the Treasury in the
exercise of its authority to issue U.S. Treasury Securities as
defined under FINRA Rule 6710(p). Under 5 U.S.C. 105, the term
``executive agency'' is defined to mean an ``Executive department, a
Government corporation, and an independent establishment.''
    \30\ See FINRA Rule 6710(n) defining ``GSE'' to have the meaning
set forth in 2 U.S.C. 622(8). Under 2 U.S.C. 622(8), a GSE is
defined, in part, to mean a corporate entity created by a law of the
United States that has a Federal charter authorized by law, is
privately owned, is under the direction of a board of directors, a
majority of which is elected by private owners, and, among other
things, is a financial institution with power to make loans or loan
guarantees for limited purposes such as to provide credit for
specific borrowers or one sector and raise funds by borrowing (which
does not carry the full faith and credit of the Federal Government)
or to guarantee the debt of others in unlimited amounts.
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    As discussed below, FINRA's initial amendments to Rule 4210
regarding Covered Agency Transactions went through a notice and comment
period during which FINRA filed three amendments to the proposed rule
change that, among other things, responded to comments about the
potential burdens of the proposed rule change, including the potential
burdens on smaller broker-dealers.\31\ In June 2016, the Division,
pursuant to delegated authority, approved FINRA's amendments to Rule
4210 (``2016 Amendments'').\32\ No petition was filed with the
Commission to review the staff's exercise of delegated authority to
approve the 2016 Amendments.
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    \31\ See section I.B.1. of this order (discussing the procedural
history of the notice and comment period for the 2016 Amendments).
    \32\ Exchange Act Release No. 78081 (June 15, 2016), 81 FR
40364, 40375 (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) (``2016 Approval Order'').
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    Under the 2016 Amendments, FINRA's broker-dealer members must make
and enforce a written risk limit determination for each counterparty
with whom the broker-dealer engages in Covered Agency Transactions.\33\
The effective date for the credit risk determination requirement was
December 15, 2016 and, therefore, FINRA's broker-dealer members
currently are subject to this requirement. Further, under the 2016
Amendments, FINRA's broker-dealer members (unless an exception applies)
must collect the daily mark to market loss from all counterparties with
respect to their Covered Agency Transactions and for non-exempt
accounts also collect maintenance margin of two percent.\34\ The
effective date for these margin collection requirements is October 25,
2023.\35\
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    \33\ See Rule 4210(e)(2)(H)(ii)(b).
    \34\ See Rule 4210(e)(2)(H)(i) and (ii) under the 2016
Amendments. Under the 2016 Amendments, the daily mark to market loss
is a counterparty's loss (i.e., the broker-dealer's gain) resulting
from marking a Covered Agency Transaction to the market. See Rule
4210(e)(2)(H)(i)g. The maintenance margin amount is two percent of
the contract value of the net ``long'' or net ``short'' position in
Covered Agency Transactions, by CUSIP, with the counterparty. See
Rule 4210(e)(2)(H)(i)f. An exempt account is an account of another
broker-dealer or a person with a net worth of at least $45 million
and financial assets of at least $40 million and who meets one of
five other conditions. See Rule 4210(a)(13). See also infra note 86
(defining ``exempt account'' under FINRA Rule 4210(a)(13)).
    \35\ See Exchange Act Release No. 97062 (Mar. 7, 2023), 88 FR
15473 (Mar. 13, 2023) (File No. SR-FINRA-2023-002).
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    With respect to the 2016 Amendments, FINRA stated it would consider
amending them as may be necessary to mitigate their impact on smaller
broker-dealers.\36\ Interested parties told FINRA that the 2016
Amendments favor larger broker-dealers because they have more market
power to negotiate margin agreements or Master Securities Forward
Transactions Agreements (``MSFTAs'') with their counterparties, and
that smaller broker-dealers also are at a competitive disadvantage to
non-FINRA members (i.e., regional banks) because these entities are not
subject to margin requirements for Covered Agency Transactions.
Additionally, some smaller broker-dealers told FINRA that, among other
things, the ability to take a capital charge in lieu of collecting
margin would help alleviate this competitive disadvantage, though it
would not fully resolve the competitive disparity between FINRA's
broker-dealer members subject to FINRA Rule 4210 and regional banks
that are not subject to similar margin requirements.\37\
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    \36\ See 2016 Approval Order, 81 FR at 40375.
    \37\ See Notice, 86 FR at 28162.
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    To address these concerns, FINRA filed a proposed rule change in
2021 (SR-FINRA-2021-010) to amend the margin collection requirements
for Covered Agency Transactions in Rule 4210 that were adopted under
the 2016 Amendments. As discussed below, FINRA's proposed amendments
went through a notice and comment period during which FINRA filed one
amendment that, among other things, responded to comments about the
potential burdens of the proposal.\38\ Generally, as discussed below,
the proposed amendments are intended to further reduce the burdens of
the margin collection requirements with respect to Covered Agency
Transactions, particularly for smaller broker-dealers. In January 2022,
the Division, pursuant to delegated authority, approved these
amendments (``2021 Amendments'').\39\
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    \38\ See section I.B.2. of this order (discussing the procedural
history of the 2021 Amendments).
    \39\ See Exchange Act Release No. 94013 (Jan. 20, 2022), 87 FR
4076 (Jan. 26, 2022) (SR-FINRA-2021-010) (``2022 Approval Order'').
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    As discussed below, the 2021 Amendments would (among other things):
(1) eliminate the two percent maintenance margin requirement that
applies to non-exempt accounts; (2) permit broker-dealers to take a
capital charge in lieu of collecting the mark to market loss, subject
to specified conditions and limitations; and (3) make revisions
designed to streamline, consolidate, and clarify the text of the rule.
The 2021 Amendments also include an implementation schedule for the
requirements in Rule 4210 pertaining to collecting margin with respect
to Covered Agency Transactions, as those requirements would be amended
by the 2021 Amendments (``Amended Margin Collection Requirements'').
The implementation schedule provides that FINRA would announce the
effective date for the Amended Margin Collection Requirements no later
than 60 days following the Commission's approval of the 2021 Amendments
and the announced effective date would be between nine and ten months
following the approval.
    In February 2022, the Bond Dealers of America (``BDA'') and Brean
Capital, LLC (``Brean Capital'') (collectively, the ``Petitioners'')
jointly filed a timely petition requesting that the Commission review
the Division's approval of the 2021 Amendments.\40\ The Commission
granted the Petition for Review and, thereby, agreed to review the
Division's action under delegated authority.\41\
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    \40\ See Petition for Review. Prior to the filing of the
Petition for Review, the Petitioners timely filed a notice of their
intent to file a petition.
    \41\ See Exchange Act Release No. 94724 (Apr. 14, 2022), 87 FR
23287 (Apr. 19, 2022) (``2022 Scheduling Order'').
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    The Petitioners requested that the Commission disapprove the 2021
Amendments. Procedurally, if the Commission disapproves the 2021
Amendments, the 2016 Amendments would remain in place and become
effective on October 25, 2023. Among other things, this would mean that
the Amended Margin Collection Requirements--which would reduce certain
burdens of the 2016 Amendments--would not take effect.
    In response to the Petition for Review, the Commission has
conducted a de novo review of the Division's action by delegated
authority approving the 2021 Amendments. The review gave careful
consideration to the entire record--including FINRA's filings, the

comments and statements received on the filings, FINRA's responses to
those comments and statements, the Petition for Review, and the
comments and statements received in response to the Petition for
Review--to determine whether the 2021 Amendments are consistent with
the requirements of the Exchange Act and the rules and regulations
thereunder, including that they do not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Exchange Act.\42\
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    \42\ See 15 U.S.C. 78o-3(b)(6) and (9).
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    For the reasons discussed below, the Commission finds that FINRA
has met its burden to show that the 2021 Amendments are consistent with
the requirements of the Exchange Act and the applicable rules and
regulations thereunder; including that they do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\43\ Consequently, the Commission is: (1) setting aside the
Division's 2022 Approval Order approving the 2021 Amendments pursuant
to delegated authority; and (2) approving the 2021 Amendments.
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    \43\ See 15 U.S.C. 78o-3(b)(6) and (9).
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    Finally, as discussed below, the 2021 Amendments were subject to
notice and comment which provided multiple opportunities for interested
parties to comment. The proposed rule change also included the
institution of proceedings, which afforded interested parties
additional opportunities and time to provide comments to the
Commission. Consequently, the record for the 2021 Amendments includes
numerous comments, and responses from FINRA to the comments.\44\
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    \44\ See section I.B.2. of this order (discussing the procedural
history of the 2021 Amendments).
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B. Procedural History and Background of Covered Agency Transaction
Margin Requirements

1. The 2016 Amendments (SR-FINRA-2015-036)
    On October 6, 2015, FINRA filed with the Commission, pursuant to
Section 19(b)(1) of the Exchange Act \45\ and Rule 19b-4
thereunder,\46\ a proposed rule change to amend FINRA Rule 4210 to
establish margin requirements for Covered Agency Transactions (i.e.,
the requirements that FINRA's broker-dealer members perform credit risk
determinations and collect margin with respect to Covered Agency
Transactions).\47\ The proposed rule change was published for comment
in the Federal Register on October 20, 2015.\48\ On November 10, 2015,
FINRA extended the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to January 15, 2016.\49\ The Commission received over 100
comment letters on the proposed amendments.\50\
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    \45\ 15 U.S.C. 78s(b)(1).
    \46\ 17 CFR 240.19b-4.
    \47\ See File No. SR-FINRA-2015-036. Certain documents related
to this rule change are available on FINRA's website at: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2015-036.
    \48\ See Exchange Act Release No. 76148 (Oct. 14, 2015), 80 FR
63603 (Oct. 20, 2015) (File No. SR-FINRA-2015-036).
    \49\ See Letter to Katherine England, Assistant Director,
Division, Commission from Adam Arkel. Associate General Counsel,
Office of the General Counsel, FINRA (Nov. 10, 2015).
    \50\ The public comment file for the proposed rule change is
available at: https://www.sec.gov/comments/sr-finra-2015-036/finra2015036.shtml (``2016 Rulemaking Comment File''). The
Commission staff also participated in numerous meetings and
conference calls with certain commenters and other market
participants, which are also noted in the 2016 Rulemaking Comment
File.
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    On January 13, 2016, FINRA responded to the comments and filed
Amendment No. 1 to the proposed rule change.\51\ In response to
comments, Amendment No. 1, among other things, excluded certain types
of securities from the scope of the proposed margin requirements and
set bifurcated implementation dates for when broker-dealers would need
to begin complying with the amendments if the Commission approved them:
six months with respect to the credit risk determination requirements
and eighteen months with respect to the margin collection requirements.
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    \51\ See Amendment No. 1 to the proposed rule change (Jan. 13,
2016) (``Amendment No. 1'').
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    On January 14, 2016, the Commission issued an order instituting
proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act \52\ to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1.\53\ The 2016 Order Instituting Proceedings
was issued by the Division pursuant to delegated authority and was
published in the Federal Register on January 21, 2016.\54\ By
instituting proceedings, the Commission extended by 90 days the date by
which the Commission would need to approve or disapprove the proposed
amendments and provided the opportunity for further extensions. The
Commission received more than 20 comment letters in response to the
2016 Order Instituting Proceedings.\55\ On March 21, 2016, FINRA
responded to the comments and filed Amendment No. 2.\56\ The amendment,
among other things, clarified certain text of the proposed rule.
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    \52\ 15 U.S.C. 78s(b)(2)(B).
    \53\ See Exchange Act Release No. 76908 (Jan. 14, 2016), 81 FR
3532 (Jan. 21, 2016) (Order Instituting Proceedings To Determine
Whether To Approve or Disapprove Proposed Rule Change to Amend FINRA
Rule 4210 (Margin Requirements) to Establish Margin Requirements for
the TBA Market, as Modified by Partial Amendment No. 1) (``2016
Order Instituting Proceedings'').
    \54\ Id.
    \55\ See 2016 Rulemaking Comment File.
    \56\ See Amendment No. 2 to the proposed rule change (Mar. 21,
2016) (``Amendment No. 2'').
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    On April 15, 2016, notice of Amendment No. 2 to the proposed rule
change was published in the Federal Register to solicit comments from
interested persons and to designate a longer period for Commission
action on the proposed rule change: until June 16, 2016.\57\ The
Commission received nine additional comment letters in response to the
Amendment No. 2 Notice.\58\ On May 26, 2016, FINRA responded to the
comments and filed Amendment No. 3.\59\ Amendment No. 3 expanded the
applicability of an exception under which the broker-dealer would not
need to collect margin from counterparties with limited Covered Agency
Transactions. In particular, the amendment applied the exception to
counterparties with $10 million or less in gross open Covered Agency
Transactions instead of a lower threshold of $2.5 million or less, as
originally proposed.
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    \57\ See Exchange Act Release No. 77579 (Apr. 11, 2016), 81 FR
22347 (Apr. 15, 2016) (Notice of Filing of Amendment No. 2 and
Designation of a Longer Period for Commission Action on Proceedings
to Determine Whether to Approve or Disapprove Proposed Rule Change
to Amend FINRA Rule 4210 (Margin Requirements) to Establish Margin
Requirements for the TBA Market, as Modified by Amendment Nos. 1 and
2) (``Amendment No. 2 Notice'').
    \58\ See 2016 Rulemaking Comment File.
    \59\ See Amendment No. 3 to the proposed rule change (May 26,
2016) (``Amendment No. 3'').
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    On June 21, 2016, a notice and order was published in the Federal
Register to solicit comment on Amendment No. 3 and approve the proposed
rule change, as modified by Amendment Nos. 1, 2, and 3 on an
accelerated basis (i.e., approve the 2016 Amendments).\60\ The Division
issued the 2016 Approval Order pursuant to delegated authority. The
Commission did not receive any comments in response to the notice of
Amendment No. 3. Further, no petition was filed with the Commission to
review the Division's action approving the 2016 Amendments by delegated
authority. The effective date for the

requirement to perform credit risk determinations under the 2016
Amendments was December 15, 2016. The effective date for the margin
collection requirements for Covered Agency Transactions under the 2016
Amendments is October 25, 2023.\61\
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    \60\ 2016 Approval Order.
    \61\ See Exchange Act Release No. 97062 (Mar. 7, 2023), 88 FR
15473 (Mar. 13, 2023) (File No. SR-FINRA-2023-002) (extending the
implementation date of the margin collection requirements under SR-
FINRA-2015-036 from April 24, 2023 to October 25, 2023).
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2. The 2021 Amendments (SR-FINRA-2021-010)
    On May 7, 2021, FINRA filed with the Commission, pursuant to
Section 19(b)(1) of the Exchange Act \62\ and Rule 19b-4
thereunder,\63\ a proposed rule change to amend the margin requirements
for Covered Agency Transactions under Rule 4210.\64\ The proposed rule
change would: (1) eliminate the two percent maintenance margin
requirement that applies to non-exempt accounts; (2) subject to
specified conditions and limitations, permit members to take a capital
charge in lieu of collecting margin for excess net mark to market
losses on Covered Agency Transactions; and (3) make revisions designed
to streamline, consolidate and clarify the Covered Agency Transaction
rule language. The proposed rule change was published for comment in
the Federal Register on May 25, 2021.\65\ 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.\66\ The Commission received five
comment letters in response to the proposed rule change.\67\
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    \62\ 15 U.S.C. 78s(b)(1).
    \63\ 17 CFR 240.19b-4.
    \64\ The full text of the proposed rule change and the exhibits
FINRA filed are collectively referred to as the ``proposal,'' and
are available at: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2021-010.
    \65\ See Notice.
    \66\ See Letter from Adam Arkel, Associate General Counsel,
Office of General Counsel, FINRA, to Sheila Swartz, Division,
Commission (June 30, 2021).
    \67\ The public comment file for the proposed rule change is
published on the Commission's website at: https://www.sec.gov/comments/sr-finra-2021-010/srfinra2021010.htm (``2021 Rulemaking
Comment File'').
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    On August 9, 2021, FINRA responded to the comments and filed
Amendment No. 1 (2021) to the proposed rule change.\68\ In response to
comments, Amendment No. 1 (2021), among other things, would: (1) modify
the definition of ``non-margin counterparty'' to exclude small cash
counterparties and other exempted counterparties; (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; and (3)
set an implementation date for the Amended Margin Collection
Requirements.\69\
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    \68\ See Amendment No. 1 to the proposed rule change (Aug. 9,
2021) (``Amendment No. 1 (2021)'').
    \69\ See Amendment No. 1 (2021).
---------------------------------------------------------------------------

    On August 20, 2021, the Commission issued an order instituting
proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act \70\ to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1 (2021).\71\ The 2021 Order Instituting
Proceedings was issued by the Division pursuant to delegated authority
and was published in the Federal Register on August 26, 2021.\72\ The
Commission received two comment letters in response to the 2021 Order
Instituting Proceedings.\73\ On September 16, 2021, FINRA responded to
the comments received in response to the 2021 Order Instituting
Proceedings.\74\ 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.\75\
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    \70\ 15 U.S.C. 78s(b)(2)(B).
    \71\ See Exchange Act Release No. 92713 (Aug. 20, 2021), 86 FR
47655 (Aug. 26, 2021) (``2021 Order Instituting Proceedings'').
    \72\ Id.
    \73\ See 2021 Rulemaking Comment File.
    \74\ See Letter from Adam Arkel, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Commission
(Sept. 16, 2021) (``FINRA Letter'').
    \75\ See Letter from Adam Arkel, Associate General Counsel,
Office of General Counsel, FINRA, to Sheila Swartz, Division,
Commission (Oct. 26, 2021).
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    On January 20, 2022, the Division, acting pursuant to delegated
authority on behalf of the Commission,\76\ approved the proposed rule
change, as modified by Amendment No. 1 (2021).\77\ On January 27, 2022,
the BDA and Brean Capital--the ``Petitioners''--filed a notice of
intention to petition for review of the 2022 Approval Order.\78\
Pursuant to the Commission's Rules of Practice 431(e), the 2022
Approval Order was stayed by the filing with the Commission of a notice
of intention to petition for review.\79\ On February 3, 2022, the
Petitioners jointly filed a timely Petition for Review.\80\ On April
14, 2022, the Commission issued a scheduling order, pursuant to
Commission's Rules of Practice, granting the Petition for Review of the
2022 Approval Order and providing until May 10, 2022 for any party or
other person to file a written statement in support of, or in
opposition to, the 2022 Approval Order.\81\ The scheduling order also
stated that the proposed rule change, as modified by Amendment No. 1
(2021), shall remain stayed pending further Commission action.\82\ On
May 10, 2022, FINRA submitted a written statement in support of the
2022 Approval Order.\83\ On May 10, 2022, the Petitioners submitted a
written statement in opposition to the 2022 Approval Order.\84\ The
Commission also received over ten additional statements from market
participants in response to the Petition for Review.\85\
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    \76\ 17 CFR 200.30-3(a)(12).
    \77\ See 2022 Approval Order.
    \78\ See Notice of Intention to Petition for Review of 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, Release No. 34-94013; File No. SR-
FINRA-2021-010, available at https://www.sec.gov/rules/sro/finra/2022/34-94013-petn-cooper-kirk.pdf.
    \79\ 17 CFR 201.431(e).
    \80\ See Petition for Review.
    \81\ See 2022 Scheduling Order.
    \82\ Id.
    \83\ See FINRA's Statement in Support of Proposed Rule Change to
Amend the Requirements for Covered Agency Transactions Under FINRA
Rule 4210 (File No. SR-FINRA-2021-010) (``FINRA Statement'').
    \84\ See Petitioners' Statement in Opposition to Approval of the
Proposed Rule Change (``Petitioners' Statement'').
    \85\ See 2021 Rulemaking Comment File. Weichert Financial
Services submitted six nearly identical letters signed by different
individuals. See Letters from Nancy Crocetto, SVP, Mortgage
Operations (May 9, 2022); Eric Declercq, President (May 9, 2022);
James M. Weichert, President & Chief Executive Officer (May 9,
2022); Anthony P. Fattizzi, Chief Risk Officer (May 4, 2022);
Michael Cadematori (May 4, 2022); Timothy McLaughlin, Chief
Investment Officer (May 3, 2022). These are collectively considered
one comment letter and referred to as the ``Weichert Letters.''
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II. How the 2021 Amendments Would Change the Covered Agency Transaction
Margin Requirements of Rule 4210

A. Elimination of the Two Percent Maintenance Margin Requirement

    Under the 2016 Amendments, Rule 4210 imposes different margin
requirements for accounts that are ``exempt accounts'' and accounts
that are not ``exempt accounts.'' Accounts that are not ``exempt
accounts'' under the 2016 Amendments are subject to stricter margin
requirements than

``exempt accounts'' because the broker-dealer is required to collect
two percent maintenance margin with respect to these accounts in
addition to margin to cover the counterparty's mark to market loss.\86\
In particular, paragraph (e)(2)(H)(ii)e. of Rule 4210 broadly provides
that the broker-dealer must collect margin from counterparties that are
non-exempt accounts equal to the maintenance margin amount, defined 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, subject to specified exceptions under the
rule.\87\ By contrast, under the 2016 Amendments, paragraph
(e)(2)(H)(ii)d. of Rule 4210 broadly provides that the broker-dealer
must collect margin from counterparties that are exempt accounts equal
to any net mark to market loss, subject to specified exceptions under
the rule (i.e., maintenance margin need not be collected).\88\
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    \86\ The term ``exempt account'' is defined under FINRA Rule
4210(a)(13). Broadly, an exempt account means a FINRA member, a non-
FINRA member registered broker-dealer, an account that is a
``designated account'' under FINRA Rule 4210(a)(4) (specifically, a
bank as defined under Section 3(a)(6) of the Exchange Act, a savings
association as defined under Section 3(b) of the Federal Deposit
Insurance Act, the deposits of which are insured by the Federal
Deposit Insurance Corporation, an insurance company as defined under
Section 2(a)(17) of the Investment Company Act, an investment
company registered with the Commission under the Investment Company
Act, a state or political subdivision thereof, or a pension plan or
profit sharing plan subject to the Employee Retirement Income
Security Act or of an agency of the United States or of a state or
political subdivision thereof), and any person that has a net worth
of at least $45 million and financial assets of at least $40 million
for purposes of paragraphs (e)(2)(F), (e)(2)(G) and (e)(2)(H) of
FINRA Rule 4210, 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 at 28163, n.18. Unless
otherwise noted, references to the 2016 Amendments are to the
``current rule'' or ``original rulemaking.''
    \87\ See 2016 Approval Order, 81 FR at 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.
    \88\ See 2016 Approval Order, 81 FR at 40367; see also paragraph
(e)(2)(H)(ii)d. of the current rule in Exhibit 5 to the 2016
Amendments. Similar to paragraph (e)(2)(H)(ii)e., current paragraph
(e)(2)(H)(ii)d. 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.
---------------------------------------------------------------------------

    In connection with the 2021 Amendments, FINRA stated that broker-
dealer members expressed concern that the different treatment of exempt
and non-exempt accounts is burdensome because members will be obligated
to obtain and assess the financial information needed to determine
which counterparties must be treated as non-exempt accounts.\89\
Further, based on feedback from members since the approval date of the
2016 Amendments and additional observation of market conditions, FINRA
stated it now 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.\90\ According to FINRA,
members pointed out that, in practice, the maintenance margin
requirement would apply to relatively few accounts of entities that
participate in the Covered Agency Transaction market. Further, FINRA
stated that monitoring and collecting maintenance margin for these
accounts will be operationally burdensome and out of proportion with
the number and size of the affected accounts.\91\ Further, according to
FINRA, bank dealers are not subject to the requirement to collect
maintenance margin from their customers, which would significantly
disadvantage broker-dealers that compete with bank dealers.\92\ To
address these concerns, FINRA proposed to eliminate paragraphs
(e)(2)(H)(ii)d. and (e)(2)(H)(ii)e. of Rule 4210, and replace them with
new paragraph (e)(2)(H)(ii)c. This paragraph would provide that FINRA's
broker-dealer members must collect margin for each counterparty's \93\
excess net mark to market loss,\94\ 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).\95\ In
particular, under the amendments, FINRA's broker-dealer members would
not be required to collect the two percent maintenance margin amount
for non-exempt accounts.
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    \89\ See Notice, 86 FR at 28163. Further, FINRA stated that
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.
    \90\ See Notice, 86 FR at 28163.
    \91\ Id.
    \92\ Id.
    \93\ 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 at 28163-64, n.25.
    \94\ 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'' would mean (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 at 28164, n.26.
    \95\ 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 proposed deleting this
language. See Notice, 86 FR at 28164, n.27.
---------------------------------------------------------------------------

B. Option for Capital Charge in Lieu of Mark to Market Margin

    The 2021 Amendments would add new paragraph (e)(2)(H)(ii)d. to Rule
4210.\96\ This paragraph would provide FINRA's broker-dealer members,
subject to specified conditions and limitations, the option to take a
capital charge in lieu of collecting margin for a counterparty's excess
net mark to market loss (that is, 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. FINRA stated 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. FINRA also stated that 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.\97\ To this end, as stated above, the proposed rule change
includes conditions and limitations that FINRA stated 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.\98\
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:
---------------------------------------------------------------------------

    \96\ See Notice, 86 FR at 28164.
    \97\ See Notice, 86 FR at 28164; see also FINRA Statement at 25
(citing Letter from Michael Nicholas, Chief Executive Officer, BDA
to Ms. Kris Dailey Vice President, Risk Oversight & Operational
Regulation, FINRA (June 7, 2018) at 1-2 (``BDA 2018 Letter''),
available at http://d31hzlhk6di2h5.cloudfront.net/20180607/81/e8/1f/28/96174e7b8c13fad4d07fa8aa/BDA_4210_Capital_Charge_.pdf).
    \98\ See Notice, 86 FR at 28164.
---------------------------------------------------------------------------

     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 \99\ 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; \100\
---------------------------------------------------------------------------

    \99\ 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
(2021); see also section II.D. below for a discussion of
modification to proposed definition of non-margin counterparty.
    \100\ See proposed paragraph (e)(2)(H)(ii)d.1. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

     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 proposed rule change,\101\ 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; \102\
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    \101\ Current paragraph (e)(2)(I) sets forth specified
concentration thresholds. As discussed further below in section
II.C, the rule change would make conforming revisions to the rule.
    \102\ See proposed paragraph (e)(2)(H)(ii)d.2. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

     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,\103\ 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; \104\ and
---------------------------------------------------------------------------

    \103\ This is referred to collectively as the 25% TNC/$30MM
Threshold for purposes of this order.
    \104\ See proposed paragraph (e)(2)(H)(ii)d.3. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

     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.\105\
---------------------------------------------------------------------------

    \105\ See Notice, 86 FR at 28164. See also proposed paragraph
(e)(2)(H)(ii)d.4. in Exhibit 5 to the proposal.
---------------------------------------------------------------------------

C. 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.
Generally, these amendments are intended to, among other things: (1)
consolidate language related to certain exceptions regarding the de
minimis transfer amount and $10 million gross open position amount and
introduce the term ``small cash counterparty''; (2) remove defined
terms that are no longer relevant; (3) conform and consolidate language
related to excepted counterparties and risk limits; (4) revise existing
rule text to reflect the elimination of the two percent maintenance
margin requirement; and (5) revise related supplemental material to
conform to the proposed rule changes. These proposed changes are
described in greater detail below.
     The proposed rule change would consolidate 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. FINRA stated that 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, 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).\106\ The proposed rule change deletes
paragraph (e)(2)(H)(ii)f., which currently addresses the de minimis
exception and would be rendered redundant by the rule change. 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
identifies the types of counterparties that are excepted from the
rule's margin requirements, to include a ``small cash counterparty.''
Proposed new paragraph (e)(2)(H)(i)h. would provide that a counterparty
is a ``small cash counterparty'' if:
---------------------------------------------------------------------------

    \106\ See Notice, 86 FR at 28165.
---------------------------------------------------------------------------

    [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; \107\
---------------------------------------------------------------------------

    \107\ See proposed paragraph (e)(2)(H)(i)h.1. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

    [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; \108\
---------------------------------------------------------------------------

    \108\ See proposed paragraph (e)(2)(H)(i)h.2. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

    [cir] The counterparty regularly settles its Covered Agency
Transactions on a delivery-versus-payment (``DVP'') basis or for cash;
\109\ and
---------------------------------------------------------------------------

    \109\ See proposed paragraph (e)(2)(H)(i)h.3. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

    [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,\110\
or use other financing techniques.\111\
---------------------------------------------------------------------------

    \110\ 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.
    \111\ See proposed paragraph (e)(2)(H)(i)h.4. in Exhibit 5 to
the proposal.
---------------------------------------------------------------------------

    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 by the rule
change.\112\ 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.
---------------------------------------------------------------------------

    \112\ See Notice, 86 FR at 28165.
---------------------------------------------------------------------------

     FINRA proposes to delete the definition of ``bilateral
transaction'' set forth in current paragraph (e)(2)(H)(i)a. The
definition is used 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 states
that the term ``bilateral transaction'' is unduly narrow given that the
proposed revised definition of ``counterparty'' would have the effect
of clarifying that the rule's scope includes transactions guaranteed by
the member.\113\
---------------------------------------------------------------------------

    \113\ See Notice, 86 FR at 28165.
---------------------------------------------------------------------------

     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 the maintenance margin
requirement, FINRA believes that the term is not needed.\114\
---------------------------------------------------------------------------

    \114\ See Notice, 86 FR at 28165.
---------------------------------------------------------------------------

     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 to conform
with the changes proposed in the 2021 Amendments and 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 . . .'' \115\ 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 . . .'' \116\ Paragraph (e)(2)(H)(ii)a.2.A. would not be
changed, other than to be redesignated as paragraph (e)(2)(H)(ii)a.2.
Paragraph (e)(2)(H)(ii)a.2.B. would be eliminated as redundant \117\
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.'' \118\
---------------------------------------------------------------------------

    \115\ 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. defining the term
``registered clearing agency.'' See Notice, 86 FR at 28165, n.39.
    \116\ 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 at
28165, n.40.
    \117\ See proposed paragraph (e)(2)(H)(ii)a. in Exhibit 5 to the
proposal.
    \118\ See proposed paragraph (e)(2)(H)(ii)b. in Exhibit 5 to the
proposal.
---------------------------------------------------------------------------

     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 of 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
paragraph (e)(2)(I) 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 . . .'' \119\ 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.''
---------------------------------------------------------------------------

    \119\ 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.\120\
---------------------------------------------------------------------------

    \120\ See Notice, 86 FR at 28166.
---------------------------------------------------------------------------

     Current Supplemental Material .02 addresses the
requirement to establish 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 the
term mark to market loss or deficiency is defined under the current
rule, may eliminate 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 proposed rule
change would eliminate the need to distinguish exempt versus non-exempt
accounts (including 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.\121\ FINRA
proposes to redesignate current Supplemental Material .05 as
Supplemental Material .03.\122\
---------------------------------------------------------------------------

    \121\ See Notice, 86 FR at 28166.
    \122\ 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 stated that the effective date
will be no later than 120 days following publication of the Regulatory
Notice announcing Commission approval.\123\
---------------------------------------------------------------------------

    \123\ See discussion of Amendment No. 1 (2021) in section III.E.
below regarding the proposed adjustment of the implementation date.
See also Amendment No. 1 (2021) 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, given that such members are not subject to FINRA Rule 4210.
See Notice, 86 FR at 28166, n.45. The term ``funding portal'' is
defined in Rule 100(b)(5) of FINRA's Funding Portal Rules. The term
``capital acquisition broker'' is defined in Rule 016(c) of FINRA's
Capital Acquisition Broker Rules.
---------------------------------------------------------------------------

D. Amendment No. 1 (2021)

    In Amendment No. 1 (2021) to the proposed rule change, FINRA
proposed to: (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.\124\ In addition, Amendment No. 1 (2021) states that, if
the Commission approves the proposed rule change, as modified by
Amendment No. 1 (2021), FINRA will announce the effective date of the
proposed rule change, as modified by Amendment No. 1 (2021), 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.\125\
---------------------------------------------------------------------------

    \124\ Amendment No. 1 (2021) also contains several conforming
changes to paragraph numbering to accommodate the proposed
modifications to the rule text. See Exhibit 4 to Amendment No. 1
(2021).
    \125\ See Amendment No. 1 (2021); 2021 Order Instituting
Proceedings, 86 FR at 47665.
---------------------------------------------------------------------------

III. Commission Discussion and Findings

    After careful review of the proposed rule change, as modified by
Amendment No. 1 (2021), comment letters, FINRA's responses to the
comments, the Petition for Review, and the statements received in
response to the Petition for Review, as discussed below, the Commission
finds that the proposed rule change, as modified by Amendment No. 1
(2021), is consistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to a national securities
association.\126\ Specifically, for the reasons discussed below, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1 (2021), is consistent

with Section 15A(b)(6) of the Exchange Act,\127\ 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.
The Commission also finds that the proposed rule change, as modified by
Amendment No. 1 (2021), is consistent with Section 15A(b)(9) of the
Exchange Act,\128\ which requires that the rules of a national
securities association must not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
---------------------------------------------------------------------------

    \126\ 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 alleviation of competitive impacts on broker-dealers
with the elimination of the two percent maintenance margin
requirement for non-exempt accounts and the option to take a capital
charge in lieu of collecting the excess net mark to market loss,
subject to a cap; 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).
    \127\ 15 U.S.C. 78o-3(b)(6).
    \128\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

A. The Elimination of the Two Percent Maintenance Margin Requirement,
the Optional Capital in Lieu of Margin Charge, and the Streamlining of
the Rule Text are Consistent With the Exchange Act

1. Elimination of the Two Percent Maintenance Margin for Non-Exempt
Accounts
a. Comments Received on the Proposal
    As discussed in section II.A. above, FINRA proposed to eliminate
the two percent maintenance margin requirement that would apply to non-
exempt accounts under the current rule. The Commission received one
comment supporting the proposed rule change to eliminate the two
percent maintenance margin requirement for non-exempt accounts.\129\
---------------------------------------------------------------------------

    \129\ See Letter from Chris Killian, Managing Director,
Securitization, Corporate Credit, Libor, Asset Management Group of
SIFMA (June 15, 2021) (``SIFMA AMG Letter'') at 1.
---------------------------------------------------------------------------

b. FINRA's Rationale for the Proposed Change
    FINRA stated that eliminating the two percent maintenance margin
requirement for non-exempt accounts is intended to reduce costs for
FINRA members and address any perceived competitive disadvantage
between FINRA members and banks regarding Covered Agency Transactions.
FINRA also stated that elimination of the two percent maintenance
margin requirement will reduce costs and provide operational relief to
FINRA members, as they will not need to enter into separate custodial
arrangements with third-party banks to custody the maintenance margin
of counterparties that cannot deposit margin collateral directly with a
broker-dealer.\130\ By simplifying the current rule, mitigating
concerns about regulatory compliance costs and allowing FINRA members
to compete in the market more equally with non-FINRA members, FINRA
stated that the elimination of the two percent maintenance margin
requirement for non-exempt accounts promotes a more just and equitable
market by promoting competition and efficiency, which will benefit
investors and the public interest.\131\
---------------------------------------------------------------------------

    \130\ See FINRA Statement at 23-24, 33; Notice, 86 FR at 28163-
64.
    \131\ See FINRA Statement at 23-24.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    The elimination of the two percent maintenance margin will reduce
operational burdens and compliance costs for broker-dealers because
they will no longer need to monitor which accounts are exempt or non-
exempt for purposes of the Covered Agency Transaction margin
requirements. In addition, the two percent maintenance margin
requirement only would have applied to a small number of accounts.
Monitoring which accounts are non-exempt accounts and collecting
maintenance margin for these accounts is operationally burdensome and
out of proportion with the number and size of the affected accounts.
Elimination of the two percent maintenance margin requirement for non-
exempt accounts also will alleviate competitive impacts for FINRA-
member broker-dealers in comparison to banks that, depending on their
size, may: (1) follow best practices of exchanging variation margin
recommended by the Treasury Markets Practice Group (``TMPG''),\132\ or
(2) not otherwise be subject to margin requirements with respect to
Covered Agency Transactions. Therefore, under the proposed rule
changes, the elimination of the maintenance margin requirement and the
remaining requirement to collect the excess net mark to market loss (or
take a capital charge, subject to specified terms and conditions) will
allow broker-dealers to more effectively compete with banks that either
only collect variation margin from their counterparties for Covered
Agency Transactions or that do not collect any margin. Consequently,
the elimination of the two percent maintenance margin requirement will
reduce regulatory requirements for FINRA broker-dealers while promoting
consistent margin practices among FINRA members.
---------------------------------------------------------------------------

    \132\ See 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 best practice of exchanging 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.
---------------------------------------------------------------------------

    While the proposed rule change eliminates the two percent
maintenance margin requirement for non-exempt accounts, broker-dealers
will continue to be protected from the risks of unsecured credit
exposures arising from Covered Agency Transactions because, under the
proposed rule change, they must collect the excess net market to market
loss from a counterparty or take a capital charge (subject to specified
conditions and limitations), unless an exception applies. Further,
under current Rule 4210, broker-dealers may collect additional margin
(i.e., house margin) from a counterparty above the minimums required by
the Covered Agency Transaction margin requirements. Finally, under the
current rule, FINRA broker-dealers must perform a written credit risk
assessment for each counterparty, which is designed to help them manage
the risks of Covered Agency Transactions.
    Consequently, this amendment will help to facilitate trading in
Covered Agency Transactions by reducing the competitive burdens of the
margin requirements for FINRA member broker-dealers, including smaller
broker-dealers. This will promote competition by reducing the costs
associated with collecting maintenance margin from a counterparty and
permitting broker-dealers of all sizes to compete more effectively with
banks that are not required to collect maintenance margin or that do
not collect any margin from their counterparties for Covered Agency
Transactions. Finally, the continued requirements to collect the excess
net mark to market loss from a counterparty and credit risk assessment
procedures will continue to protect FINRA-member broker-dealers and
investors from the risks of unsecured credit exposures in the Covered
Agency Transaction market.
2. Option for Capital Charge in Lieu of Collecting Excess Net Mark to
Market Loss
a. Comments Received on Proposal
    As discussed in section II.B. above, FINRA proposed, subject to
specified conditions and limitations, to provide FINRA broker-dealers
the option to take a capital charge in lieu of collecting a
counterparty's excess net mark to market loss (i.e., the net mark to
market loss to the extent it exceeds $250,000). One commenter indicated
that its members were appreciative of the proposed rule change stating
that it was

consistent with other provisions of FINRA Rule 4210 that permit broker-
dealers to take capital charges rather than collect margin for
transactions involving securities of high credit quality.\133\
---------------------------------------------------------------------------

    \133\ See Letter from Christopher B. Killian, Managing Director
Securitization, Corporate Credit, Libor, SIFMA (June 15, 2021)
(``SIFMA Letter'') at 5.
---------------------------------------------------------------------------

    Other commenters opposed the proposed capital charge in lieu of
margin stating it would affect liquidity by requiring smaller broker-
dealers to take capital charges because they do not have and cannot
obtain margin agreements or MSFTAs from their counterparties.\134\ For
example, the Petitioners, in delineating the types of institutions that
participate in the agency mortgage-backed securities market as
investors, stated that pension funds and state agencies may be
prohibited by their charters from pledging assets, and as a result
would be unable to post margin.\135\ Petitioners stated that, partially
as a result of counterparties who are unable to post margin, because of
the limitation imposed by the 25% TNC/$30MM Threshold, the ability of
FINRA members to introduce liquidity into the market during periods of
unusual volatility will be drastically limited.\136\ Commenters also
stated that these smaller broker-dealers would need to maintain a
substantial amount of excess net capital in order to comply with the
proposed rule, which could reduce liquidity and impair regulatory
capital under certain market conditions.\137\ These firms, according to
commenters, would be unable to commit to purchasing additional mortgage
loans until outstanding trades settled, which they stated could
prohibit many smaller broker-dealers (including minority, women, and
veteran owned firms) from engaging in Covered Agency Transactions or
curtail their business.\138\ These commenters stated that this, in
turn, could reduce market liquidity and disrupt the mortgage
origination process which could harm market participants and customers.
---------------------------------------------------------------------------

    \134\ See Letter from Duncan F. Williams, President, Duncan-
Williams Inc., and Brad Jones, Executive Vice President, Managing
Director--Correspondent Division, SouthState Bank N.A. (May 10,
2022) (``Duncan-Williams/SouthState Letter'') at 2-3; Letter from
Michael Decker, Senior Vice President, BDA on behalf of CastleOak
Securities; Loop Capital Markets; MFR Securities Inc.; Penserra
Securities, R. Seelaus & Co. LLC; Siebert Williams Shank & Co., LLC;
and Tigress Financial Parter to Vanessa Countryman, Secretary,
Commission (May 10, 2022) (``BDA Small Firms Letter'') at 2-3;
Letter from DiAnne Calabrisotto, Chief Operating Officer, Siebert
Williams Shank & Co., LLC (May 10, 2022) (``Siebert Letter'') at 2;
Letter from Stephen Berkeley, Chief Compliance Officer and
Regulatory Counsel, Loop Capital Markets LLC (May 12, 2022) (``Loop
Capital Letter'') at 2.
    \135\ See Petition for Review at 8, 33. Petitioners also stated
that registered investment companies cannot re-pledge collateral.
Id.
    \136\ See Petition for Review at 30, 33.
    \137\ See Duncan-Williams/SouthState Letter at 3-4; BDA Small
Firms Letter at 2-3; Letter from Chirag G. Shah, President and Chief
Executive Officer, Performance Trust Capital Partners (May 10, 2022)
(``Performance Trust Capital Letter'') at 2; Letter from Wendy L.
Brooks, Senior Managing Director, Mesirow Financial, Inc. (May 3,
2022) (``Mesirow Letter'') at 2.
    \138\ See Letter from David R. Jones, CastleOak Securities, L.P.
(May 10, 2022) (``CastleOak Securities Letter'') at 1-2; Weichert
Letters at 2; Letter from Kirk R. Malmberg, President and Chief
Executive Officer, Federal Home Loan Bank of Atlanta (May 10, 2022)
(``Malmberg Letter 2'') at 2; Letter from Larry W. Bowden, Executive
Vice President, Stephens, Inc. (May 10, 2022) (``Stephens Letter'')
at 3; BDA Small Firms Letter at 2-3; Williams/SouthState Letter at
3; Siebert Letter at 2; Performance Trust Capital Letter at 2.
---------------------------------------------------------------------------

    Commenters also stated that the proposed rule change would result
in potential anti-competitive impacts on small and medium-sized broker-
dealers, including women, veteran, and minority-owned firms.\139\
Specifically, these commenters stated that imposing margin requirements
or 100% capital charges on Covered Agency Transactions would cause
smaller and mid-sized firms (including women, veteran, and minority-
owned firms) to exit the Covered Agency Transaction market or
significantly decrease their ability to transact in the market,
resulting in greater concentration among fewer market participants,
reducing access to the Covered Agency Transaction market or negatively
affecting market liquidity.\140\ These commenters stated that the
proposed amendments would cause them to exit the market or decrease
their ability to transact in the market because customers would prefer
to transact with banks that are not subject to margin requirements,
many customers would be unwilling to enter into margin agreements, the
operational and compliance costs of engaging in Covered Agency
Transactions would increase significantly, and excessive margin
requirements and capital charges would be involved for smaller firms
compared to larger firms even though the transactions are riskless to
the firm. Other commenters also stated that the proposed requirements,
either in whole or in part, are not suitable for Specified Pool
Transactions and CMOs.\141\ One commenter also expressed concern that
an early survey of its customers indicated that many of its customers
are uncomfortable with executing an MSFTA that indicates that there is
a potential liquidity event or margin call in a volatile market, even
if unlikely, and that bank affiliated firms do not require the
execution of such a document.\142\ One commenter suggested that the
proposed capital charges in lieu of margin should be applied at 10%
rather than at 100% of the excess net mark to market loss.\143\
Commenters also expressed concerns that the proposed rule change would
have a disparate impact on underserved communities which smaller firms
typically serve and stated that FINRA did not specifically consider the
consequences and impact the proposal would have on the housing finance
sector and access to the liquidity for underserved communities.\144\
Consequently, commenters believe that the proposed rule change will
cause smaller broker-dealers to exit the market, resulting in decreased
competition and liquidity in the Covered Agency Transaction
market.\145\
---------------------------------------------------------------------------

    \139\ See SIFMA Letter at 2-3; Letter from Michael Decker,
Senior Vice President, Public Policy, Bond Dealers of America (June
15, 2021) (``BDA Letter'') at 4-5; Letter from Thomas J. Fleming &
Adrienne M. Ward, Olshan, on behalf of Brean Capital, LLC (June 15,
2021) (``Brean Capital Letter'') at 18-21; Letter from Kirk R.
Malmberg, President and Chief Executive Officer, Federal Home Loan
Bank of Atlanta (Jan. 18, 2022) at 1-2 (``Malmberg Letter 1'');
Letter from Senator John Boozman, Senator Thom Tillis, and Senator
Cynthia M. Lummis (Jan. 10, 2022) (``Boozman et al Letter'') at 1-2;
Petition for Review at 26-29; Duncan-Williams/SouthState Letter at
2-3; Stephens Letter at 2; Mesirow Letter at 2; Loop Capital Letter
at 2.
    \140\ See SIFMA Letter at 2-3; BDA Letter at 4-5; Brean Capital
Letter at 18-20; Malmberg Letter 1 at 1-2; Boozman et al Letter at
1-2; Petition for Review at 27-31; Stephens Letter at 2; BDA Small
Firms Letter at 3.
    \141\ See Letter from Chris Melton, Individual (Aug. 2, 2021)
(``Melton Letter'') at 1; SIFMA Letter at 1-3.
    \142\ See Stephens Letter at 2.
    \143\ See Brean Capital Letter at 25.
    \144\ See Petition for Review at 41-42; Letter from Alanna
McCargo, President, Government National Mortgage Association (Jan.
20, 2022) at 1-2.
    \145\ See Petition for Review at 30-31.
---------------------------------------------------------------------------

    Further, the Petitioners stated that the proposed rule change would
increase systemic risk, as the option to take a capital charge in lieu
of margin with its associated 25% TNC/$30MM Threshold, would force
regional broker-dealers to suspend trading in Covered Agency
Transactions after a few trades or to liquidate customer positions, and
cause customers to move their business to banks which could transform
moderate market volatility into a liquidity crisis.\146\
---------------------------------------------------------------------------

    \146\ Petitioners also stated that the proposed rule change
would enhance systemic risk as a result of several factors. These
factors include: (1) removing liquidity from agency mortgage-backed
security markets; (2) introducing uncertainty into the market due to
the difference between trade prices and mark to market losses for
calculation of margin; (3) failing to provide a solution to the
``chain'' fail problem; (4) increasing the bargaining power of
primary dealers to the detriment of introducing brokers; and (5)
encouraging a shift in business to banks by broker-dealers with bank
affiliates. See Petition for Review at 31-33, 37-38. Petitioners
also stated that the 25% TNC/$30MM Threshold will limit large
broker-dealers from introducing liquidity in the market in times of
stress which may add volatility to the market. See Petition for
Review at 30. See section III.B. below for a discussion of the
concerns commenters raised regarding chain of fails and the
calculation of variation margin.

---------------------------------------------------------------------------

    Petitioners also stated that the Division staff, in approving the
2021 Amendments by delegated authority, failed to engage in reasoned
decision-making, and that FINRA never identified the market
participants it engaged with or the substance of the conversations with
them. Petitioners further stated that FINRA did not offer any evidence
or data to support the need for the proposed changes or the need for
FINRA to establish a margin regime for Covered Agency
Transactions.\147\ Petitioners also stated that the proposed rule
change is unnecessary and an abuse of discretion and that the rule is
unworkable, increases systemic risk, and will have a catastrophic
effect on regional broker-dealers. They stated that despite FINRA's
efforts to mitigate the harms to smaller market participants and lessen
the burdens that it will impose on competition, these burdens remain
significant, unnecessary and inappropriate.\148\
---------------------------------------------------------------------------

    \147\ See Petition for Review at 43-45.
    \148\ See Letter from Thomas J. Fleming, Adrienne M. Ward,
Olshan, David H. Thompson, Cooper & Kirk, PLLC Harold Reeves, Esq.,
Cooper & Kirk, PLL on behalf of BDA and Brean Capital (Sept. 10,
2021) (``BDA and Brean Capital Letter'') at 32-42; Petition for
Review at 26-27.
---------------------------------------------------------------------------

    Finally, one commenter stated that the March 2020 period of
volatility during the COVID-19 pandemic provided a perfect example of a
situation when margin flexibility on the part of broker-dealers was
necessary \149\ and that if this situation were replicated in the
future, the amendments would effectively remove the ability of broker-
dealers to exercise appropriate discretion with respect to their
clients' positions and would contribute to market stress.\150\
---------------------------------------------------------------------------

    \149\ See MBA Letter at 2.
    \150\ See MBA Letter at 2.
---------------------------------------------------------------------------

b. FINRA's Response to Comments
    In response to the comments to the Notice, FINRA stated that it has
engaged with industry participants extensively on their 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.\151\ FINRA also stated that the original rulemaking is
necessary because of the risks posed by unsecured credit exposures in
the Covered Agency Transactions market.\152\
---------------------------------------------------------------------------

    \151\ See Amendment No. 1 (2021) at 4; 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''); 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
time 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.
    \152\ See Amendment No. 1 (2021) at 4-5 and 2015 Notice, 80 FR
at 63615-16.
---------------------------------------------------------------------------

    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,\153\ and made key revisions in finalizing the 2016
Amendments expressly to mitigate any potential impact on smaller firms
and on activity in the Covered Agency Transaction market, including
increasing the small cash counterparty exception from $2.5 million to
$10 million, subject to specified conditions, and modifying the two
percent maintenance margin requirement, as adopted pursuant to the
original rulemaking, to create an exception for cash investors that
otherwise would have been subject to the requirement.\154\
---------------------------------------------------------------------------

    \153\ See Amendment No. 1 (2021) at 5 and 2016 Approval Order,
81 FR at 40371.
    \154\ See Amendment No. 1 (2021) at 5.
---------------------------------------------------------------------------

    FINRA also exempted mortgage bankers from the maintenance margin
requirements in the 2016 Amendments; exempted multifamily housing
securities and project loan program securities from the new margin
requirements; \155\ and established a $250,000 de minimis transfer
amount, for a single counterparty, subject to specified conditions, up
to which members need not collect margin or take a charge to their net
capital.\156\
---------------------------------------------------------------------------

    \155\ See Amendment No. 1 (2021) at 5-6 and Partial Amendment
No. 1 to SR-FINRA-2015-036, available at https://www.finra.org/rules-guidance/rule-filings/sr-finra-2015-036.
    \156\ See Amendment No. 1 (2021) at 6 and 2016 Approval Order,
81 FR at 40368.
---------------------------------------------------------------------------

    Additionally, FINRA stated that once the Commission approved the
2016 Amendments that it would monitor the impact of the new
requirements and, if the requirements proved overly onerous or
otherwise were shown to negatively impact the market, it would consider
amending such requirements to mitigate the rule's impact.\157\ Industry
participants requested that FINRA monitor the potential impact of the
2016 Amendments on smaller and mid-sized firms, and that FINRA extend
the implementation date of the requirements pending its consideration
of any potential amendments to the rule.\158\ In response to the
concerns of industry participants, FINRA also stated that it engaged in
extensive dialogue, both with industry participants and other
regulators, including staff of the Commission and the Federal Reserve
System, for purposes of amending the 2016 Amendments.\159\ Further,
FINRA extended the implementation date of the margin collection
requirements pursuant to the 2016 Amendments on multiple
occasions.\160\
---------------------------------------------------------------------------

    \157\ See Amendment No. 1 (2021) at 6 and Partial Amendment No.
3 to SR-FINRA-2015-036.
    \158\ See Amendment No. 1 (2021) at 6.
    \159\ See Amendment No. 1 (2021) at 6.
    \160\ See Amendment No. 1 (2021) at 6 and Notice, 86 FR at
28162.
---------------------------------------------------------------------------

    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: \161\ (1)
eliminating the two percent maintenance margin requirement with respect
to non-exempt accounts for purposes of their Covered Agency
Transactions; \162\ and (2) subject to specified conditions and limits,
permitting members to take a capital charge in lieu of collecting
margin for each counterparty's excess net mark to market loss.\163\
FINRA believes the amendments to the original rulemaking as set forth
in the proposed rule change, with the additional clarifications it has
provided to commenters, afford industry participants appropriate relief
and clarity, and that the proposed rule change should be approved.\164\
---------------------------------------------------------------------------

    \161\ See Amendment No. 1 (2021) at 6 and Notice, 86 FR at
28162-63.
    \162\ This proposal is discussed in section III.A.1. above.
    \163\ See Amendment No. 1 (2021) at 6-7. This proposal is
discussed in section III.A.2. above.
    \164\ See Amendment No. 1 (2021) at 7.
---------------------------------------------------------------------------

    Further, in response to the additional comments received regarding
the 2021 Order Instituting Proceedings, FINRA stated that commenters
have repeatedly expressed the same points, including during the
original rulemaking, which FINRA stated it has repeatedly addressed,
and that it believes the

rulemaking is necessary because of the risk posed by unsecured credit
exposures in the Covered Agency Transaction market.\165\ FINRA also
stated that recent events in connection with market volatility stemming
from the COVID-19 pandemic \166\ have illustrated the importance of
risk and exposure limits,\167\ and 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
and that the regulatory need for attention to this area is no less than
when FINRA initiated the original rulemaking.\168\
---------------------------------------------------------------------------

    \165\ See FINRA Letter at 4-7. For example, FINRA stated that
BDA and Brean Capital contended that permitting members to take the
capital charge in lieu of colleting margin is untenable, that having
requirements for Covered Agency Transactions would have the effect
of causing a ``chain'' of fails, that firms will be driven from the
market and that FINRA has not addressed critical questions as to how
the requirements will work. In response, FINRA stated that these
arguments are not novel and that FINRA exhaustively addressed them
with industry participants throughout the course of the 2016
Amendments and the development of the proposal. FINRA also stated
that it provided extensive further explanations in Amendment No. 1
(2021). See id. at 7.
    \166\ See FINRA Letter at 5, n.17 (citing DERA Report).
    \167\ See FINRA Letter at 5.
    \168\ See FINRA Letter at 6. As of the second quarter of 2021,
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. Id. at 5-6.
---------------------------------------------------------------------------

    In response to the Petition for Review and comments that FINRA
failed to engage in reasoned decision-making or provide evidence or
data to support the proposal, FINRA stated that record supports the
narrow amendments under the proposed rule change. FINRA further stated
that rather than imposing new requirements, the narrow amendments to
FINRA Rule 4210 in the proposal address--and in fact reduce the
potential burden of--amendments to FINRA Rule 4210 included in the 2016
Amendments.\169\ Specifically, in its Statement, FINRA stated that
permitting FINRA members to take a capital charge in lieu of collecting
mark to market margin was a change that was specifically motivated by
its efforts to address concerns that the 2016 Amendments could create
an unfair disparity between large brokers and small and medium-sized
brokers, and that various small broker-dealers commented during the
rulemaking process that being permitted to take a capital charge in
lieu of margin would help alleviate the competitive disadvantage that
small and medium-sized firms face in obtaining margin agreements with
counterparties, as it would provide an alternative to collecting
margin.\170\ FINRA further stated that in a 2018 letter, BDA, one of
the Petitioners, requested that FINRA adopt a provision that would
permit members to take a capital charge in lieu of margin as BDA
indicated that discussions with two small broker-dealers indicated that
this would allow those small broker-dealers the ability to remain
competitive and would not erode their capital.\171\
---------------------------------------------------------------------------

    \169\ See FINRA Statement at 9, and 21-22.
    \170\ See FINRA Statement at 24-25.
    \171\ See FINRA Statement at 25 (citing BDA 2018 Letter). FINRA
stated that BDA in reciting its own discussions with two smaller
broker-dealers who expressed support for a capital charge in lieu of
margin option, wrote that the two smaller broker-dealers believed
``the Capital Charge Proposal would give them many options to remain
competitive in [Covered Agency Transactions]'' and that they were
``not concerned that the Capital Charge Proposal [would] be
anticompetitive'' or force them to ``erode away their capital in
order to be competitive.'' BDA 2018 Letter at 2 (cited in FINRA
Statement at 25).
---------------------------------------------------------------------------

    FINRA further stated that the whole purpose of the 2021 Amendments
is to respond to the types of concerns raised by smaller firms by
providing greater flexibility than they have under the current
rule.\172\ Further, FINRA stated that the proposed rule permits FINRA
members a limited capacity to take capital charges in lieu of
collecting margin and thereby assume the risk of counterparty default,
and that could help FINRA members to establish (or maintain)
relationships with counterparties who are not willing to post
margin.\173\
---------------------------------------------------------------------------

    \172\ See FINRA Statement at 33.
    \173\ See FINRA Statement at 33.
---------------------------------------------------------------------------

    FINRA has stated that it intends to monitor the proposed rule's
implementation and its impact.\174\ FINRA stated it remains committed
to ensuring that FINRA Rule 4210, as amended, in practice, does not
disadvantage smaller broker-dealers who are most focused on community
institutions, including those owned by women, minorities and
veterans.\175\ FINRA also stated that the proposed rule demonstrates
FINRA's commitment to smaller firms in action, as FINRA is pro-actively
responding to concerns raised by market participants and proposing
appropriate amendments to FINRA Rule 4210.\176\
---------------------------------------------------------------------------

    \174\ See FINRA Statement at 34.
    \175\ See FINRA Statement at 34.
    \176\ See FINRA Statement at 34.
---------------------------------------------------------------------------

    In addition, with respect to comments that FINRA failed to engage
in reasoned decision making regarding the 2021 Amendments, FINRA stated
it complied with all applicable procedural requirements.\177\ FINRA
stated that the Petitioners used the record in the 2021 Amendments to
take issue with FINRA's adoption of margin requirements for Covered
Agency Transactions in the 2016 Amendments.\178\ FINRA stated that it
was not required to re-do the entire rulemaking process that led to the
approval of the 2016 Amendments to make amendments to the current rule,
and that the Commission is not required to re-canvass a rulemaking
process that stretches back to 2014 to approve the 2021 Amendments to
an already-approved rule change.\179\ FINRA also stated in response to
Petitioner's comments that it did not disclose who it consulted with in
the development of the 2021 Amendments as mischaracterizing the
record.\180\ FINRA stated it set forth the process it undertook to
develop the 2021 Amendments in the proposal, and that the record
contains a lengthy and detailed analysis of comments received.\181\
Finally, FINRA stated that the rationale for SR-FINRA-2021-010 is
clearly supported in the administrative record by detailed and rigorous
assessments of any burden imposed on competition (including thorough
analysis of economic impact assessments, anticipated benefits,
anticipated costs, and alternative approaches).\182\
---------------------------------------------------------------------------

    \177\ See FINRA Statement at 29.
    \178\ See FINRA Statement at 29.
    \179\ See FINRA Statement at 29-30.
    \180\ See FINRA Statement at 30.
    \181\ See FINRA Statement at 30.
    \182\ See FINRA Statement at 23.
---------------------------------------------------------------------------

    FINRA stated that the proposed rule change promotes competition by
leveling the playing field among Covered Agency Transaction market
participants of all sizes, thereby reducing disruption in this market
without the loss of any investor protection.\183\ Further, FINRA stated
by limiting the ability of larger members to take a capital charge, the
proposal promotes competition in the market, particularly for smaller
broker-dealers.\184\ FINRA believes that the amendments set forth in
the proposed rule change strike an appropriate balance in providing
small and medium-sized FINRA member broker-dealers with an alternative
to collecting margin, while ensuring that the regulatory objective of
FINRA Rule 4210, as amended by the proposed rule, is not undermined by
limiting the

option to take a capital charge with the 25% TNC/$30MM Threshold.\185\
---------------------------------------------------------------------------

    \183\ See FINRA Statement at 26.
    \184\ See FINRA Statement at 35.
    \185\ See FINRA Statement at 26.
---------------------------------------------------------------------------

    FINRA stated that it disagrees with commenters' concerns that the
25% TNC/$30MM Threshold is a flaw in the proposal, as the objective of
the proposed rule change is to encourage the collection of margin.\186\
FINRA stated that the purpose of FINRA Rule 4210, as amended by the
2016 Amendments and 2021 Amendments, is to shore up the practices in
the Covered Agency Transaction market by encouraging the margining of
those positions--not to allow members to avoid such requirements
through the taking of a large net capital charge. FINRA stated that
allowing firms to take a capital charge in lieu of margin is meant to
add flexibility to the rule, not to supplant its margin
requirements.\187\ FINRA stated that in effect, the 25% TNC/$30MM
Threshold is a risk management mechanism given the introduction of the
proposed capital charge option.\188\ FINRA stated that for some FINRA
members, the volume of business may reach the threshold where further
capital charges cannot be taken, and at that point, the 25% TNC/$30MM
Threshold would then prevent the member from entering into new Covered
Agency Transactions with any counterparty that cannot or will not post
margin.\189\ While the ability of the FINRA member to inject liquidity
into the Covered Agency Transaction market could potentially be
reduced, FINRA stated that raising the threshold for permitted capital
charges would reduce the effectiveness of the 2021 Amendments by
increasing the FINRA member's exposure to the risk of counterparty
default and would undermine the goal of promoting and supporting
competition in the market by allowing larger FINRA members that are
more able to commit capital to avoid collecting margin.\190\ In
addition, FINRA stated that permitting a capital charge to substitute
completely for the collection of margin would undermine the core
regulatory objectives of the margin requirements for Covered Agency
Transactions to reduce the risk of unsecured exposures to Covered
Agency Transactions and to encourage the collection of margin.\191\
---------------------------------------------------------------------------

    \186\ See FINRA Statement at 26.
    \187\ See FINRA Statement at 26.
    \188\ See FINRA Statement at 35.
    \189\ See FINRA Statement at 35.
    \190\ See FINRA Statement at 35.
    \191\ See FINRA Statement at 26-27.
---------------------------------------------------------------------------

    FINRA also stated that permitting capital to substitute wholly for
the requirement to collect margin would exacerbate, rather than
address, the disparity between small and medium-sized firms and larger
competitors, as larger competitors would be able to use their larger
balance sheets to effectively avoid the margin requirements altogether,
to the disadvantage small and medium-sized firms.\192\ Because taking a
capital charge is optional, FINRA stated that members will only commit
capital in lieu of margin when they believe it appropriately balances
the benefits and risks.\193\ FINRA stated it intended to keep strong
incentives to collect margin and use the amendments only to allow
flexibility in complying with the rule.\194\
---------------------------------------------------------------------------

    \192\ See FINRA Statement at 26-27.
    \193\ See FINRA Statement at 27.
    \194\ See FINRA Statement at 27.
---------------------------------------------------------------------------

    In response to Petitioners' comments that certain entities, such as
pension funds and state agencies, may be unable to post margin, or that
registered investment companies are not permitted to re-pledge
collateral, FINRA stated that it disagrees, arguing that Petitioners do
not explain why registered investment companies could not re-pledge
collateral subject to appropriate custody arrangements.\195\ In
addition, to the extent Petitioners assert that registered investment
companies or pension plans cannot post margin, FINRA believes they are
incorrect, stating that it believes that registered investment
companies can post margin.\196\ FINRA stated that these entities are
simply required to account for the obligation to post margin as part of
their potential exposures with respect to derivative transactions, as a
condition to their derivative obligations not being subject to more
general restrictions on such companies' ability to incur debt.\197\ In
addition, FINRA stated that it believed that, under a 2013 Advisory
Opinion from the Department of Labor, ERISA pension plans can post both
initial and variation margin, and the assets deposited with the
counterparty ``to support payment obligations that may become necessary
for the plan'' ``would not be plan assets for the purposes of Title I
of ERISA.'' \198\ Finally, FINRA stated that, in any event, the
proposed amendment that would permit FINRA members to substitute a
capital charge for the collection of margin is intended to provide the
very flexibility Petitioners seek to continue to deal with
counterparties who are unable or unwilling to post margin, while
maintaining the overall effectiveness of the rule.\199\
---------------------------------------------------------------------------

    \195\ See FINRA Statement at 27-28.
    \196\ See FINRA Statement at 28.
    \197\ See FINRA Statement at 28. Specifically, FINRA cites to a
Commission release regarding the use of derivatives by registered
investment companies and business development companies to argue
that registered investment companies can post margin, but must
account for the obligation to post margin as part of their potential
exposures to derivatives transactions as a condition to their
derivative obligations not being subject to more general
restrictions on the ability to incur debt. See Use of Derivatives by
Registered Investment Companies and Business Development Companies,
Investment Company Act Release No. 34084 (Nov. 20, 2020), 85 FR
83162, 83175 (Dec. 21, 2020) (File No. S7-24-15).
    \198\ See FINRA Statement at 28; Department of Labor Advisory
Opinion 2013-01A (Feb. 7, 2013).
    \199\ See FINRA Statement at 28.
---------------------------------------------------------------------------

    In response to the comment that the proposed amendment will
increase systemic risk or that FINRA failed to consider it, FINRA
stated that systemic risk was one of the original reasons FINRA
proposed the 2016 Amendments in the first place.\200\ Further, FINRA
stated that the 2021 Amendments are part of an effort by FINRA to
address a significant source of potential systemic risk, and risk to
its members: the risk of exposure to counterparty defaults on the
purchase of forward-settling Covered Agency Transactions during the
often lengthy period between trade and settlement dates.\201\ In
addition, FINRA stated that to the extent that certain market
participants are no longer able to take on the same amount of risk that
they were prior to the 2016 Amendments that will reduce systematic risk
rather than increase it.\202\
---------------------------------------------------------------------------

    \200\ See FINRA Statement at 42.
    \201\ See FINRA Statement at 2, 5, 8.
    \202\ See FINRA Statement at 42. FINRA stated that unmargined
positions in the TBA market could raise systemic concerns, because,
if one or more counterparties defaulted, the interconnectedness and
concentration in the TBA market may lead to potentially broadening
losses and the possibility of substantial disruption to financial
markets and participants. Id.
---------------------------------------------------------------------------

    In response to comments that the proposed rule change may result in
higher capital or margin charges, FINRA stated that, 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.\203\ According to FINRA, the only requirement
to be able to net transactions in determining a counterparty's ``net
mark to market loss'' 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).\204\
---------------------------------------------------------------------------

    \203\ See Amendment No. 1 (2021) at 7-8.
    \204\ See Amendment No. 1 (2021) at 7-8.
---------------------------------------------------------------------------

    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),\205\ and (2) members should be required to take
capital charges for only ten percent of their counterparties'
unmargined mark to market losses.\206\ FINRA stated that it believes
that these suggestions would significantly undercut the objective of
the rule to protect against the risk of unsecured credit exposure in
Covered Agency Transactions.\207\ In addition, FINRA stated that the
same factors that make smaller firms more sensitive to the margin
requirements also make them more vulnerable to the risk of counterparty
default, which such firms may be less able to absorb, underscoring the
need for the margin requirement regime. Further, FINRA stated that the
current rule, 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.\208\ FINRA stated that the proposed rule change
preserves all of the exceptions in the current rule, eliminates the two
percent maintenance margin requirement, and provides an option, subject
to specified terms and conditions, to take capital charges in lieu of
collecting margin for net mark to market losses in excess of
$250,000.\209\ Because the proposed rule change eliminates the two
percent maintenance margin requirement and 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.\210\
---------------------------------------------------------------------------

    \205\ See section III.F.3. below for FINRA's responses to
comments and the Commission's findings related to moving the margin
collection date to a longer period.
    \206\ 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 (2021) at 9; FINRA
Statement at 34.
    \207\ See Amendment No. 1 (2021) at 8-9; FINRA Statement at 34.
    \208\ See Amendment No. 1 (2021) at 8.
    \209\ See Amendment No. 1 (2021) at 8.