On March 14, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 21-11 (Notice), which seeks comment on proposed amendments to Rule 4210 (Margin Requirements) that would clarify and incorporate into the rule current interpretations regarding when issued and other extended settlement transactions and provide relief to facilitate the application of the rule to these transactions. Comments must be received by May 14.
Rule 4210 protects member firms against customer credit risk by generally requiring firms to collect margin when they extend credit to their customers. Extensions of credit covered by the rule include transactions in which member firms permit customers to make partial or delayed payment on securities purchases (or partial or delayed delivery of securities sold). FINRA examinations revealed some uncertainty in firms’ understanding about what constitutes delayed payment or delivery for purposes of the margin rules. This uncertainty regarding whether a payment or delivery should be considered delayed may be due, in part, to the fact that Federal Reserve Board (FRB) Regulation T allows transactions to be booked into a customer’s cash account based on the customer’s agreement to make full cash payment for securities purchased (or deposit securities sold) promptly (i.e., within the standard settlement cycle) but then allows two additional business days to resolve any issues with a customer’s payment before requiring a broker-dealer to cancel or liquidate the customer’s purchase of non-exempted securities (or obtain an extension of time). To have a clear and uniform standard to eliminate potential uncertainty regarding whether a payment or delivery is considered delayed, the proposed amendments include a definition of “extended settlement transaction” and add a new paragraph (f)(3)(C) to Rule 4210 requiring all extended settlement transactions (or net positions resulting from extended settlement transactions) to be margined as though they were in margin accounts, except for the specifically excepted transactions or positions described therein.
The proposed amendments also propose to (1) provide clarity for transactions in when issued securities, (2) codify a current interpretation that the limit on net capital deductions apply to all capital charges taken in lieu of collecting margin, including capital charges on when issued transactions and other extended settlement transactions under existing and proposed exceptions from the generally applicable margin requirements, and (3) make other related clarifications, including with respect to the definition of “customer” in FINRA Rule 4210(a)(3), specify that extensions of credit include extended settlement transactions, repurchase transactions or non-purpose securities borrow transactions, and add supplementary material stating that Regulation T good faith accounts are treated as margin accounts under the rule.
Regulatory Notice 21-11, which includes the proposed amendments and information regarding how to submit a comment.