FINRA Rule 4210 Amendments
Are you prepared to comply with new amendments to FINRA Rule 4210?
After years of delay, the Financial Industry Regulatory Authority (FINRA) is finally enacting amendments to Rule 4210. The new Covered Agency Transaction requirements take effect in May 2024 and have significant implications for impacted market participants and their Master Securities Forward Trading Agreements (MSFTAs).
In this article:
- Understanding the FINRA Rule 4210 Amendments
- Axiom: Your Partner in FINRA 4210 Compliance
- FINRA Rule 4210 FAQ
- Regulatory & Compliance Lawyers for Financial Services
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Understanding the FINRA Rule 4210 Amendments
Following seven years of extensions, the U.S. Securities and Exchange Commission finally approved FINRA's Rule 4210 amendments for Covered Agency Transactions on July 27, 2023, with implementation set for May 22, 2024.
The amendments apply to the following types of transactions:
- To Be Announced transactions, inclusive of adjustable-rate mortgage (ARM) transactions
- Specified Pool Transactions
- Transactions in Collateralized Mortgage Obligations (CMOs) issued in conformity with a program of an agency or Government-Sponsored Enterprise (GSE), with forward settlement dates.
According to FINRA Notice 43-23, the amendments change Rule 4210 in three significant ways:
- The amendments eliminate the 2% maintenance margin requirement on Covered Agency Transactions by non-exempt accounts. As such, broker-dealers will no longer need to distinguish exempt account customers from other customers for purposes of Covered Agency Transaction margin. They will instead collect margin for each counterparty’s excess mark-to-market loss regardless of exempt or non-exempt account status.
- Subject to specified conditions and limitations, the amendments permit broker-dealers to take a capital charge rather than collect margin for excess net mark-to-market losses on Covered Agency Transactions.
- Make revisions to streamline, consolidate and clarify the Covered Agency Transaction rule language.
Axiom: Your Partner in FINRA 4210 Compliance
Timely compliance with the new FINRA Rule 4210 amendments will place a significant regulatory burden on impacted broker-dealers at a time when many corporate law departments face considerable budgetary and headcount pressures.
Axiom can help.
Founded over 20 years ago to meet the unique resourcing needs of modern legal departments, we’re committed to helping our clients control costs, achieve efficiency, and remain agile in the face of today’s rapidly evolving regulatory landscape. With access to an extensive global network of high-caliber legal professionals, Axiom can connect your organization with one or more regulatory and compliance attorneys with the relevant knowledge and experience to seamlessly navigate FINRA’s new Covered Agency Transaction requirements.
- Regulatory Compliance Advisory: Providing comprehensive guidance on interpreting and adhering to the newly finalized rule.
- Policy and Procedure Development: Crafting robust policies and procedures tailored to comply with the new FINRA Rule 4210 Amendments.
- Training and Education: Playbook creation to leverage when educating staff members on the amended regulations.
- Implementation Support: Assisting with the practical implementation of the rule's new requirements.
- Negotiation Support: Assist with negotiation of relevant documents and amendments.
With Axiom as your FINRA compliance partner, you never have to compromise your highest standards.
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FINRA Rule 4210 FAQ
FINRA Rule 4210 is a regulation established by the Financial Industry Regulatory Authority (FINRA) that sets forth the margin requirements for broker-dealers. The rule specifies the criteria under which credit may be extended to customers, the maintenance of collateral, and the calculation of margin for various types of securities transactions. Its primary goal is to manage the risk associated with securities lending and borrowing, protecting both the brokerage firm and its clients.
FINRA Rule 4210 applies to all FINRA member firms that engage in margin transactions with customers. This includes brokerage firms and dealers that offer margin accounts to their clients for the purpose of purchasing securities on credit.
The key components of FINRA Rule 4210 include:
- Initial Margin Requirements: The initial collateral required to establish a position in a margin account.
- Maintenance Margin Requirements: The minimum amount of equity that must be maintained in a margin account after the initial purchase.
- Margin Calls: Requirements for depositing additional collateral or selling securities if the equity in the margin account falls below the maintenance margin requirement.
- Concentration Charge: Additional margin requirements for accounts with a high concentration in a single security or issuer.
- Exempt Accounts: Criteria for accounts that may be exempt from certain margin requirements.
Margin requirements under Rule 4210 are determined based on the type of securities held in the margin account, the volatility of those securities, the overall credit risk of the customer, and other factors that may affect the risk of the loan. The rule outlines specific percentages for initial and maintenance margin requirements, which can vary based on the assessment of the aforementioned factors.
Yes, there are exemptions to FINRA Rule 4210 for certain institutional accounts and for transactions that are deemed to have a lower risk profile. These exemptions are based on the financial strength of the institution or the specific circumstances of the transaction.
If a customer fails to meet a margin call under Rule 4210, the broker-dealer has the right to sell securities held in the customer's account to cover the margin deficiency without prior consent. This action is taken to protect the financial integrity of the broker-dealer and ensure compliance with the minimum equity requirements.
FINRA enforces Rule 4210 through regular examinations of member firms, reviewing their compliance with margin requirements, and monitoring for any irregularities or violations. Firms found in violation of Rule 4210 may face disciplinary actions, including fines, suspensions, or other sanctions.
Firms can ensure compliance with FINRA Rule 4210 by maintaining robust risk management and compliance programs that include monitoring margin accounts, ensuring accurate calculation of margin requirements, and promptly addressing margin calls. Education and training for staff on the intricacies of margin requirements and regular audits can also help in maintaining compliance.
If your organization requires compliance assistance before the new FINRA Rule 4120 amendments take effect in May 2024, Axiom can help.
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