Mandatory TBA Margining under FINRA Rule 4210 Starts May 22, 2024

On August 18, 2023, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 23-14 announcing that mandatory margining of certain delayed delivery agency mortgage-backed securities, including so-called TBAs (or “To Be Announced” securities), will go into effect on May 22, 2024.

This regulatory initiative began in 2012 as an industry standard promulgated by the New York Fed’s Treasury Market Practices Group.

Then, in 2016, FINRA proposed amendments to its Rule 4210, but deferred the implementation date of those amendments several times since their initial proposal. As summarized by FINRA:

FINRA has amended the requirements relating to Covered Agency Transactions that FINRA originally adopted in 2016. Covered Agency Transactions include (1) To Be Announced transactions, inclusive of adjustable rate mortgage transactions, (2) Specified Pool Transactions and (3) transactions in Collateralized Mortgage Obligations, issued in conformity with a program of an agency or Government-Sponsored Enterprise, with forward settlement dates, as recapped more fully in [Regulatory Notice 23-14].

The many delays in the implementation of what many call “mandatory TBA margining” has resulted in “starts and stops” to negotiations of the relevant trading agreement between broker-dealers and their customers, which consist of a wide range of market participants including banks who originate mortgage products in addition to mutual and private funds that invest in agency mortgage-backed securities and various other fixed-income securities.

The trading agreement for the TBA asset class is published by the Securities Industry and Financial Markets Association (“SIFMA”) and known as the Master Securities Forward Trading Agreement (or “MSFTA”). SIFMA published an amendment in 2018 that was updated in 2022 to bring the standard MSFTA into conformity with the requirements of FINRA Rule 4210—market participants often refer to this as the “4210 Amendment.”

Although an extremely well-drafted and balanced form of amendment, SIFMA has not yet—or at least as of the date of the publication of this article—published a version of the 4210 Amendment that reflects the final rule as adopted by FINRA in Regulatory Notice 23-14 in August 2023.

Accordingly, there are two items of note:

1. The two-percent maintenance margin (i.e., like an initial margin) requirement was dropped from the final version of Rule 4210 adopted by FINRA, along with the definition of an “Exempt Account”; and
2. The final version of Rule 4210 also does not have a mandatory five-day liquidation period.

Market participants using the 4210 Amendment may want to speak to qualified counsel about how to negotiate provisions into their MSFTAs that address the requirements of Rule 4210 as ultimately adopted by FINRA.