iFINRA Reminds Member Firms of Obligations for Customer Order Handling, Margin Requirements and Effective Liquidity Management Practices During Extreme Market Conditions
On March 18, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 21-12 (Notice), which reminds member firms of their obligations during extreme market conditions with respect to handling customer orders, maintaining appropriate margin requirements and effectively managing their liquidity.
FINRA is reminding member firms that they should maintain strong procedures, thoughtfully crafted in advance, to reasonably ensure they can continue to provide investors access to the securities markets during times of extreme market volatility, as in the past several months. These procedures include order handling procedures designed to maintain best execution for customers; margin procedures to prevent a firm from becoming overextended from lending in support of customer trades; and liquidity management practices to ensure the firm is able to continue to provide customers with access to the markets despite abnormal liquidity demands.
The Notice focused on reminding member firms of (1) the principles of fair dealing, and that the duty of best execution requires the fair, consistent and reasonable treatment of customer orders at all times, (2) the importance of informing customers about member firms’ order handling procedures, particularly during volatile market periods and that member firms should look to prior guidance from FINRA that addresses the kinds of disclosures firms should consider making in connection with their fair dealing obligations, and (3) considering the need for additional margin consistent with Rule 4210 and reviewing FINRA’s guidance on sound liquidity practices that firms can use to meet their obligations to maintain reasonable funding and liquidity risk management.
FINRA Regulatory Notice 21-12.
FINRA Requests Comment on Proposed Amendments to Margin Rule 4210
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.
FINRA CAT Production Readiness Certification Deadline
Consolidated Audit Trail, LLC (CAT) and Financial Industry Regulatory Authority CAT, LLC (FINRA) remind industry members and CAT reporting agents that the deadline to request Production Readiness Certification for the CAT CAIS LTID Production Environment is Friday, April 9. The CAT Customer and Account Information System (CAIS) Large Trader Identification Number (LTID) Test and Production Environments are open. The CAIS LTID Production Go-Live date for Phase 2a, 2b and 2c reportable activity for Large Industry Members is April 26.
Contact the FINRA CAT Helpdesk at help@finracat.com or (888) 696-3348 with any questions.
