Finra Sets Margin for ‘TBA’ Markets


Investing in the mortgage-backed securities market is going to become more expensive as the Financial Industry Regulatory Authority has published a rule change that will establish margin requirements for the “to be announced” market.

Securities affected by rule change include TBA transactions, including adjustable rate mortgages; specified pool transactions; and collateralized mortgage obligations issued in conformity with a program of an agent of government-sponsored enterprise with forward settlement dates.

According to Finra officials,the agency and government-sponsored enterprise MBS markets has approximately $5 trillion of securities outstanding and between $750 billion and $1.5 trillion in gross unsettled and unmargined dealer-to-client transactions.

Such an environment “can pose significant counterparty risk to individual market participants” as well as “the market’s sheer size …raise systemic concerns,” concluded a report published by the Federal Reserve Bank of New York-sponsored Treasury Market Practice Group and cited by the regulator.

To address these issues, Finra members would be required to collect “mark to market” margins starting as early as December 4. Members who transact with non-exempt accounts also will have to collect a maintenance margin equal to 2% of each securities’ market value.

However, Finra officials estimate that very few accounts would be treated as non-exempt account under the new rule, according to the rule filing.

Knowing the cost of compliance may fall on smaller firms that do not have margining infrastructure already in place, the new rule will exempt counterparties with gross open positions of $2.5 million or less from the maintenance margin requirement and modifications to the rule’s de minimis transfer positions subject to specified conditions.

Ultimately, Finra officials expect that the rule change will mitigate counterparty risk to protect both side to a transaction from potential default as well as create a fairer environment for all market participants.

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