With over $186 billion in average daily trading volume, the To-Be-Announced (“TBA”) market serves as a significant funding and hedging vehicle for consumer mortgage origination. Although a large portion of the TBA market is comprised of highly liquid agency MBS, the exchange of margin has not typically been required. Without the backstop of collateral, another financial crisis could spell significant turmoil for investors.
Given the TBA market’s significance to lenders, in an effort to address counterparty risk, FINRA issued its long-awaited proposed margin rule in January 2014 requiring margin on TBA transactions for the first time (FINRA Rule 4210). Its release sparked a response of 29 comment letters from broker-dealers, largely focusing on the proposal’s impact on firms’ operations and capital.
In response to these comment letters, we believe FINRA will revise the proposal’s margin requirements this summer by exempting certain transactions that have shorter settlement cycles (which comprise the bulk of smaller firms’ activities). We also expect FINRA to submit the revised rule for the SEC’s approval by September, followed by a second comment period.
Although there will likely be a nine to twelve month implementation period after the rule is finalized (which will be early next year in our view), the rule is complex and its potential operational challenges are significant. Firms should begin preparing soon.
This Regulatory Brief provides an analysis of the proposed rule, our view of how the proposal will change this summer, and our perspective on what firms should do to meet its requirements.