Our Take: financial services regulatory update – April 19, 2024
Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.
Current topics – April 19, 2024
- 1. FICC proposes margin amendments
- 2. On our radar
1. FICC proposes margin amendments
- What happened? The Fixed Income Clearing Corporation (FICC) proposed amendments to its Global Securities Division Rulebook as required by the SEC’s recently approved expanded central Treasury clearing.
- What does the proposal say? It updates expectations for calculating, collecting and holding customer margin:
- Segregation of margin for proprietary transactions of netting members (i.e., direct members or direct participants of FICC) from the transactions they submit on behalf of indirect participants via the sponsorship or agent clearing model.
- 15c3-3 debits for Sponsoring and Agent Clearing Members contingent upon the segregation of customer margin into individual indirect participant accounts.
- A standard margin component schedule to consolidate existing margin rules and provide a detailed breakdown of margin component definitions.
- New minimum margin requirements in order to reasonably assure that netting member required fund deposits are sufficient to mitigate risk exposure to FICC and its members in the event of extreme market volatility.
- What’s next? There will be further proposals from FICC through June of this year. Once the rules are finalized and approved by the SEC, they will need to be implemented by firms no later than March 31, 2025.
Our Take
Some clarity is provided but questions remain. The proposed amendments provide clear guidelines for segregation of customer funds but questions remain around how pre-funding will work in practice. While they note that netting members will be allowed to utilize proprietary funds to pre-fund margin obligations on behalf of their indirect affiliates, they do not provide a clear framework for whether proprietary funds are returned back to netting members once customer cash or securities are received to cover the obligation. It is also still unclear how this pre-funding arrangement might impact the ability of a netting member to make a debit in the Customer Reserve Formula1 for segregated indirect participants.
Actions firms should take now. Market participants have their first view into the specific operational changes that will be needed to implement expanded central U.S. Treasury clearing. Firms should begin to make strategic decisions (e.g., whether they will choose to designate certain customers as segregated indirect participants) and assess the impact to their operations (e.g., potential changes to account structures) to ensure they will be able to comply by March 31, 2025. They should also assess whether potential increases in their required fund deposits will have material impacts on liquidity.
For more on expanded central Treasury clearing and the FICC’s proposed amendments, see:
- Expanded central Treasury clearing: The countdown begins
- U.S. Treasury Clearing: FICC proposes access rule amendments
- U.S. Treasury Clearing: FICC proposes margin amendments
The Customer Reserve Formula is a calculation outlined in Rule 15c3-3a which firms are required to use in determining the amount of customer funds to set aside to meet withdrawals or to cover potential losses.
2. On our radar
These notable developments hit our radar recently:
- Fed issues Financial Stability Report. On April 19th, the Fed issued its semi-annual Financial Stability Report highlighting valuation pressures, borrowing by businesses and households, leverage in the financial sector and funding risks.This report also discusses potential near-term risks including elevated interest rates, worsening geopolitical conflicts, persistent inflation, strains in the commercial real estate sector, lingering impact from bank stress, fiscal debt sustainability, and policy uncertainty.
- SIFMA hosts Basel III endgame roundtable. On April 18th, the Securities Industry and Financial Markets Association (SIFMA) hosted a roundtable discussion on the impact of Basel III endgame on U.S. capital markets, end users, and the broader economy.
- CFPB issues final rule on supervision designation procedures. On April 16th, the CFPB announced the updating of its procedures for designating nonbank covered persons for supervision, to conform to a recent organizational change and to further ensure that proceedings are fair, effective, and efficient for all parties.
- FINRA enforcement chief outlines key objectives. On April 17th, the head of the Financial Industry Regulatory Authority’s (FINRA’s) enforcement division published a blog post outlining his objectives, including focusing on cases that involve senior and vulnerable adults, customer harm, recidivist behavior and firms and brokers with a history of misconduct. He stated that FINRA will also emphasize enforcement of compliance with Regulation Best Interest (Reg BI). Best Execution standards, and Consolidated Audit Trail (CAT) reporting.
- Treasury issues new sanctions on Iran. On April 18th, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued sanctions on 16 individuals and two entities that produce engines that power the drones used in the April 13th attack on Israel. OFAC is also designating five companies in multiple jurisdictions providing component materials for steel production by one of Iran’s largest steel producers.
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