Olshan Provides Comments to SEC on FINRA Margin Proposal for Agency MBS
Olshan, on behalf of client Brean Capital, LLC, has filed with the SEC a comment on proposed amendments to FINRA Rule 4210, the margin rule, which would drastically impact regional broker dealers such as Brean that trade agency mortgage-backed securities (“Agency MBS, which are also known as “Covered Agency Transactions”). The market in Agency MBS and the liquidity it provides are essential to the stability of the U.S. housing market, because the capital provided by Agency MBS permits the underwriting of new loans. FINRA’s proposed amendments to Rule 4210 would supersede amendments approved in 2016, which have yet to be implemented. Olshan previously challenged those amendments as contrary to law and, together with other market participants, successfully obtained delays in implementation until October 2021. Prior to the 2016 amendments, FINRA had never imposed margin requirements on Covered Agency Transactions, and over many decades, broker-dealer risk in trading Covered Agency Transactions had been successfully addressed through net capital requirements. Olshan’s comment letter explains how the imposition of mandatory margin requirements would have a negative effect on market liquidity, particularly on the liquidity that firms like Brean provide to regional dealers, banks, mortgage originators and other institutional investors that are important participants in the Agency MBS market. FINRA’s proposed rulemaking would in fact enhance risk in the market and have a strong anti-competitive effect, providing primary dealers in Agency MBS with disproportionate power to dictate terms in the market and shifting business to regional bank dealers not subject to a margin regime. For these reasons, the proposed amendments should not be approved. Instead, Olshan urges market participants to collaborate with DTCC to enhance its current clearing facility capacity to include all bonds, including Agency MBS that would be subject to the proposed amendments’ margin requirements, and further the shared goals of increasing market transparency and stability without the threat to liquidity and competition presented by the proposed amendments. Olshan litigation partners Adrienne Ward and Thomas Fleming worked on the submission. The letter is available here.