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Olshan Petitions SEC For Review of Order Approving FINRA Rule Imposing Margin on Agency MBS

February 8, 2022

On February 3, 2022, Olshan, on behalf of clients Bond Dealers of America and Brean Capital, LLC, has petitioned the SEC for review of its January 20, 2022 order (the “Order”) approving the amendments to FINRA Rule 4210 (the “Margin Rule”) that modify prior amendments approved in 2016 (the “2016 Rule”). Absent this challenge, the 2016 Rule, inclusive of the amendments, will become effective in nine to ten months.

The Petition marks the culmination of Olshan’s clients’ challenges to an eight-year effort by FINRA to impose margin requirements on agency mortgage-backed securities (“Agency MBS, which are referred to as “Covered Agency Transactions” or “CATs” in the Margin Rule). As demonstrated in the Petition, the imposition of margin on CATs will drastically impact regional broker-dealers that trade agency mortgage-backed securities, as well as their customers, which include state agencies, regional banks and mortgage originators. This in turn will harm the Agency MBS market, which provides capital that permits the underwriting of new loans, and thereby creates liquidity essential to the stability of the U.S. housing market.

Prior to October 2015, FINRA had not attempted to regulate CATs through the Margin Rule, and over many decades, broker-dealer risk in trading Agency MBS had been successfully addressed through net capital requirements. Dating to FINRA’s original rule proposal, Olshan has challenged the inclusion of CATs in the Margin Rule as contrary to law and competition and has also demonstrated that FINRA’s proposals are not workable. The issues raised by Olshan, together with other market participants, has led to repeated delays in implementation of the 2016 Rule. In November 2019, FINRA recognized the legitimacy of the concerns voiced by Olshan’s clients and other market participants that the 2016 Rule would harm smaller and medium-sized broker-dealers, and, in May 2021, FINRA proposed further amendments to address them. In June and September 2021, Olshan submitted comments that showed that the rule would still impose negative impact of the proposed mandatory margin requirements on competition as well as to the liquidity that regional broker-dealers provide to market participants in the Agency MBS market.  Nonetheless, on January 20, 2022, the Commission approved the proposed rule change. 

The Petition challenges the 2016 Rule and the Order.  Olshan litigation partners Adrienne Ward and Thomas Fleming worked on the submission with co-counsel Cooper & Kirk PLLC. The Petition is available here.

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