
[Federal Register Volume 81, Number 4 (Thursday, January 7, 2016)]
[Notices]
[Pages 844-847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-33312]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76813; File No. SR-FINRA-2015-059]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
the Derivatives and Other Off-Balance Sheet Items Schedule Pursuant to 
FINRA Rule 4524 (Supplemental FOCUS Information)

December 31, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 23, 2015, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which items have been substantially 
prepared by FINRA. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the instructions to the Derivatives and 
Other Off-Balance Sheet Items Schedule (``OBS'') pursuant to FINRA Rule 
4524 (Supplemental FOCUS Information) to expand the application of the 
OBS to certain non-carrying/non-clearing firms that have significant 
amounts of off-balance sheet obligations. The proposed rule change does 
not propose amendments to existing rule text.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections IIA, 
IIB, and IIC below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA Rule 4524 requires each firm, as FINRA shall designate, to 
file such additional financial or operational schedules or reports as 
FINRA may deem necessary or appropriate for the protection of investors 
or in the public interest as a supplement to the FOCUS Report.\3\ In 
February 2013, the SEC approved FINRA's adoption, pursuant to FINRA 
Rule 4524, of the OBS as a supplement to the FOCUS report.\4\ The OBS 
captures important information that is not otherwise reported on firms' 
balance sheets and requires all firms that carry customer accounts or 
self-clear or clear transactions for others (referred to, collectively, 
as ``carrying or clearing firms'') to file with FINRA the OBS within 22 
business days of the end of each calendar quarter, unless a carrying or 
clearing firm meets the de minimis exception set forth in the 
instructions to the OBS.\5\
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    \3\ See Securities Exchange Act Release No. 66364 (February 9, 
2012), 77 FR 8938 (February 15, 2012) (Order Approving File No. SR-
FINRA-2011-064). FINRA Rule 4524 also provides that FINRA will 
specify the content of additional schedules or reports, their 
format, and the timing and the frequency of such supplemental 
filings in a Regulatory Notice (or similar communication), the 
content of which FINRA will file with the Commission pursuant to 
Section 19(b) of the Act.
    \4\ See Securities Exchange Act Release No. 68832 (February 5, 
2013), 78 FR 9754 (February 11, 2013) (Order Approving File No. SR-
FINRA-2012-050). Carrying or clearing firms were required to file 
with FINRA their initial OBS on or before July 31, 2013, to disclose 
off-balance sheet information as of June 30, 2013. See Regulatory 
Notice 13-10 (March 2013) (Supplemental FOCUS Information).
    \5\ The de minimis exception relieves a carrying or clearing 
firm from filing the OBS for the reporting period if the aggregate 
of all gross amounts of off-balance sheet items is less than 10 
percent of the firm's excess net capital on the last day of the 
reporting period. For purposes of the OBS, as well as the proposed 
amendments to the OBS, the term ``excess net capital'' means net 
capital reduced by the greater of the minimum dollar net capital 
requirement or two percent of combined aggregate debit items as 
shown in the Formula for Reserve Requirements pursuant to SEA Rule 
15c3-3. See Securities Exchange Act Release No. 68832 (February 5, 
2013), 78 FR 9754, 9755 (February 11, 2013) (Order Approving File 
No. SR-FINRA-2012-050).
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    Pursuant to FINRA Rule 4524, the proposed rule change would amend 
the instructions to the OBS to expand its application beyond carrying 
or clearing firms to include firms that neither carry customer accounts 
nor clear transactions (referred to, collectively, as ``non-clearing 
firms'') that have, pursuant to SEA Rule 15c3-1,\6\ a

[[Page 845]]

minimum dollar net capital requirement equal to or greater than 
$100,000, and at least $10 million in reportable items pursuant to the 
OBS. As discussed in more detail below, FINRA believes this proposed 
expansion is necessary to effectively examine for compliance with, and 
enforce, its rules on capital adequacy. The proposed rule change does 
not otherwise change the OBS or its instructions, including the de 
minimis exception. Accordingly, consistent with the current OBS, any 
firm (i.e., either a carrying or clearing firm or a non-clearing firm) 
that meets the de minimis exception need not file the OBS for the 
reporting period.\7\ Further, under the proposed rule change, as under 
the current OBS, any firm that is required to file the OBS must do so 
as of the last day of a reporting period within 22 business days of the 
end of each calendar quarter.
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    \6\ See 17 CFR 240.15c3-1 (Net Capital Requirements for Brokers 
or Dealers). SEA Rule 15c3-1(a)(2)(iii) requires a ``dealer'' (as 
defined in SEA Rule 15c3-1(a)(2)(iii)) to maintain net capital of 
not less than $100,000.
    \7\ However, a firm that claims the de minimis exception must 
affirmatively indicate through the eFOCUS system that no filing is 
required for the reporting period. See Regulatory Notice 13-10 
(March 2013) (Supplemental FOCUS Information).
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    When FINRA proposed the OBS, FINRA noted the need, in the aftermath 
of the financial crisis, to obtain more comprehensive and consistent 
information regarding carrying or clearing firms' off-balance sheet 
assets, liabilities and other commitments.\8\ By requiring carrying or 
clearing firms to report their gross exposures in financing 
transactions (e.g., reverse repos, repos and other transactions that 
are otherwise netted under generally accepted accounting principles, 
reverse repos and repos to maturity and collateral swap transactions), 
interests in and exposure to variable interest entities, non-regular 
way settlement transactions (including to-be-announced or TBA \9\ 
securities and delayed delivery/settlement transactions), underwriting 
and other financing commitments, and gross notional amounts in 
centrally cleared and non-centrally cleared derivative transactions on 
the OBS, FINRA has been able to more effectively monitor on an ongoing 
basis the potential impact that such off-balance sheet activities may 
have on carrying or clearing firms' net capital, leverage and 
liquidity, and their ability to fulfill their customer protection 
obligations.
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    \8\ See Securities Exchange Act Release No. 68270 (November 20, 
2012), 77 FR 70860 (November 27, 2012) (Notice of Filing File No. 
SR-FINRA-2012-050).
    \9\ FINRA Rule 6710(u) defines ``TBA'' to mean a transaction in 
an Agency Pass-Through Mortgage-Backed Security (``MBS'') or a Small 
Business Administration (``SBA'')-Backed Asset-Backed Security 
(``ABS'') where the parties agree that the seller will deliver to 
the buyer a pool or pools of a specified face amount and meeting 
certain other criteria but the specific pool or pools to be 
delivered at settlement is not specified at the Time of Execution, 
and includes TBA transactions for good delivery and TBA transactions 
not for good delivery. Agency Pass-Through MBS and SBA-Backed ABS 
are defined under FINRA Rule 6710(v) and FINRA Rule 6710(bb), 
respectively. The term ``Time of Execution'' is defined under FINRA 
Rule 6710(d).
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    Since the OBS became effective, however, FINRA has observed 
considerable principal trading activities of some non-clearing firms. 
In particular, through its efforts to establish margin requirements for 
the TBA market \10\ and subsequent examinations of firms' margining 
practices related to all securities transactions with extended 
settlement dates, FINRA has become aware of non-clearing firms with 
both material TBA transactions as well as other types of securities 
transactions with extended settlement dates. In the case of TBA 
transactions, non-clearing firms may have entered into a Master 
Securities Forward Transaction Agreement (``MSFTA'') \11\ with their 
clients and are principal to the TBA transactions. In the case of other 
transactions with extended settlement dates cleared through a clearing 
firm, non-clearing firms are principal to the trades and financially 
responsible to the clearing firms for any losses that may result from 
clients' failures to complete the transactions on the date of 
settlement. Therefore, these transactions may present significant 
financial exposure for non-clearing firms. FINRA is concerned about 
firms appropriately monitoring their financial exposure and applying 
capital charges for these transactions as required for compliance with 
SEA Rule 15c3-1.\12\ Further, such transactions are not reported on 
non-clearing firms' balance sheets, making it difficult to monitor 
their compliance with capital requirements.
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    \10\ See Securities Exchange Act Release No. 76148 (October 14, 
2015), 80 FR 63603 (October 20, 2015) (Notice of Filing File No. SR-
FINRA-2015-036).
    \11\ The Securities Industry and Financial Markets Association 
(``SIFMA'') developed, and subsequently updated, in coordination 
with the Treasury Market Practices Group (``TMPG''), the MSFTA as a 
standard industry template for forward and other delayed delivery 
transactions involving mortgage-backed and asset-backed securities. 
See, e.g., SIFMA Guidance Notes to the Master Securities Forward 
Transaction Agreement (December 2012), available at: http://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/.
    \12\ 17 CFR 240.15c3-1.
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    As a result of these concerns, and to ensure that all firms with 
significant derivative and off-balance sheet positions report these 
positions to FINRA on a consistent and regular basis, FINRA is 
proposing to expand the reporting requirements of the OBS to non-
clearing firms that have a minimum dollar net capital requirement equal 
to or greater than $100,000, and at least $10 million in reportable 
items pursuant to the OBS. The current de minimis exception would 
remain available to any firm that conducts limited off-balance sheet 
activity.\13\
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    \13\ See supra note 5.
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    If the Commission approves the proposed rule change, FINRA will 
announce the implementation date (i.e., the first quarterly reporting 
period for newly affected firms \14\) in a Regulatory Notice to be 
published no later than 60 days following Commission approval of the 
proposed rule change. The implementation date will be no later than 210 
days following Commission approval of the proposed rule change.
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    \14\ Carrying or clearing firms that are currently subject to 
the OBS's reporting requirements would not be impacted by the 
proposed rule change and shall continue to file on a quarterly 
basis, as required, without interruption.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change is 
consistent with the Act because expanding the reporting requirements of 
the OBS to the proposed non-clearing firms would permit FINRA to assess 
effectively on an ongoing basis the potential impact off-balance sheet 
activities may have on these firms' net capital, leverage and 
liquidity, and ability to fulfill obligations to other members and 
counterparties. FINRA also expects that impacted non-clearing firms, as 
well as their correspondent clearing firms, would benefit from 
increased awareness of their open trade exposures, which may reduce 
their potential for losses, encourage better counterparty risk 
management and promote firms' financial stability. The proposed rule 
change is also consistent with Section 712(b)(3)(B) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act in that it is necessary 
to enable FINRA to more effectively examine for compliance with, and 
enforce, its rules on capital adequacy.\16\
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    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ Public Law 111-203, 124 Stat. 1376 (2010).

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[[Page 846]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA has carefully crafted the 
proposed rule change to achieve its intended and necessary regulatory 
purpose while minimizing the burden on firms.

Economic Impact Assessment

    The purpose of the proposal is to ensure that all firms with 
significant derivative and off-balance sheet positions report these 
positions to FINRA on a consistent and regular basis. Specifically, the 
proposal extends the reporting requirement to non-clearing firms that 
have a minimum dollar net capital requirement equal to or greater than 
$100,000, and at least $10 million in reportable items pursuant to the 
OBS. The primary anticipated net benefit of the proposal is better 
insights into the size and nature of firms' open exposures in TBA and 
other extended settlement transactions or other off-balance sheet 
exposures. This information would enable FINRA to more efficiently 
monitor on an ongoing basis the financial condition of member firms, 
including firms' compliance with capital adequacy rules. FINRA also 
expects that impacted non-clearing firms, as well as their 
correspondent clearing firms, would benefit from increased awareness of 
their open trade exposures, which may reduce their potential for 
losses. Accordingly, FINRA's experience suggests that firms may apply 
better counterparty risk management practices as a result of extending 
the OBS to the additional firms.
    FINRA estimates that approximately 100 additional firms will be 
required to file the OBS under the proposal, though the actual number 
will fluctuate as off-balance sheet items and excess net capital vary 
depending on firms' reporting figures. However, the filing of the OBS 
is not expected to have significant compliance costs for the newly 
affected firms and will not impact member firms currently required to 
file the OBS.\17\ The information required for proposed newly affected 
firms to complete the OBS should be accessible to firms due to firms' 
obligations to maintain books and records and to take applicable 
capital charges in relation to off-balance sheet transactions. Further, 
FINRA understands that correspondent clearing firms typically provide 
non-clearing firms with information on all open trades or provide non-
clearing firms with ready access to such information, either of which 
could serve as a potential source for the required information for non-
clearing firms. Finally, as discussed above, for those firms that 
conduct limited off-balance sheet activity, the proposed amended OBS 
retains the de minimis exception for each reporting period.\18\
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    \17\ For example, in discussions with non-clearing firms 
regarding the proposal, several firms estimated that it would take 
no more than a few hours per quarter and cost $5,000 to $10,000 per 
year to file the OBS.
    \18\ See supra note 5.
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    The proposal will ensure that all firms with significant off-
balance sheet obligations are required to report them in a consistent 
manner. Further, the reporting requirement is expected to create 
positive externalities as firms that currently do not report this 
information will be able to better monitor and manage their 
counterparty exposures, better manage their participation in off-
balance sheet activities and maintain sufficient net capital to support 
such transactions. To the extent that member firms reduce their off-
balance sheet activities as a result of this rule, impacted customers 
may incur search costs as they replace their broker counterparties.
    A potential significant benefit of the proposal may arise from 
enhanced monitoring of systemic risk that is caused by the 
interconnectedness of firms through significant counterparty exposure 
and likelihood of correlated defaults in the financial industry. This 
enhanced monitoring of systemic risk should also benefit clearing firms 
as counterparty risk is partially mitigated for these firms as a result 
of better monitoring of financial exposures created by these 
transactions. There is academic evidence that banking systems may be 
less prone to crises if more comprehensive financial reporting regimes 
are in effect, even when the reporting is only to the regulator.\19\
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    \19\ Solomon A. Tadesse, The Economic Value of Regulated 
Disclosure: Evidence from the Banking Sector, 25 J. Acct. & Pub. 
Pol'y 32-70 (2006).
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    FINRA considered alternative thresholds, such as extending the OBS 
reporting requirements to non-clearing firms with less than $10 million 
in reportable items, when developing the proposed rule change. In 
connection with this proposal, FINRA identified 334 firms that 
currently do not file the OBS with open exposure in TBA and other 
extended settlement transactions totaling approximately $93.3 
billion.\20\ FINRA reviewed their aggregate exposures in TBA and other 
extended settlement transactions and found that the majority of these 
firms (227 firms) had open exposures of less than $10 million, totaling 
approximately $363 million, and that the level of firms' exposures 
dropped off significantly below the $10 million threshold. In this 
regard, of the non-clearing firms identified to have less than $10 
million in TBA and other extended settlement exposure, the vast 
majority of those (204 firms) had exposure of less than $5 million, 
totaling approximately $206 million. Accordingly, the firms with open 
TBA and other extended settlement transactions of less than $10 million 
collectively account for less than 1% of the total aggregate open TBA 
and other extended settlement transactions of the non-clearing firms 
identified. FINRA does not believe that the purpose of the proposed 
rule change is furthered by requiring firms with relatively immaterial 
levels of this type of exposure to file the OBS. Therefore, FINRA 
believes that extending the reporting requirements to non-clearing 
firms meeting the chosen criteria--that is, those with a minimum dollar 
net capital requirement equal to or greater than $100,000 (the required 
minimum dollar net capital for dealers under SEA Rule 15c3-1(a)(2)(iii) 
\21\) and at least $10 million in reportable items--will capture those 
non-clearing firms with the most significant amounts of off-balance 
sheet exposure and possible risk to other members and counterparties.
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    \20\ To assess the potential size of TBA and other extended 
settlement transactions of non-clearing firms, FINRA conducted a 
survey of some of the largest correspondent clearing firms. The 
figures represented are only approximate and represent identified 
non-clearing firms' exposures as of a specific date. As exposures in 
TBA and other extended settlement trades vary from month to month, 
the actual number of firms falling into these categories will 
change, as will the number of firms required to file the OBS on any 
given month.
    \21\ See supra note 6.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory

[[Page 847]]

organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-059 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2015-059. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2015-059 and should be 
submitted on or before January 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-33312 Filed 1-6-16; 8:45 am]
 BILLING CODE 8011-01-P


