
[Federal Register Volume 81, Number 13 (Thursday, January 21, 2016)]
[Notices]
[Pages 3532-3545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01058]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76908; File No. SR-FINRA-2015-036]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove Proposed Rule Change To Amend FINRA Rule 4210 
(Margin Requirements) To Establish Margin Requirements for the TBA 
Market, as Modified by Partial Amendment No. 1

January 14, 2016.

I. Introduction

    On October 6, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 4210 (Margin 
Requirements) to establish margin requirements for covered agency 
transactions, also referred to, for purposes of this proposed rule 
change, as the To Be Announced (``TBA'') market.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on October 20, 2015.\3\ On November 10, 2015, FINRA extended 
the time period in which the Commission must approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule change 
to January 15, 2016. The Commission received 109 comment letters, \4\ 
which include 50 Type A comment letters and four Type B comment letters 
in response to the proposed rule change. On January 13, 2016, FINRA 
responded to the comments and filed Partial Amendment No. 1 to the 
proposal.\5\ The Commission is publishing this order to solicit 
comments on Partial Amendment No. 1 from interested persons and to 
institute proceedings pursuant to Exchange Act Section 19(b)(2)(B) \6\ 
to determine whether to approve or disapprove the proposed rule change, 
as modified by Partial Amendment No. 1.
---------------------------------------------------------------------------

    \3\ See Exchange Act Release No. 76148 (Oct. 14, 2015), 80 FR 
63603 (Oct. 20, 2015) (File No. SR-FINRA-2015-036) (``Notice'').
    \4\ See Letters from Margaret Allen, AGM Financial, dated 
November 10, 2015 (``AGM Letter''); Paul J. Barrese, Sandler O'Neill 
& Partners, L.P., dated November 10, 2015 (``Sandler O'Neill 
Letter''); Doug Bibby and Doug Culkin, National Multifamily Housing 
Council and National Apartment Association, dated November 10, 2015 
(``NMHC/NAA Letter''); David W. Blass, Investment Company Institute, 
dated November 9, 2015 (``ICI Letter''); Robert Cahn, Prudential 
Mortgage Capital Company, LLC, dated November 10, 2015 (``Prudential 
Letter''); James M. Cain, Sutherland Asbill & Brennan LLP (on behalf 
of the Federal Home Loan Banks), dated November 10, 2015 
(``Sutherland Letter''); Timothy W. Cameron, Esq. and Laura Martin, 
Securities Industry and Financial Markets Association, Asset 
Management Group, dated November 10, 2015 (``SIFMA AMG Letter''); 
Jonathan S. Camps, Love Funding, dated November 9, 2015 (``Love 
Funding Letter''); Richard A. Carlson, Davis-Penn Mortgage Co., 
dated November 9, 2015 (``Davis-Penn 1 Letter''); Michael S. Cordes, 
Columbia National Real Estate Finance, LLC, dated November 9, 2015 
(``Columbia Letter''); Carl E. Corrado, Great Lakes Financial Group, 
LP, dated January 4, 2016 (``Great Lakes Letter''); Daniel R. Crain, 
Crain Mortgage Group, LLC, dated November 6, 2015 (``Crain 
Letter''); James F. Croft, Red Mortgage Capital, LLC, dated November 
10, 2015 (``Red Mortgage Letter''); Dan Darilek, Davis-Penn Mortgage 
Co., dated November 9, 2015 (``Davis-Penn 2 Letter''); Jayson F. 
Donaldson, NorthMarq Capital Finance, L.L.C, dated November 10, 2015 
(``NorthMarq Letter''); Robert B. Engel, CoBank, ACB (on behalf of 
the Farm Credit Banks), dated November 10, 2015 (``CoBank Letter''); 
Robert M. Fine, Brean Capital, LLC, dated November 10, 2015 (``Brean 
Capital 1 Letter''); Tari Flannery, M&T Realty Capital Corporation, 
dated November 9, 2015 (``M&T Realty Letter''); Bernard P. Gawley, 
The Ziegler Financing Corporation, dated November 10, 2015 
(``Ziegler Letter''); John R. Gidman, Association of Institutional 
INVESTORS, dated November 10, 2015 (``AII Letter''); Keith J. 
Gloeckl, Churchill Mortgage Investment, LLC, dated November 6, 2015 
(``Churchill Letter''); Eileen Grey, Mortgage Bankers Association & 
Others, dated October 29, 2015 (``MBA & Others 1 Letter''); Mortgage 
Bankers Association & Others (including American Seniors Housing 
Association), dated November 10, 2015 (``MBA & Others 2 Letter''); 
Tyler Griffin, Dwight Capital, dated November 10, 2015 (``Dwight 
Letter''); Pete Hodo, III, Highland Commercial Mortgage, dated 
November 5, 2015 (``Highland 1 Letter''); Robert H. Huntington, 
Credit Suisse Securities (USA) LLC, dated November 10, 2015 
(``Credit Suisse Letter''); Matthew Kane, Centennial Mortgage, Inc., 
dated November 9, 2015 (``Centennial Letter''); Christopher B. 
Killian, Securities Industry and Financial Markets Association, 
dated November 10, 2015 (``SIFMA Letter''); Robert T. Kirkwood, 
Lancaster Pollard Holdings, LLC, dated November 10, 2015 
(``Lancaster Letter''); Tony Love, Forest City Capital Corporation, 
dated November 5, 2015 (``Forest City 1 Letter''); Tony Love, Forest 
City Capital Corporation, dated November 10, 2015 (``Forest City 2 
Letter''); Anthony Luzzi, Sims Mortgage Funding, Inc., dated 
November 9, 2015 (``Sims Mortgage Letter''); Diane N. Marshall, 
Prairie Mortgage Company, dated November 10, 2015 (``Prairie 
Mortgage Letter''); Matrix Applications, LLC, dated November 10, 
2015 (``Matrix Letter''); Douglas I. McCree, CMB, First Housing, 
dated November 10, 2015 (``First Housing Letter''); Michael 
McRoberts, DUS Peer Group, dated November 2, 2015 (``DUS Letter''); 
Chris Melton, Coastal Securities, dated November 9, 2015 (``Coastal 
Letter''); John O. Moore Jr., Highland Commercial Mortgage, dated 
November 6, 2015 (``Highland 2 Letter''); Dennis G. Morton, AJM 
First Capital, LLC, dated November 10, 2015 (``AJM Letter''); 
Michael Nicholas, Bond Dealers of America, dated November 10, 2015 
(``BDA Letter''); Lee Oller, Draper and Kramer, Incorporated, dated 
November 10, 2015 (``Draper Letter''); Roderick D. Owens, Committee 
on Healthcare Financing, dated November 6, 2015 (``CHF Letter''); 
Jose A. Perez, Perez, dated November 9, 2015 (``Perez Letter''); 
David F. Perry, Century Health Capital, Inc., dated November 9, 2015 
(``Century Letter''); Deborah Rogan, Bellwether Enterprise Real 
Estate Capital, LLC, dated November 10, 2015 (``Bellwether 
Letter''); Bruce Sandweiss, Gershman Mortgage, dated November 18, 
2015 (``Gershman 1 Letter''); Craig Singer and James Hussey, RICHMAC 
Funding LLC, dated November 9, 2015 (``Richmac Letter''); David H. 
Stevens, Mortgage Bankers Association, dated November 10, 2015 
(``MBA Letter''); Stephen P. Theobald, Walker & Dunlop, LLC, dated 
November 10, 2015 (``W&D Letter''); Robert Tirschwell, Brean 
Capital, LLC, dated November 10, 2015 (``Brean Capital 2 Letter''); 
Mark C. Unangst, Gershman Mortgage, dated November 23, 2015 
(``Gershman 2 Letter''); Charles M. Weber, Robert W. Baird & Co. 
Incorporated, dated November 10, 2015 (``Robert Baird Letter''); 
Steve Wendel, CBRE, Inc., dated November 10, 2015 (``CBRE Letter''); 
Carl B. Wilkerson, American Council of Life Insurers, dated November 
10, 2015 (``ACLI Letter''); David H. Stevens, Mortgage Bankers 
Association, dated January 11, 2016 (``MBA Supplemental Letter''). 
The Type A and B form letters generally contain language opposing 
the inclusion of multifamily housing and project loan securities 
within the scope of the proposed rule change. The Commission staff 
also participated in numerous meetings and conference calls with 
some commenters and other market participants.
    \5\ See Partial Amendment No. 1, dated January 13, 2016 
(``Partial Amendment No. 1''). FINRA's responses to comments 
received and proposed amendments are included in Partial Amendment 
No. 1. The text of Partial Amendment No. 1 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.
    \6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Institution of proceedings does not indicate that the Commission 
has reached any conclusions with respect to the proposed rule change, 
not does it mean that the Commission will ultimately disapprove the 
proposed rule change. Rather, as discussed below, the Commission seeks 
additional input on the proposed rule change, as modified by Partial 
Amendment No. 1, and on the issues presented by the proposal.

II. Description of the Proposed Rule Change \7\

    In its filing, FINRA proposed amendments to FINRA Rule 4210 (Margin 
Requirements) to establish requirements for: (1) TBA transactions,\8\

[[Page 3533]]

inclusive of adjustable rate mortgage (``ARM'') transactions; (2) 
Specified Pool Transactions; \9\ and (3) transactions in Collateralized 
Mortgage Obligations (``CMOs''),\10\ issued in conformity with a 
program of an agency \11\ or Government-Sponsored Enterprise 
(``GSE''),\12\ with forward settlement dates, (collectively, ``Covered 
Agency Transactions,'' also referred to, for purposes of this filing, 
as the ``TBA market'').
---------------------------------------------------------------------------

    \7\ The proposed rule change, as described in this Item II, is 
excerpted, in part, from the Notice, which was substantially 
prepared by FINRA. See supra note 3.
    \8\ See 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.
    \9\ See FINRA Rule 6710(x) defines Specified Pool Transaction to 
mean a transaction in an Agency Pass-Through MBS or an SBA-Backed 
ABS requiring the delivery at settlement of a pool or pools that is 
identified by a unique pool identification number at the Time of 
Execution.
    \10\ See FINRA Rule 6710(dd).
    \11\ See FINRA Rule 6710(k).
    \12\ See FINRA Rule 6710(n) and 2 U.S.C. 622(8).
---------------------------------------------------------------------------

    FINRA stated that most trading of agency and GSE Mortgage-Backed 
Security (``MBS'') takes place in the TBA market, which is 
characterized by transactions with forward settlements as long as 
several months past the trade date.\13\ The agency and GSE MBS market 
is one of the largest fixed income markets, with approximately $5 
trillion of securities outstanding and approximately $750 billion to 
$1.5 trillion in gross unsettled and unmargined transactions between 
dealers and customers.\14\
---------------------------------------------------------------------------

    \13\ See, e.g., James Vickery & Joshua Wright, TBA Trading and 
Liquidity in the Agency MBS Market, Federal Reserve Bank of New York 
(``FRBNY'') Economic Policy Review, May 2013, available at: <https://www.newyorkfed.org/medialibrary/media/research/epr/2013/1212vick.pdf>; see also SEC's Staff Report, Enhancing Disclosure in 
the Mortgage-Backed Securities Markets, January 2003, available at: 
<https://www.sec.gov/news/studies/mortgagebacked.htm>.
    \14\ See Treasury Market Practices Group (``TMPG''), Margining 
in Agency MBS Trading, November 2012, available at: <https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/margining_tmpg_11142012.pdf> (the ``TMPG Report''). The TMPG is a 
group of market professionals that participate in the TBA market and 
is sponsored by the FRBNY.
---------------------------------------------------------------------------

    FINRA stated that historically, the TBA market is one of the few 
markets where a significant portion of activity is unmargined, thereby 
creating a potential risk arising from counterparty exposure. With a 
view to this gap between the TBA market versus other markets, FINRA 
noted the TMPG recommended standards (the ``TMPG best practices'') 
regarding the margining of forward-settling agency MBS 
transactions.\15\ FINRA stated that the TMPG best practices are 
recommendations and as such currently are not rule requirements. FINRA 
believes unsecured credit exposures that exist in the TBA market today 
can lead to financial losses by dealers. Permitting counterparties to 
participate in the TBA market without posting margin can facilitate 
increased leverage by customers, thereby potentially posing a risk to 
the dealer extending credit and to the marketplace as a whole. Further, 
FINRA's present requirements do not address the TBA market 
generally.\16\
---------------------------------------------------------------------------

    \15\ See TMPG, Best Practices for Treasury, Agency, Debt, and 
Agency Mortgage-Backed Securities Markets, revised June 10, 2015, 
available at: <https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG_June%202015_Best%20Practices>.
    \16\ See Interpretations/01 through/08 of FINRA Rule 
4210(e)(2)(F), available at: <http://www.finra.org/web/groups/industry/@ip/@reg/@rules/documents/industry/p122203.pdf>. Such 
guidance references TBAs largely in the context of Government 
National Mortgage Association (``GNMA'') securities. The modern TBA 
market is much broader than GNMA securities.
---------------------------------------------------------------------------

    Accordingly, to establish margin requirements for Covered Agency 
Transactions, FINRA proposed to redesignate current paragraph (e)(2)(H) 
of Rule 4210 as new paragraph (e)(2)(I), to add new paragraph (e)(2)(H) 
to Rule 4210, to make conforming revisions to paragraphs (a)(13)(B)(i), 
(e)(2)(F), (e)(2)(G), (e)(2)(I), as redesignated by the rule change, 
and (f)(6), and to add to the rule new Supplementary Materials .02 
through .05. The proposed rule change is informed by the TMPG best 
practices and is described in further detail below.\17\
---------------------------------------------------------------------------

    \17\ See supra note 15; see also, TMPG, Frequently Asked 
Questions: Margining Agency MBS Transactions, June 13, 2014, 
available at: <https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/marginingfaq06132014.pdf>; TMPG Releases Updates to 
Agency MBS Margining Recommendation, March 27, 2013, available at: 
<https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/Agency%20MBS% 20margining%20public%20announcement%2003-27-2013.pdf>.
---------------------------------------------------------------------------

A. Proposed FINRA Rule 4210(e)(2)(H) (Covered Agency Transactions) \18\

    FINRA intends the proposed rule change to reach its members 
engaging in Covered Agency Transactions with specified counterparties. 
The core requirements of the proposed rule change are set forth in new 
paragraph (e)(2)(H) of FINRA Rule 4210.
---------------------------------------------------------------------------

    \18\ This section describes the proposed rule change prior to 
the proposed amendments in Partial Amendment No. 1, which are 
described below.
---------------------------------------------------------------------------

1. Definition of Covered Agency Transactions (Proposed FINRA Rule 
4210(e)(2)(H)(i)c) \19\
    Proposed paragraph (e)(2)(H)(i)c. of the rule would define Covered 
Agency Transactions to mean:
---------------------------------------------------------------------------

    \19\ See supra note 3; see also, Exhibit 5, text of proposed 
rule change, as originally filed.
---------------------------------------------------------------------------

     TBA transactions, as defined in FINRA Rule 6710(u), 
inclusive of ARM transactions, for which the difference between the 
trade date and contractual settlement date is greater than one business 
day;
     Specified Pool Transactions, as defined in FINRA Rule 
6710(x), for which the difference between the trade date and 
contractual settlement date is greater than one business day; and
     CMOs, as defined in FINRA Rule 6710(dd), issued in 
conformity with a program of an agency, as defined in FINRA Rule 
6710(k), or a GSE, as defined in FINRA Rule 6710(n), for which the 
difference between the trade date and contractual settlement date is 
greater than three business days.

FINRA intended the proposed definition of Covered Agency Transactions 
to be congruent with the scope of products addressed by the TMPG best 
practices and related updates.\20\
---------------------------------------------------------------------------

    \20\ See description of Partial Amendment No. 1 in section 
II.D.1. below, proposing to allow member firms to elect not to apply 
the proposed margin requirements to multifamily housing and project 
loan securities.
---------------------------------------------------------------------------

2. Other Key Definitions Established by the Proposed Rule Change 
(Proposed FINRA Rule 4210(e)(2)(H)(i)) \21\
    In addition to Covered Agency Transactions, the proposed rule 
change would establish the following key definitions for purposes of 
new paragraph (e)(2)(H) of Rule 4210:
---------------------------------------------------------------------------

    \21\ See supra note 3; see also, Exhibit 5, text of proposed 
rule change, as originally filed.
---------------------------------------------------------------------------

     The term ``bilateral transaction'' means a Covered Agency 
Transaction that is not cleared through a registered clearing agency as 
defined in paragraph (f)(2)(A)(xxviii) of Rule 4210;
     The term ``counterparty'' means any person that enters 
into a Covered Agency Transaction with a member and includes a 
``customer'' as defined in paragraph (a)(3) of Rule 4210;
     The term ``deficiency'' means the amount of any required 
but uncollected maintenance margin and any required but uncollected 
mark to market loss;
     The term ``gross open position'' means, with respect to 
Covered Agency Transactions, the amount of the absolute dollar value of 
all contracts entered into by a counterparty, in all CUSIPs; provided, 
however, that such amount shall be computed net of any settled

[[Page 3534]]

position of the counterparty held at the member and deliverable under 
one or more of the counterparty's contracts with the member and which 
the counterparty intends to deliver;
     The term ``maintenance margin'' means margin equal to two 
percent of the contract value of the net long or net short position, by 
CUSIP, with the counterparty;
     The term ``mark to market loss'' means the counterparty's 
loss resulting from marking a Covered Agency Transaction to the market;
     The term ``mortgage banker'' means an entity, however 
organized, that engages in the business of providing real estate 
financing collateralized by liens on such real estate;
     The term ``round robin'' trade means any transaction or 
transactions resulting in equal and offsetting positions by one 
customer with two separate dealers for the purpose of eliminating a 
turnaround delivery obligation by the customer; and
     The term ``standby'' means contracts that are put options 
that trade over-the-counter (``OTC''), as defined in paragraph 
(f)(2)(A)(xxvii) of Rule 4210, with initial and final confirmation 
procedures similar to those on forward transactions.
3. Requirements for Covered Agency Transactions (Proposed FINRA Rule 
4210(e)(2)(H)(ii)) \22\
    The specific requirements that would apply to Covered Agency 
Transactions are set forth in proposed paragraph (e)(2)(H)(ii). These 
requirements would address the types of counterparties that are subject 
to the proposed rule, risk limit determinations, specified exceptions 
from the proposed margin requirements, transactions with exempt 
accounts,\23\ transactions with non-exempt accounts, the handling of de 
minimis transfer amounts, and the treatment of standbys.
---------------------------------------------------------------------------

    \22\ Id.
    \23\ The term ``exempt account'' is defined under FINRA Rule 
4210(a)(13). Broadly, an exempt account means a FINRA member, non-
FINRA member registered broker-dealer, account that is a 
``designated account'' under FINRA Rule 4210(a)(4) (specifically, a 
bank as defined under SEA Section 3(a)(6), a savings association as 
defined under Section 3(b) of the Federal Deposit Insurance Act, the 
deposits of which are insured by the Federal Deposit Insurance 
Corporation, an insurance company as defined under Section 2(a)(17) 
of the Investment Company Act, an investment company registered with 
the Commission under the Investment Company Act, a state or 
political subdivision thereof, or a pension plan or profit sharing 
plan subject to the Employee Retirement Income Security Act or of an 
agency of the United States or of a state or political subdivision 
thereof), and any person that has a net worth of at least $45 
million and financial assets of at least $40 million for purposes of 
paragraphs (e)(2)(F) and (e)(2)(G) of the rule, as set forth under 
paragraph (a)(13)(B)(i) of Rule 4210, and meets specified conditions 
as set forth under paragraph (a)(13)(B)(ii). FINRA is proposing a 
conforming revision to paragraph (a)(13)(B)(i) so that the phrase 
``for purposes of paragraphs (e)(2)(F) and (e)(2)(G)'' would read 
``for purposes of paragraphs (e)(2)(F), (e)(2)(G) and (e)(2)(H).'' 
See supra note 3.
---------------------------------------------------------------------------

 Counterparties Subject to the Rule
    Paragraph (e)(2)(H)(ii)a. of the proposed rule provides that all 
Covered Agency Transactions with any counterparty, regardless of the 
type of account to which booked, are subject to the provisions of 
paragraph (e)(2)(H) of the rule. However, paragraph (e)(2)(H)(ii)a.1. 
of the proposed rule provides that with respect to Covered Agency 
Transactions with any counterparty that is a Federal banking agency, as 
defined in 12 U.S.C. 1813(z) under the Federal Deposit Insurance Act, 
central bank, multinational central bank, foreign sovereign, 
multilateral development bank, or the Bank for International 
Settlements, a member may elect not to apply the margin requirements 
specified in paragraph (e)(2)(H) provided the member makes a written 
risk limit determination for each such counterparty that the member 
shall enforce pursuant to paragraph (e)(2)(H)(ii)b., as discussed 
below.
 Risk Limits
    Paragraph (e)(2)(H)(ii)b. of the rule provides that members that 
engage in Covered Agency Transactions with any counterparty shall make 
a determination in writing of a risk limit for each such counterparty 
that the member shall enforce. The rule provides that the risk limit 
determination shall be made by a designated credit risk officer or 
credit risk committee in accordance with the member's written risk 
policies and procedures. Further, in connection with risk limit 
determinations, the proposed rule establishes new Supplementary 
Material .05. The new Supplementary Material provides that, for 
purposes of any risk limit determination pursuant to paragraphs 
(e)(2)(F), (e)(2)(G) or (e)(2)(H) of the rule:
    [cir] If a member engages in transactions with advisory clients of 
a registered investment adviser, the member may elect to make the risk 
limit determination at the investment adviser level, except with 
respect to any account or group of commonly controlled accounts whose 
assets managed by that investment adviser constitute more than 10 
percent of the investment adviser's regulatory assets under management 
as reported on the investment adviser's most recent Form ADV;
    [cir] Members of limited size and resources that do not have a 
credit risk officer or credit risk committee may designate an 
appropriately registered principal to make the risk limit 
determinations;
    [cir] The member may base the risk limit determination on 
consideration of all products involved in the member's business with 
the counterparty, provided the member makes a daily record of the 
counterparty's risk limit usage; and
    [cir] A member shall consider whether the margin required pursuant 
to the rule is adequate with respect to a particular counterparty 
account or all its counterparty accounts and, where appropriate, 
increase such requirements.
     Exceptions from the Proposed Margin Requirements: (1) 
Registered Clearing Agencies; (2) Gross Open Positions of $2.5 Million 
or Less in Aggregate
    Paragraph (e)(2)(H)(ii)c. provides that the margin requirements 
specified in paragraph (e)(2)(H) of the rule shall not apply to:
    [cir] Covered Agency Transactions that are cleared through a 
registered clearing agency, as defined in FINRA Rule 
4210(f)(2)(A)(xxviii), and are subject to the margin requirements of 
that clearing agency; and
    [cir] any counterparty that has gross open positions in Covered 
Agency Transactions with the member amounting to $2.5 million or less 
in aggregate, if the original contractual settlement for all such 
transactions is in the month of the trade date for such transactions or 
in the month succeeding the trade date for such transactions and the 
counterparty regularly settles its Covered Agency Transactions on a 
Delivery Versus Payment (``DVP'') basis or for cash; provided, however, 
that such exception from the margin requirements shall not apply to a 
counterparty that, in its transactions with the member, engages in 
dollar rolls, as defined in FINRA Rule 6710(z),\24\ or round robin 
trades, or that uses other financing techniques for its Covered Agency 
Transactions.
---------------------------------------------------------------------------

    \24\ See FINRA Rule 6710(z).
---------------------------------------------------------------------------

     Transactions with Exempt Accounts
    Paragraph (e)(2)(H)(ii)d. of the proposed rule provides that, on 
any net long or net short position, by CUSIP, resulting from bilateral 
transactions with a counterparty that is an exempt account, no 
maintenance margin shall be required. However, the rule provides that 
such transactions must be marked to the market daily and the member 
must collect any net mark to market

[[Page 3535]]

loss, unless otherwise provided under paragraph (e)(2)(H)(ii)f. The 
rule provides that if the mark to market loss is not satisfied by the 
close of business on the next business day after the business day on 
which the mark to market loss arises, the member shall be required to 
deduct the amount of the mark to market loss from net capital as 
provided in Exchange Act Rule 15c3-1 until such time the mark to market 
loss is satisfied. The rule requires that if such mark to market loss 
is not satisfied within five business days from the date the loss was 
created, the member must promptly liquidate positions to satisfy the 
mark to market loss, unless FINRA has specifically granted the member 
additional time. Under the rule, members may treat mortgage bankers 
that use Covered Agency Transactions to hedge their pipeline of 
mortgage commitments as exempt accounts for purposes of paragraph 
(e)(2)(H) of this Rule.\25\
---------------------------------------------------------------------------

    \25\ The proposed rule change adds to Rule 4210 new 
Supplementary Material .02, which provides that for purposes of 
paragraph (e)(2)(H)(ii)d. of the rule, members must adopt written 
procedures to monitor the mortgage banker's pipeline of mortgage 
loan commitments to assess whether the Covered Agency Transactions 
are being used for hedging purposes. The proposed requirement is 
appropriate to ensure that, if a mortgage banker is permitted exempt 
account treatment, the member has conducted sufficient due diligence 
to determine that the mortgage banker is hedging its pipeline of 
mortgage production. In this regard, FINRA notes that the current 
Interpretations under Rule 4210 already contemplate that members 
evaluate the loan servicing portfolios of counterparties that are 
being treated as exempt accounts. See Interpretation/02 of FINRA 
Rule 4210(e)(2)(F).
---------------------------------------------------------------------------

     Transactions with Non-Exempt Accounts
    Paragraph (e)(2)(H)(ii)e. of the rule provides that, on any net 
long or net short position, by CUSIP, resulting from bilateral 
transactions with a counterparty that is not an exempt account, 
maintenance margin, plus any net mark to market loss on such 
transactions, shall be required margin, and the member shall collect 
the deficiency, as defined in paragraph (e)(2)(H)(i)d. of the rule, 
unless otherwise provided under paragraph (e)(2)(H)(ii)f. of the rule. 
The rule provides that if the deficiency is not satisfied by the close 
of business on the next business day after the business day on which 
the deficiency arises, the member shall be required to deduct the 
amount of the deficiency from net capital as provided in Exchange Act 
Rule 15c3-1 until such time the deficiency is satisfied.\26\ Further, 
the rule provides that if such deficiency is not satisfied within five 
business days from the date the deficiency was created, the member 
shall promptly liquidate positions to satisfy the deficiency, unless 
FINRA has specifically granted the member additional time.
---------------------------------------------------------------------------

    \26\ The proposed rule change adds to FINRA Rule 4210 new 
Supplementary Material .03, which provides that, for purposes of 
paragraph (e)(2)(H) of the rule, to the extent a mark to market loss 
or deficiency is cured by subsequent market movements prior to the 
time the margin call must be met, the margin call need not be met 
and the position need not be liquidated; provided, however, if the 
mark to market loss or deficiency is not satisfied by the close of 
business on the next business day after the business day on which 
the mark to market loss or deficiency arises, the member shall be 
required to deduct the amount of the mark to market loss or 
deficiency from net capital as provided in Exchange Act Rule 15c3-1 
until such time the mark to market loss or deficiency is satisfied. 
FINRA believes that the proposed requirement should help provide 
clarity in situations where subsequent market movements cure the 
mark to market loss or deficiency.
---------------------------------------------------------------------------

    FINRA believes that the maintenance margin requirement is 
appropriate because it aligns with the potential risk as to non-exempt 
accounts engaging in Covered Agency Transactions and the specified two 
percent amount is consistent with other measures in this area. The rule 
provides that no maintenance margin is required if the original 
contractual settlement for the Covered Agency Transaction is in the 
month of the trade date for such transaction or in the month succeeding 
the trade date for such transaction and the customer regularly settles 
its Covered Agency Transactions on a DVP basis or for cash; provided, 
however, that such exception from the required maintenance margin shall 
not apply to a non-exempt account that, in its transactions with the 
member, engages in dollar rolls, as defined in FINRA Rule 6710(z), or 
round robin trades, as defined in proposed FINRA Rule 
4210(e)(2)(H)(i)i., or that uses other financing techniques for its 
Covered Agency Transactions.
     De Minimis Transfer Amounts
    Paragraph (e)(2)(H)(ii)f. of the rule provides that any deficiency, 
as set forth in paragraph (e)(2)(H)(ii)e. of the rule, or mark to 
market losses, as set forth in paragraph (e)(2)(H)(ii)d. of the rule, 
with a single counterparty shall not give rise to any margin 
requirement, and as such need not be collected or charged to net 
capital, if the aggregate of such amounts with such counterparty does 
not exceed $250,000 (``the de minimis transfer amount''). The proposed 
rule provides that the full amount of the sum of the required 
maintenance margin and any mark to market loss must be collected when 
such sum exceeds the de minimis transfer amount.
     Unrealized Profits; Standbys
    Paragraph (e)(2)(H)(ii)g. of the rule provides that unrealized 
profits in one Covered Agency Transaction position may offset losses 
from other Covered Agency Transaction positions in the same 
counterparty's account and the amount of net unrealized profits may be 
used to reduce margin requirements. With respect to standbys, only 
profits (in-the-money amounts), if any, on long standbys shall be 
recognized.

B. Conforming Amendments to FINRA Rule 4210(e)(2)(F) (Transactions With 
Exempt Accounts Involving Certain ``Good Faith'' Securities) and FINRA 
Rule 4210(e)(2)(G) (Transactions With Exempt Accounts Involving Highly 
Rated Foreign Sovereign Debt Securities and Investment Grade Debt 
Securities) \27\
---------------------------------------------------------------------------

    \27\ This section describes the proposed rule change prior to 
the proposed amendments in Partial Amendment No. 1, which are 
described below.
---------------------------------------------------------------------------

    The proposed rule change makes a number of revisions to paragraphs 
(e)(2)(F) and (e)(2)(G) of FINRA Rule 4210: \28\
---------------------------------------------------------------------------

    \28\ See supra note 3; see also, Exhibit 5, text of proposed 
rule change, as originally filed.
---------------------------------------------------------------------------

     The proposed rule change revises the opening sentence of 
paragraph (e)(2)(F) to clarify that the paragraph's scope does not 
apply to Covered Agency Transactions as defined pursuant to new 
paragraph (e)(2)(H). Accordingly, as amended, paragraph (e)(2)(F) 
states: ``Other than for Covered Agency Transactions as defined in 
paragraph (e)(2)(H) of this Rule . . . '' FINRA believes that this 
clarification will help demarcate the treatment of products subject to 
paragraph (e)(2)(F) versus new paragraph (e)(2)(H). For similar 
reasons, the proposed rule change revises paragraph (e)(2)(G) to 
clarify that the paragraph's scope does not apply to a position subject 
to new paragraph (e)(2)(H) in addition to paragraph (e)(2)(F) as the 
paragraph currently states. As amended, the parenthetical in the 
opening sentence of the paragraph states: ``([O]ther than a position 
subject to paragraph (e)(2)(F) or (e)(2)(H) of this Rule).''
     Current, pre-revision paragraph (e)(2)(H)(i) provides that 
members must maintain a written risk analysis methodology for assessing 
the amount of credit extended to exempt accounts pursuant to paragraphs 
(e)(2)(F) and (e)(2)(G) of the rule which shall be made available to 
FINRA upon request. The proposed rule change places this language in 
paragraphs (e)(2)(F) and (e)(2)(G) and deletes it from its current 
location. Accordingly, FINRA proposes to move to paragraphs (e)(2)(F) 
and (e)(2)(G): ``Members shall maintain a written risk analysis 
methodology for assessing the amount of credit extended

[[Page 3536]]

to exempt accounts pursuant to [this paragraph], which shall be made 
available to FINRA upon request.'' Further, FINRA proposes to add to 
each: ``The risk limit determination shall be made by a designated 
credit risk officer or credit risk committee in accordance with the 
member's written risk policies and procedures.'' FINRA believes this 
amendment makes the risk limit determination language in paragraphs 
(e)(2)(F) and (e)(2)(G) more congruent with the corresponding language 
proposed for new paragraph (e)(2)(H) of the rule.
     The proposed rule change revises the references in 
paragraphs (e)(2)(F) and (e)(2)(G) to the limits on net capital 
deductions as set forth in current paragraph (e)(2)(H) to read 
``paragraph (e)(2)(I)'' in conformity with that paragraph's 
redesignation pursuant to the rule change.

C. Redesignated Paragraph (e)(2)(I) (Limits on Net Capital Deductions) 
29
---------------------------------------------------------------------------

    \29\ This section describes the proposed rule change prior to 
the proposed amendments in Partial Amendment No. 1, which are 
described below.
---------------------------------------------------------------------------

    Under current paragraph (e)(2)(H) of FINRA Rule 4210, in brief, a 
member must provide prompt written notice to FINRA and is prohibited 
from entering into any new transactions that could increase the 
member's specified credit exposure if net capital deductions taken by 
the member as a result of marked to the market losses incurred under 
paragraphs (e)(2)(F) and (e)(2)(G), over a five day business period, 
exceed: (1) For a single account or group of commonly controlled 
accounts, five percent of the member's tentative net capital (as 
defined in Exchange Act Rule 15c3-1); or (2) for all accounts combined, 
25 percent of the member's tentative net capital (again, as defined in 
Exchange Act Rule 15c3-1). As discussed above, the proposed rule change 
redesignates current paragraph (e)(2)(H) of the rule as paragraph 
(e)(2)(I), deletes current paragraph (e)(2)(H)(i), and makes conforming 
revisions to paragraph (e)(2)(I), as redesignated, for the purpose of 
clarifying that the provisions of that paragraph are meant to include 
Covered Agency Transactions as set forth in new paragraph (e)(2)(H). In 
addition, the proposed rule change clarifies that de minimis transfer 
amounts must be included toward the five percent and 25 percent 
thresholds as specified in the rule, as well as amounts pursuant to the 
specified exception under paragraph (e)(2)(H) for gross open positions 
of $2.5 million or less in aggregate.
    Redesignated paragraph (e)(2)(I) of the rule provides that, in the 
event that the net capital deductions taken by a member as a result of 
deficiencies or marked to the market losses incurred under paragraphs 
(e)(2)(F) and (e)(2)(G) of the rule (exclusive of the percentage 
requirements established thereunder), plus any mark to market loss as 
set forth under paragraph (e)(2)(H)(ii)d. of the rule and any 
deficiency as set forth under paragraph (e)(2)(H)(ii)e. of the rule, 
and inclusive of all amounts excepted from margin requirements as set 
forth under paragraph (e)(2)(H)(ii)c.2. of the rule or any de minimis 
transfer amount as set forth under paragraph (e)(2)(H)(ii)f. of the 
rule, exceed: \30\
---------------------------------------------------------------------------

    \30\ See supra note 3; see also, Exhibit 5, text of proposed 
rule change, as originally filed.
---------------------------------------------------------------------------

     for any one account or group of commonly controlled 
accounts, 5 percent of the member's tentative net capital (as such term 
is defined in Exchange Act Rule 15c3-1), or
     for all accounts combined, 25 percent of the member's 
tentative net capital (as such term is defined in Exchange Act Rule 
15c3-1), and,
     such excess as calculated in paragraphs (e)(2)(I)(i)a. or 
b. of the rule continues to exist on the fifth business day after it 
was incurred,
the member must give prompt written notice to FINRA and shall not enter 
into any new transaction(s) subject to the provisions of paragraphs 
(e)(2)(F), (e)(2)(G) or (e)(2)(H) of the rule that would result in an 
increase in the amount of such excess under, as applicable, paragraph 
(e)(2)(I)(i) of the rule.
    If the Commission approves the proposed rule change, FINRA proposed 
to announce the effective date of the proposed rule change in a 
Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date would be no later than 180 days 
following publication of the Regulatory Notice announcing Commission 
approval.\31\
---------------------------------------------------------------------------

    \31\ See description of Partial Amendment No. 1, in section 
II.D.2. below, which revises the proposed implementation dates.
---------------------------------------------------------------------------

D. Partial Amendment No. 1

    In Partial Amendment No. 1, FINRA responds to comments received on 
the Notice \32\ and adds to the proposed rule language, in response to 
comments, proposed paragraph (e)(2)(H)(ii)a.2 to FINRA Rule 4210, which 
provides that a member may elect not to apply the margin requirements 
of paragraph (e)(2)(H) to multifamily and project loan securities, 
subject to specified conditions. Further, FINRA proposes in Partial 
Amendment No. 1 that the risk limit determination requirements as set 
forth in paragraphs (e)(2)(F), (e)(2)(G) and (e)(2)(H) of Rule 4210 and 
proposed Supplementary Material .05 become effective six months from 
the date the proposed rule change is approved by the Commission. FINRA 
proposes that the remainder of the proposed rule change become 
effective 18 months from the date the proposed rule change is approved 
by the Commission.
---------------------------------------------------------------------------

    \32\ See supra note 3. With the exception of comments received 
related to multifamily housing and project loan securities and the 
proposed implementation dates, FINRA's responses to comments 
received are discussed in section III below.
---------------------------------------------------------------------------

1. Proposed Exemption for Multifamily and Project Loan Securities
    In its original filing, FINRA noted that the scope of Covered 
Agency Transactions \33\ is intended to be congruent with the scope of 
products addressed by the TMPG best practices and related TMPG updates, 
and that the term would include within its scope multifamily housing 
and project loan program securities such as Freddie Mac K Certificates, 
Fannie Mae Delegated Underwriting and Servicing bonds, and Ginnie Mae 
Construction Loan or Project Loan Certificates (collectively, 
``multifamily and project loan securities'').\34\
---------------------------------------------------------------------------

    \33\ See section II.A.1. above, for a description of the 
definition of Covered Agency Transactions in the original filing. 
See supra note 3.
    \34\ See supra note 3.
---------------------------------------------------------------------------

    Commenters expressed concerns that FINRA should not include 
multifamily and project loan securities within the scope of the 
proposed margin requirements.\35\ These commenters said that the 
proposed rule change would impose undue burdens on participants in the 
multifamily and project loan securities market, that the multifamily 
and project loan securities market is of small size relative to the 
overall TBA market, and that the regulatory benefits gained from any 
reduction of systemic risk and counterparty exposure would be 
outweighed by the harms caused to the market. These commenters also 
stated that there are safeguards in the market, including the provision 
of good

[[Page 3537]]

faith deposits by the borrower to the lender, and requirements imposed 
by the issuing agencies and GSEs, and, related to that point, that the 
manner in which multifamily and project loan securities are originated 
and traded does not give rise to the type of credit exposure that may 
exist in the TBA market overall. Commenters said that about $40 to $50 
billion per year in multifamily and project loan securities are issued 
versus about $1 trillion for the TBA market overall,\36\ that a typical 
multifamily or project loan security is based on a single loan for a 
single project the identity of which is known at the time the lender 
and borrower agree to the terms of the loan and the security is 
underwritten, thereby helping to reduce settlement risk, and that, by 
contrast, securities in the overall TBA market are based on pools of 
loans that often have not been originated at the time the Covered 
Agency Transaction takes place.\37\ Commenters said that multifamily 
and project loan securities are not widely traded and often cannot be 
marked to the market for purposes of complying with the proposed margin 
requirements.\38\
---------------------------------------------------------------------------

    \35\ See Letter Type A, Letter Type B, AGM Letter, AJM Letter, 
BDA Letter, Bellwether Letter, CBRE Letter, Centennial Letter, 
Century Letter, CHF Letter, Churchill Letter, Columbia Letter, Crain 
Letter, Davis-Penn 1 Letter, Davis-Penn 2 Letter, Draper Letter, DUS 
Letter, Dwight Letter, First Housing Letter, Forest City 1 Letter, 
Forest City 2 Letter, Gershman 1 Letter, Gershman 2 Letter, Great 
Lakes Letter, Highland 1 Letter, Highland 2 Letter, Lancaster 
Letter, Love Funding Letter, M&T Realty Letter, MBA Letter, MBA & 
Others 1 Letter, MBA & Others 2 Letter, MBA Supplemental Letter, 
NMHC/NAA Letter, NorthMarq Letter, Perez Letter, Prairie Mortgage 
Letter, Prudential Letter, Red Mortgage Letter, Richmac Letter, Sims 
Mortgage Letter, W&D Letter, and Ziegler Letter.
    \36\ See CBRE Letter, CHF Letter, Forest City 1 Letter, Forest 
City 2 Letter, Letter Type A, MBA Letter, and NMHC/NAA Letter.
    \37\ See Century Letter, MBA Letter, MBA Supplemental Letter, 
and NorthMarq Letter.
    \38\ See Century Letter, MBA Letter, NorthMarq Letter, and W&D 
Letter.
---------------------------------------------------------------------------

    In response, FINRA has reconsidered and does not propose at this 
time to require that members apply the proposed margin 
requirements,\39\ to multifamily and project loan securities, subject 
to specified conditions. Specifically, FINRA proposes in Partial 
Amendment No. 1 to add to FINRA Rule 4210 new paragraph 
(e)(2)(H)(ii)a.2. to provide that a member may elect not to apply the 
margin requirements of paragraph (e)(2)(H) of the rule with respect to 
Covered Agency Transactions with a counterparty in multifamily housing 
securities or project loan program securities, provided that: (1) Such 
securities are issued in conformity with a program of an Agency, as 
defined in FINRA Rule 6710(k), or a GSE, as defined in FINRA Rule 
6710(n), and are documented as Freddie Mac K Certificates, Fannie Mae 
Delegated Underwriting and Servicing bonds, or Ginnie Mae Construction 
Loan or Project Loan Certificates, as commonly known to the trade; and 
(2) the member makes a written risk limit determination for each such 
counterparty that the member shall enforce pursuant to paragraph 
(e)(2)(H)(ii)b. of Rule 4210.\40\ FINRA believes that the proposed 
exception for multifamily and project loan securities is appropriate at 
this time.
---------------------------------------------------------------------------

    \39\ In the interest of clarity, FINRA notes that the ``proposed 
margin requirements'' refers to the margin requirements as to 
Covered Agency Transactions as set forth in the original filing, as 
amended by Partial Amendment No. 1. Products or transactions that 
are outside the scope of Covered Agency Transactions are otherwise 
subject to the requirements of FINRA Rule 4210, as applicable.
    \40\ See Exhibit 4 and Exhibit 5 in Partial Amendment No. 1. 
Proposed Rule 4210(e)(2)(H)(ii)b. sets forth the proposed rule's 
requirements as to written risk limits.
---------------------------------------------------------------------------

    Based on FINRA's analysis of transactional data, multifamily and 
project loan securities constitute a small portion of the Covered 
Agency Transactions market overall,\41\ which suggests multifamily and 
project loan securities are less likely to pose issues of systemic 
risk. However, in this regard, FINRA notes that systemic risk is only 
one facet of FINRA's concern. As a matter of investor protection and 
market integrity, FINRA believes that it is appropriate to require that 
members make and enforce written risk limit determinations for their 
counterparties in multifamily and housing securities. FINRA believes 
that imposing the requirement on members to make and enforce risk 
limits as to counterparties in multifamily and project loan securities 
is appropriately tailored, as discussed in the original filing with 
respect to the risk limit requirement generally,\42\ to help ensure 
that the member is properly monitoring its risk. The requirement would 
serve to help prevent over-concentration in these products. In light of 
ongoing analysis in this area, FINRA may consider additional rulemaking 
if necessary.\43\
---------------------------------------------------------------------------

    \41\ In a sample of open transactions provided by a major 
clearing broker-dealer, transactions in multifamily securities sum 
up to approximately $5 billion and constitute approximately 8% of 
the total open transactions in TBA market securities across 1,142 
accounts.
    \42\ See supra note 3.
    \43\ For example, the federal banking agencies (the Board of 
Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, and the Office of the Comptroller of the 
Currency) recently stated that with respect to commercial real 
estate lending they have observed certain risk management practices 
at some financial institutions that cause them concern. See Board of 
Governors of the Federal Reserve System, Federal Deposit Insurance 
Corporation and Office of the Comptroller of the Currency Joint 
Release, ``Statement on Prudent Risk Management for Commercial Real 
Estate Lending'' (Dec. 18, 2015), available at: <https://www.fdic.gov/news/news/press/2015/pr15100.html.
---------------------------------------------------------------------------

    FINRA is aware that the proposed exception for multifamily and 
project loan securities may potentially impact the estimates of 
expected mark to market margin requirements presented in the Statement 
on Burden on Competition section of the original filing. Specifically, 
the original analysis was based on the net exposure to any single 
counterparty in any TBA market transaction, and therefore may have 
included situations where the exposure on an open position in a single 
family TBA market transaction could be offset by an opposite exposure 
on an open position in a multifamily TBA market transaction with the 
same counterparty.
    As such, the proposed exception for multifamily and project loan 
securities may alter the net margin calculation for members. Members 
that transact strictly in multifamily TBA market securities would find 
that their margin obligations would be lower under this formulation, 
and thus have lower burdens imposed, if the member elects not to apply 
the margin requirements specified in paragraph (e)(20(H) of the rule as 
permitted by proposed paragraph (e)(2)(H)(ii)a.2. But members who 
transact in both single and multifamily TBA market securities with a 
given counterparty might find that their margin obligations could be 
higher or lower in the presence of the exception. In addition, these 
members would likely incur additional costs to monitor single and 
multifamily TBA market transactions separately.
    While the amendment proposed in Partial Amendment No. 1 may impact 
the margin requirements for some members, FINRA has reason to expect 
that these impacts would be small based on a review of TBA market 
transactions. First, the size of the multifamily and project loan 
securities market is estimated to be relatively small compared to the 
single family segment of the market. According to the Financial 
Accounts of the United States published by the Federal Reserve Board, 
as of the third quarter of 2015, there were approximately $189.9 
billion of multifamily residential agency and GSE-backed mortgage pools 
outstanding, compared to approximately $1.5 trillion for single family 
mortgage pools.\44\ Second, FINRA staff also analyzed the TBA 
transactions in 2014 from TRACE and found that less than 1% of TBA 
transactions occurred in Delegated Underwriting and Servicing (``DUS'') 
pools securities sponsored by Fannie Mae.
---------------------------------------------------------------------------

    \44\ See Table L.125 in Board of Governors of the Federal 
Reserve System Statistical Release (December 10, 2015), available 
at: <http://www.federalreserve.gov/releases/z1/current/z1.pdf.
---------------------------------------------------------------------------

    To estimate the impact of the exception on broker-dealers and 
mortgage banks, FINRA staff also analyzed transactional data provided 
by a major clearing broker-dealer. This

[[Page 3538]]

dataset contains 27,350 open transactions as of January 7, 2016 in 
1,142 accounts at 49 brokers. 261 of these accounts, at four brokers, 
had exposure to multifamily and project loan securities. The size of 
the open transactions in the single family securities ranged between 
$7,000 and approximately $14 billion per account in the whole sample, 
with an average (median) of approximately $64 million ($6.9 million). 
For comparison purposes, the size of open transactions in the 
multifamily securities ranged between $25,000 and approximately $2 
billion per account, with an average (median) of approximately $20 
million ($640,000).\45\
---------------------------------------------------------------------------

    \45\ The difference between the average size of open 
transactions for single family and multifamily securities is 
statistically significant at the 5% level.
---------------------------------------------------------------------------

    Of the 261 accounts that had exposure to multifamily and project 
loan securities, only nine also had open transactions in single family 
securities. While the size of the open transactions for multifamily 
securities in these nine accounts is larger than that for single family 
securities in these same nine accounts that had exposure to both types 
of securities, the difference is not statistically significant due to 
the small sample size and high variance.
    The average number of days until settlement is also larger, being 
approximately 79 days for the open transactions in multifamily 
securities versus 50 days for the transactions in single-family 
securities.\46\
---------------------------------------------------------------------------

    \46\ The difference between the average settlement days for 
single family and multifamily securities is statistically 
significant at the 5% level.
---------------------------------------------------------------------------

    The evidence presented here suggests that some brokers may have 
sizable positions in multifamily securities. However, as evidenced by 
the data, these positions are likely to be maintained by a small number 
of brokers and the size of the multifamily TBA market is currently a 
small portion of the overall TBA market that does not potentially 
represent any systemic risk. Further, in the sample examined, only nine 
brokers with transactions in multifamily TBA market securities also had 
open transactions in single family TBA market securities, suggesting 
there is limited correlation in counterparty risk across the two 
segments of the market.
2. Proposed Implementation Period
    Commenters said that considerable operational and systems work will 
be needed to comply with the proposed rule change, including changes to 
or renegotiation of Master Securities Forward Transaction Agreement 
(``MSFTA'') documentation and other agreements.\47\ These commenters 
suggested that firms should be permitted 18 months to two years to 
prepare for implementation of the proposed rule change.
---------------------------------------------------------------------------

    \47\ See ACLI Letter, AII Letter, ICI Letter, Sandler O'Neill 
Letter, SIFMA Letter, and SIFMA AMG Letter.
---------------------------------------------------------------------------

    In response, FINRA believes that a phased implementation should be 
appropriate. FINRA proposes that the risk limit determination 
requirements as set forth in paragraphs (e)(2)(F), (e)(2)(G) and 
(e)(2)(H) of Rule 4210 and proposed Supplementary Material .05 of the 
rule become effective six months from the date the proposed rule change 
is approved by the Commission. FINRA proposes that the remainder of the 
proposed rule change become effective 18 months from the date the 
proposed rule change is approved by the Commission.
    The text of the proposed rule change, as amended by Partial 
Amendment No. 1, is available at the principal office of FINRA, on 
FINRA's Web site at http://www.finra.org and at the Commission's Public 
Reference Room. In addition, you may find a more detailed description 
of the original proposed rule change in the Notice.\48\
---------------------------------------------------------------------------

    \48\ See supra note 3.
---------------------------------------------------------------------------

III. Summary of Comments and FINRA's Responses \49\
---------------------------------------------------------------------------

    \49\ See supra note 3, for full FINRA discussion of the original 
filing. Comments received and FINRA's responses to the comments 
related to the multifamily housing and project loan securities, as 
well as the proposed implementation dates are addressed in section 
II.D. above.
---------------------------------------------------------------------------

    As noted above, the Commission received 109 comment letters on the 
proposed rule change, including 54 Type A and B letters.\50\ These 
comments and FINRA's responses to the comments are summarized below. 
\51\
---------------------------------------------------------------------------

    \50\ See supra note 4.
    \51\ See supra note 5.
---------------------------------------------------------------------------

A. Impact and Scope of the Proposal (Other Than With Respect to 
Multifamily and Project Loan Securities)

    Some commenters supported the proposed rule change's goal of 
addressing counterparty risk in the TBA market and reducing systemic 
risk.\52\ Some commenters acknowledged the need for overall consistency 
between the proposal and the best practices recommendations of the 
TMPG.\53\ However, commenters expressed concerns that the proposal's 
scope is overly broad and its requirements too complex to be 
operationally feasible, and that the proposal would increase costs on 
various participants in the mortgage market, including small, medium or 
regional participants, with the effect of driving some participants 
from the market.\54\ One commenter said that all but the largest firms 
would be driven out of the market.\55\ Another commenter questioned the 
need for the rulemaking on grounds that the TBA market remained stable 
prior to and throughout the 2008 financial crisis.\56\ That commenter 
also expressed concern that the pool of eligible collateral available 
for margin purposes is limited and that the opportunity cost of posting 
collateral would force institutions to forgo participating in the 
market or would force them to pass costs on to consumers.\57\ One 
commenter suggested the rule should only reach TBA transactions and 
Specified Pool Transactions.\58\ Another commenter suggested the 
proposal should not reach Specified Pool Transactions.\59\ Another 
commenter suggested that both Specified Pool Transactions and CMOs 
should be taken out of the proposal's scope and questioned FINRA's 
authority to impose the requirements.\60\ Several commenters suggested 
that the proposed settlement cycles set forth in the definition of 
Covered Agency Transactions--that is, greater than one business day 
between the trade date and the contractual settlement date for TBA 
transactions and Specified Pool Transactions, and greater than three 
business days for CMOs--are too short.\61\ These commenters proffered 
alternatives such as a specified settlement cycle for TBA transactions 
of three days or greater, on grounds that transactions settling within 
three days present minimal risk,\62\ or a specified cycle based on 
Securities Industry and Financial Markets Association (``SIFMA'') 
monthly settlement dates,\63\ or, for Specified Pool Transactions, a 
specified cycle of three or more business days.\64\
---------------------------------------------------------------------------

    \52\ See ACLI Letter, AII Letter, Brean Capital 1 Letter, SIFMA 
Letter, and SIFMA AMG Letter.
    \53\ As set forth more fully in the original filing, FINRA noted 
that the proposal is informed by the TMPG best practices. See supra 
note 3.
    \54\ See ACLI Letter, BDA Letter, Brean Capital 1 Letter, 
Coastal Letter, and SIFMA Letter.
    \55\ See Brean Capital 1 Letter.
    \56\ See ACLI Letter.
    \57\ Id.
    \58\ See ICI Letter.
    \59\ See Robert Baird Letter.
    \60\ See Coastal Letter.
    \61\ See ACLI Letter, BDA Letter, ICI Letter, Matrix Letter, 
Robert Baird Letter, and SIFMA Letter.
    \62\ See ICI Letter.
    \63\ See ACLI Letter.
    \64\ See Robert Baird Letter.
---------------------------------------------------------------------------

    In response, other than with respect to multifamily and project 
loan securities, as discussed above, FINRA does not propose to modify 
the proposed rule's application to Covered Agency

[[Page 3539]]

Transactions as set forth in the original filing. Further, FINRA does 
not propose to modify the specified settlement periods as set forth in 
the Covered Agency Transactions definition. With respect to FINRA's 
authority, in the original filing FINRA noted that it believed that the 
rule change is consistent with the provisions of Section 15A(b)(6) of 
the Exchange Act.\65\ FINRA noted, as set forth more fully in the 
original filing,\66\ that the proposed margin requirements will likely 
impose direct and indirect costs, including direct costs of compliance 
with the requirements and indirect costs resulting from changed market 
behavior of some participants, which may impact liquidity in the 
market. Though FINRA shares commenters' concerns regarding such 
potential effects, FINRA believes the proposed requirements are needed 
because the unsecured credit exposures that exist in the TBA market 
today can lead to financial losses by members. In this regard, FINRA 
noted that the TBA market has the potential for a significant amount of 
volatility,\67\ and that permitting counterparties to participate in 
the TBA market, in the absence of the proposed requirements, can 
facilitate increased leverage by customers, thereby posing risk to the 
member extending credit and to the marketplace and potentially 
imposing, in economic terms, negative externalities on the financial 
system in the event of failure. Consequently, FINRA believes as to the 
assertion that there has been no or limited degradation in the TBA 
market does not of itself demonstrate that there is no credit risk in 
this market.\68\
---------------------------------------------------------------------------

    \65\ See supra note 3. Section 15A(b)(6) 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.
    \66\ See supra note 3.
    \67\ See supra note 3. ACLI suggested that FINRA had conceded in 
the original filing that the TBA market seems to respond only 
slightly to the volatility in the U.S. interest rate environment. In 
response, this only partially states the tenor of FINRA's analysis, 
which, again, noted that price movements in the TBA market over the 
past five years suggest the market has potential for significant 
volatility.
    \68\ See supra note 3.
---------------------------------------------------------------------------

    In the original filing, FINRA discussed how it had considered, 
among other things, various options for narrowing the scope of Covered 
Agency Transactions or extending the specified settlement cycles.\69\ 
As FINRA noted, the FRBNY staff advised FINRA that such modifications 
to the proposal would result in a mismatch between FINRA standards and 
the TMPG best practices, thereby resulting in perverse incentives in 
favor of non-margined products and leading to distortions of trading 
behavior, including clustering of trades around the specified 
settlement cycles in an effort to avoid margin expenses. Further, in 
response to comments on the proposal as it had been published for 
comment in Regulatory Notice 14-02,\70\ FINRA engaged in extensive 
discussions with industry participants and other regulators, including 
staff of the SEC and the FRBNY, and engaged in analysis of the 
potential economic impact of the proposal. Following its publication in 
the Regulatory Notice, FINRA made revisions to the proposal to 
ameliorate its impact on business activity and to address the concerns 
of smaller customers that do not pose material risk to the market as a 
whole, in particular those engaging in non-margined, cash account 
business. These revisions included, among other things, the 
establishment of the exception from the proposed margin requirements 
for any counterparty with gross open positions amounting to $2.5 
million or less, subject to specified conditions, as well as specified 
exceptions to the maintenance margin requirement and modifications to 
the proposal's de minimis transfer provisions.\71\ As such, FINRA 
reiterates its view that narrowing the scope of Covered Agency 
Transactions or modifying the proposed settlement cycles in the fashion 
suggested by commenters would undermine the rule's fundamental purpose 
of improving counterparty risk management and, further, that the 
revisions made to the proposal, as described in the original filing, 
will ameliorate its impact.
---------------------------------------------------------------------------

    \69\ Id.
    \70\ Regulatory Notice 14-02 (January 2014) (Margin 
Requirements: FINRA Requests Comment on Proposed Amendments to FINRA 
Rule 4210 for Transactions in the TBA Market).
    \71\ See supra note 3. Commenters expressed concerns regarding 
these exceptions as set forth in the original filing. Commenters' 
concerns, and FINRA's response, are addressed more fully below.
---------------------------------------------------------------------------

B. Maintenance Margin

    As set forth more fully in the original filing, non-exempt accounts 
\72\ would be required to post two percent maintenance margin plus any 
net mark to market loss on their Covered Agency Transactions.\73\ 
Commenters opposed the maintenance margin requirement and expressed 
concerns about the proposed requirement's impact and efficacy.\74\ One 
commenter said that the requirement would disproportionately affect 
small to medium-sized participants and would exacerbate risks by not 
requiring that the margin be segregated and held at a non-affiliated 
custodian.\75\ A commenter similarly expressed concern that the 
requirement would disadvantage small dealers.\76\ One commenter said 
that the requirement would have the effect of requiring maintenance 
margin from medium-sized firms, rather than small or large firms, and 
that the requirement would create complexity for members by requiring 
that maintenance margin be calculated on a transaction by transaction 
basis.\77\ Another commenter also expressed the concern that the 
requirement would impact medium-sized firms and suggested that FINRA 
should consider a tiered maintenance margin requirement for trades 
under a defined gross dollar amount.\78\ One commenter said that the 
requirement should be eliminated.\79\ Another commenter suggested that 
the TMPG best practices do not have a maintenance margin requirement, 
which would create opportunity for regulatory arbitrage.\80\ The same 
commenter said that the accounts that would be subject to the 
requirement are too small to create systemic risk.\81\
---------------------------------------------------------------------------

    \72\ See supra note 23.
    \73\ See supra note 3.
    \74\ See AII Letter, Robert Baird Letter, BDA Letter, Matrix 
Letter, SIFMA Letter, and SIFMA AMG Letter. Some commenters 
expressed concern as to the operational feasibility of the rule's 
proposed exception to the maintenance margin requirement. These 
comments, and FINRA's response, are addressed more fully below.
    \75\ See SIFMA AMG Letter.
    \76\ See BDA Letter.
    \77\ See SIFMA Letter.
    \78\ See Matrix Letter.
    \79\ See Baird Letter.
    \80\ See AII Letter.
    \81\ Id.
---------------------------------------------------------------------------

    In response, FINRA does not propose to modify the maintenance 
margin requirement. Maintenance margin is a mainstay of margin regimes 
in the securities industry, and as such the need to appropriately track 
transactions should be well understood to market participants. FINRA is 
sensitive to commenters' concerns as to the potential impact of the 
requirement on members and their non-exempt customer accounts. For this 
reason, as set forth more fully in the original filing and as discussed 
further below, FINRA revised the proposal to include an exception 
tailored to customers engaging in non-margined, cash account business. 
FINRA noted that the requirement is designed to be aligned to the 
potential risk in this area and that the two percent amount 
approximates rates charged for corresponding products in other 
contexts.\82\
---------------------------------------------------------------------------

    \82\ See supra note 3.

---------------------------------------------------------------------------

[[Page 3540]]

C. ``Cash Account'' Exceptions

    As set forth more fully in the original filing,\83\ the proposed 
margin requirements would not apply to any counterparty that has gross 
open positions \84\ in Covered Agency Transactions with the member 
amounting to $2.5 million or less in aggregate, if the original 
contractual settlement for all such transactions is in the month of the 
trade date for such transactions or in the month succeeding the trade 
date for such transactions and the counterparty regularly settles its 
Covered Agency Transactions on a DVP basis or for cash. Similarly, a 
non-exempt account would be excepted from the rule's proposed two 
percent maintenance margin requirement if the original contractual 
settlement for the Covered Agency Transaction is in the month of the 
trade date for such transaction or in the month succeeding the trade 
date for such transaction and the customer regularly settles its 
Covered Agency Transactions on a DVP basis or for cash. The rule uses 
parallel language with respect to both of these exceptions to provide 
that they are not available to a counterparty that, in its transactions 
with the member, engages in dollar rolls, as defined in FINRA Rule 
6710(z), or ``round robin'' trades, or that uses other financing 
techniques for its Covered Agency Transactions. FINRA noted that these 
exceptions are intended to address the concerns of smaller customers 
engaging in non-margined, cash account business.\85\
---------------------------------------------------------------------------

    \83\ Id.
    \84\ See Exhibit 5 in Partial Amendment No. 1.
    \85\ See supra note 3. For convenience, the $2.5 million and 
maintenance margin exceptions are referred to as the ``cash 
account'' exceptions for purposes of Partial Amendment No. 1.
---------------------------------------------------------------------------

    Commenters expressed concern that the cash account exceptions are 
difficult to implement operationally and are in need of further 
guidance.\86\ These commenters suggested that the term ``regularly 
settles'' is ambiguous and vague, that members may find it too 
difficult to comply with the requirement and may therefore choose not 
to make the cash account exceptions available to their customers, that 
the references to dollar rolls, round robin trades and other financing 
techniques should be removed to make the cash account exceptions more 
accessible, or that the rule should permit members to rely on 
representations counterparties make where activity away from the member 
firm is involved. A commenter sought guidance as to whether it would 
suffice if the member has a reasonable expectation of the customer's 
behavior based on the customer's prior history of physical 
settlement.\87\ Another commenter sought guidance as to the scope of 
the term ``other financing techniques'' and whether, for instance, a 
customer's engaging in a single dollar roll or round robin trade would 
make the cash account exceptions unavailable.\88\
---------------------------------------------------------------------------

    \86\ See Robert Baird Letter, BDA Letter, Credit Suisse Letter, 
Matrix Letter, SIFMA Letter, and SIFMA AMG Letter.
    \87\ See SIFMA Letter.
    \88\ See SIFMA AMG Letter.
---------------------------------------------------------------------------

    In response, FINRA does not propose to modify the cash account 
exceptions as proposed in the original filing.\89\ Given that the 
purpose of the exceptions is to help ameliorate the proposal's impact 
on smaller customers, it is not FINRA's expectation that the exceptions 
should be onerous to implement. FINRA believes that, as worded, the 
term ``regularly settles'' is sufficient to convey that the rule's 
intent is to provide scope for flexibility on members' part as to how 
they implement the exceptions. FINRA expects that members are in a 
position to make reasonable judgments as to the observed pattern and 
course of dealing in their customers' behavior by virtue of their 
interactions with their customers. In this regard, FINRA believes the 
import of the term ``other financing techniques'' should be clear as a 
matter of plain language, that is, transactions other than on a DVP 
basis or for cash suggest the use of financing. FINRA does not expect 
that a customer that engages in a single dollar roll or round robin 
trade would be denied access to the exceptions provided the member can 
reasonably demonstrate a regular pattern by that customer of settling 
its Covered Agency Transactions on a DVP basis or for cash. In so 
doing, a member may use the customer's history of transactions with the 
member, as well as any other relevant information of which the member 
is aware. Further, FINRA believes that members should be able to rely 
on the reasonable representations of their customers where necessary 
for purposes of this requirement. FINRA welcomes further discussion 
with industry participants on this issue, and will consider issuing 
further guidance as needed.
---------------------------------------------------------------------------

    \89\ See supra note 3.
---------------------------------------------------------------------------

D. Two-Way (Bilateral) Margin

    Several commenters suggested that the proposed rule should require 
the posting of two-way or bilateral margin in Covered Agency 
Transactions, so that members and their counterparties in such 
transactions would both post and receive margin.\90\ These commenters 
suggested that two-way margin is necessary to effectively reduce risk 
given the exposure of the parties and that two-way margin is standard 
in other contexts. A commenter suggested that the TMPG encourages firms 
to engage in two-way margining and that FINRA should express support 
for firms that do so.\91\
---------------------------------------------------------------------------

    \90\ See ACLI Letter, AII Letter, Crain Letter, ICI Letter, 
SIFMA AMG Letter, and Sutherland Letter.
    \91\ See SIFMA Letter.
---------------------------------------------------------------------------

    In response, FINRA noted in the original filing that it supported 
the use of two-way margining as a means of managing risk.\92\ However, 
FINRA does not propose to address such a requirement at this time as 
part of the proposed rule change. FINRA welcomes further dialogue with 
industry participants on this issue.
---------------------------------------------------------------------------

    \92\ See supra note 3.
---------------------------------------------------------------------------

E. $2.5 Million Gross Open Position Amount and the $250,000 de Minimis 
Transfer Amount

    As discussed above, the proposed rule sets forth an exception from 
the proposed margin requirements for counterparties whose gross open 
positions in Covered Agency Transactions with the member amount to $2.5 
million or less in aggregate, as specified by the rule. As set forth 
more fully in the original filing, the proposed rule also sets forth, 
for a single counterparty, a $250,000 de minimis transfer amount up to 
which margin need not be collected or charged to net capital, as 
specified by the rule.\93\ One commenter suggested that the $2.5 
million amount is too low and that FINRA should provide guidance as to 
treatment of accounts that fluctuate in the approximate range of that 
amount.\94\ A couple of commenters suggested a $10 million exception 
for gross open positions.\95\ As to the $250,000 de minimis transfer 
amount, a few commenters suggested increasing the amount to 
$500,000.\96\ One commenter expressed concern that members would end up 
needing to monitor the $250,000 amount even though it would benefit few 
if any customers.\97\ This commenter further suggested that the rule 
should grandfather existing agreements that already provide for 
$500,000 de minimis transfer amounts.\98\ A commenter suggested 
$500,000 is appropriate because that amount is used

[[Page 3541]]

in other regulatory contexts.\99\ One commenter suggested raising the 
de minimis transfer amount to $1 million.\100\ Some commenters 
suggested that the rule should permit parties to negotiate higher 
thresholds.\101\ Another commenter suggested the $250,000 de minimis 
transfer amount would not be sufficient for participants in the 
multifamily market.\102\
---------------------------------------------------------------------------

    \93\ See supra note 3.
    \94\ See SIFMA AMG Letter.
    \95\ See SIFMA Letter and BDA Letter.
    \96\ See ACLI Letter, ICI Letter, and SIFMA Letter.
    \97\ See SIFMA Letter.
    \98\ Id.
    \99\ See ICI Letter.
    \100\ See BDA Letter.
    \101\ See CoBank Letter, SIFMA AMG Letter, Sutherland Letter.
    \102\ See Crain Letter.
---------------------------------------------------------------------------

    In response, FINRA does not propose to alter the $2.5 million 
amount for gross open positions and does not propose to alter the 
$250,000 de minimis transfer amount. As discussed in the original 
filing, FINRA believes that these amounts are appropriately tailored to 
smaller accounts that are less likely to pose systemic risk.\103\ FINRA 
believes that increasing the thresholds would undermine the rule's 
purpose. In that regard, permitting parties to negotiate higher 
thresholds by separate agreement, whether entered into before the rule 
takes effect or afterwards, would only serve to cut against the rule's 
objectives. FINRA does not propose to alter the de minimis transfer 
amount on account of multifamily securities transactions given that, as 
discussed above, FINRA is amending the rule so that members may elect 
not to apply the proposed margin requirements to multifamily and 
project loan securities, subject to specified conditions.\104\
---------------------------------------------------------------------------

    \103\ See supra note 3.
    \104\ See section II.D.1. above.
---------------------------------------------------------------------------

F. Timing of Margin Collection and Position Liquidation

    As set forth more fully in the original filing, the proposed rule 
provides that, with respect to exempt accounts, if a mark to market 
loss, or, with respect to non-exempt accounts, a deficiency, is not 
satisfied by the close of business on the next business day after the 
business day on which the mark to market loss or deficiency arises, the 
member must deduct the amount of the mark to market loss or deficiency 
from net capital as provided in Exchange Act Rule 15c3-1.\105\ Further, 
unless FINRA has specifically granted the member additional time, the 
member is required to liquidate positions if, with respect to exempt 
accounts, a mark to market loss is not satisfied within five business 
days, or, with respect to non-exempt accounts, a deficiency is not 
satisfied within such period.\106\ Commenters expressed concerns that 
the proposed rule's time frame for collection of the mark to market 
loss or deficiency (that is, margin collection) and the time frame for 
liquidation are too onerous, that longer periods should be permitted as 
the five-day liquidation period is not sufficient to resolve various 
issues that may arise, that parties should be permitted to set the 
applicable time frames in a MSFTA or other agreement, and that the time 
frames do not align with the 15 days permitted under FINRA Rule 
4210(f)(6) or other market conventions.\107\ Two commenters suggested 
that the ``T+1'' margin call would raise operational issues.\108\ 
Another commenter suggested that the capital charge should apply five 
days after the initial margin call.\109\ Another commenter suggested 
FINRA should allow firms to take a capital charge in lieu of collecting 
margin.\110\ Another commenter suggested that allowing dealers to take 
a capital charge is a suitable practice to address margin delivery 
fails and that the forced liquidation requirement should be 
eliminated.\111\
---------------------------------------------------------------------------

    \105\ See supra note 3.
    \106\ Id.
    \107\ See ACLI Letter, AII Letter, BDA Letter, SIFMA Letter, and 
SIFMA AMG Letter.
    \108\ See SIFMA Letter and SIFMA AMG Letter.
    \109\ See BDA Letter.
    \110\ See ICI Letter.
    \111\ See AII Letter.
---------------------------------------------------------------------------

    In response, FINRA does not propose to modify the timing for margin 
collection and position liquidation as set forth in the proposed rule 
change. With respect to position liquidation, while it is true that 
longstanding language under FINRA Rule 4210(f)(6) sets forth a 15-day 
period, more recent requirements adopted under the portfolio margin 
rules, which have been in widespread use among members, set forth a 
three-day time frame.\112\ FINRA believes that, with respect to Covered 
Agency Transactions, the five-day period should provide sufficient time 
for members to resolve issues. Further, as FINRA noted in the original 
filing, FINRA believes the five-day period is appropriate in view of 
the potential counterparty risk in the TBA market.\113\ Consistent with 
longstanding practice under FINRA Rule 4210(f)(6), the proposed rule 
allows FINRA to specifically grant the member additional time. FINRA 
maintains, and regularly updates, the Regulatory Extension System for 
this purpose. FINRA welcomes further discussion with industry 
participants on this issue. With respect to the timing of margin 
collection, FINRA notes that the proposed language ``by the close of 
business on the next business day after the business day'' on which the 
market to market loss or deficiency arises is consistent, again, with 
language under the portfolio margin rules, which are well understood by 
members.\114\ FINRA does not believe it is appropriate to revise the 
proposed rule to permit members to take a capital charge in lieu of 
collecting margin. FINRA notes that taking a capital charge, of itself, 
does not suffice to address counterparty risk, which is a key purpose 
of the proposed rule change. Further, FINRA believes that only 
requiring capital charges would render the rule without effect. FINRA 
does not believe it is appropriate to eliminate the liquidation 
requirement given that the requirement is intended to mitigate risk.
---------------------------------------------------------------------------

    \112\ See FINRA Rule 4210(g)(9) and FINRA Rule 4210(g)(10).
    \113\ See supra note 3.
    \114\ See FINRA Rule 4210(g)(10)(B).
---------------------------------------------------------------------------

G. Concentration Limits

    As set forth more fully in the original filing, under current (pre-
revision) paragraph (e)(2)(H) of the rule, a member must provide 
written notification to FINRA and is prohibited from entering into any 
new transactions that could increase credit exposure if net capital 
deductions, over a five day period, exceed: (1) For a single account or 
group of commonly controlled accounts, five percent of the member's 
tentative net capital; or (2) for all accounts combined, 25 percent of 
the member's tentative net capital.\115\ Commenters suggested that the 
five percent threshold should be raised to 10 percent so as to take 
account of the impact of the proposal.\116\ In response, FINRA does not 
propose to revise the five percent threshold. FINRA noted in the 
original filing that both the five percent and the 25 percent 
thresholds are currently in use and are designed to address aggregate 
risk in this area.\117\ FINRA noted that if the thresholds are easily 
reached in volatile markets, then that would suggest the thresholds 
serve an important purpose in monitoring risk.
---------------------------------------------------------------------------

    \115\ See supra note 3. Under the proposed rule change, current 
paragraph (e)(2)(H) would be redesignated as paragraph (e)(2)(I).
    \116\ See BDA Letter and SIFMA Letter.
    \117\ See supra note 3.
---------------------------------------------------------------------------

H. Mortgage Bankers

    As set forth more fully in the original filing, the proposed rule 
provides that members may treat mortgage bankers that use Covered 
Agency Transactions to hedge their pipeline of commitments as exempt 
accounts for purposes of paragraph (e)(2)(H) of the rule.\118\

[[Page 3542]]

Proposed Supplementary Material .02 of the rule provides that members 
must adopt written procedures to monitor the mortgage banker's pipeline 
of mortgage loan commitments to assess whether the Covered Agency 
Transactions are being used for hedging purposes.\119\ The Mortgage 
Bankers Association (``MBA'') suggested that, in addition to excepting 
mortgage bankers from treatment as non-exempt accounts if they hedge 
their pipeline of commitments, and thereby excepting them from the 
maintenance margin requirements that would otherwise apply, FINRA 
should also except mortgage bankers from the mark to market (also 
referred to as variation) margin requirements that would apply to 
exempt accounts.\120\ MBA suggested that mortgage bankers function as 
``end users'' that should not be unduly burdened by mandatory 
transaction rules, that requiring variation margin would distort the 
mortgage finance markets, and that hedging transactions by mortgage 
brokers do not represent a systemic risk. MBA said that FINRA had not 
done sufficient economic analysis as to the rule's impact on mortgage 
bankers.\121\ Several other commenters said that FINRA should clarify 
what level of diligence members need to apply to determine whether a 
mortgage banker is hedging its pipeline of commitments and thereby 
eligible to be treated as an exempt account.\122\ Commenters sought 
guidance as to whether for example members may comply by obtaining 
representations or certifications from the mortgage bankers.
---------------------------------------------------------------------------

    \118\ Id.
    \119\ See proposed FINRA Rule 4210.02 in Exhibit 5 of Partial 
Amendment No. 1.
    \120\ See MBA Letter.
    \121\ Id.
    \122\ See BDA Letter, Matrix Letter, SIFMA Letter, and Sandler 
O'Neill Letter.
---------------------------------------------------------------------------

    In response, as FINRA noted in the original filing, the type of 
monitoring set forth in the proposed rule is not a wholly new 
requirement.\123\ The current Interpretations under Rule 4210 already 
contemplate that members evaluate the loan servicing portfolios of 
specified counterparties that are being treated as exempt 
accounts.\124\ FINRA believes it is sound practice that members have 
written procedures to monitor the portfolios of mortgage bankers that 
are being treated as exempt accounts. As discussed earlier with respect 
to the cash account exceptions, FINRA believes that members should be 
able to rely on the reasonable representations of their mortgage banker 
customers where necessary for purposes of this requirement. FINRA 
welcomes further discussion with industry participants on this issue, 
and will consider issuing further guidance as needed. FINRA does not 
propose to modify the proposal to except mortgage bankers from the mark 
to market requirements, such as by creating an ``end user'' or other 
similar type of exception, as doing so would undermine the rule's 
purpose by excepting a major category of participant in the market. 
FINRA believes that such an exception would create incentives that 
would distort trading behavior, which could increase the risk of member 
firms and their customers. As discussed in section III.A. above, and as 
further discussed below, FINRA has noted that the proposed rule change 
will likely impose direct and indirect costs, which may lead to 
decreased liquidity in the market.\125\ However, FINRA has noted the 
need for the rule change given the potential for risk in this 
market.\126\
---------------------------------------------------------------------------

    \123\ See supra note 3.
    \124\ See Interpretation /02 of FINRA Rule 4210(e)(2)(F); see 
also, supra note 3. The Interpretation cites, in part, such factors 
as loan balance, servicing fee, remaining life of the loan, 
probability of loan survival, delinquency rate, geographic 
relationships, cost of foreclosure and servicing costs.
    \125\ See supra note 3.
    \126\ See supra note 67.
---------------------------------------------------------------------------

    In response to MBA's suggestion that FINRA did not do sufficient 
economic analysis as to the rule's impact on mortgage bankers, FINRA 
notes the following. First, MBA stated that FINRA's analysis consisted 
of a cursory examination of the TBA market over a short period of time 
using data from one broker-dealer across 35 days leading up to and 
including May 30, 2014.\127\ In response, FINRA notes that this 
interpretation of the data used in the analysis is not accurate; the 
sample period is not 35 days and the data do not contain the open 
positions of a single broker-dealer. To estimate the potential burden 
on mortgage bankers, FINRA analyzed data provided by a major clearing 
broker. This dataset contained 5,201 open transactions as of May 30, 
2014 in 375 customer (including mortgage banker) accounts at 10 broker-
dealers. These open transactions were created between October 18, 2013 
and May 30, 2014, with approximately 60% created in May 2014. Based on 
FINRA's discussions with the clearing broker, FINRA believes that the 
sample is a good representation of typical exposures. These open 
positions would require posting margin on 35 days throughout the 
sample, corresponding to less than 0.01% of the 14,001 account-day 
combinations.
---------------------------------------------------------------------------

    \127\ See MBA Letter.
---------------------------------------------------------------------------

    Second, MBA suggested that FINRA's analysis did not control the 
results of its study against typical market volatility, against the 
expected withdrawal of the Federal Reserve as an active buyer of TBA-
eligible MBS or even to follow its sample data through other periods 
throughout 2014.\128\ However, as discussed in the original filing, 
FINRA analyzed the relation between interest rate volatility and the 
volatility in the TBA market by comparing the volatility of Deutsche 
Bank's TBA index in two different interest rate regimes based on 10-
year U.S. Treasury yields and found no significant change across the 
two periods.\129\ FINRA acknowledged that the Federal Reserve 
(specifically, the FRBNY) is a major market participant in the TBA 
market. The withdrawal of FRBNY as an active buyer would have a 
significant impact on the market, unless other market participants 
increase their activities or new participants choose to enter the 
market.\130\ FINRA discussed this potential impact in the original 
filing.\131\
---------------------------------------------------------------------------

    \128\ Id.
    \129\ See supra note 3.
    \130\ Id.
    \131\ Id.
---------------------------------------------------------------------------

    Third, MBA suggested that FINRA's analysis did not appear to 
evaluate the financial and other costs the proposed rule change would 
impose on mortgage bankers and borrowers and that FINRA did not 
evaluate the impact to consumers and other borrowers resulting from an 
increase in mortgage rates and reduction in competition that would 
arise due to the proposed rule change.\132\ MBA suggested that the 
proposed rule change will harm borrowers by limiting their access to 
credit, and that requiring mortgage bankers to divert their liquidity 
from origination for margin calls imposes an acute liquidity risk on 
mortgage bankers. In response, as discussed earlier, FINRA acknowledged 
in the original filing the potential impact of the proposed rule change 
on market behavior of participants and noted that ``[s]ome parties who 
currently transact in the TBA market may choose to withdraw from or 
limit their participation in the TBA market.\133\ Reduced participation 
may lead to decreased liquidity in the market for certain issues or 
settlement periods, potentially restricting access to end users and 
increasing costs in the mortgage market.'' \134\ However, FINRA noted 
that the impact on access to credit would be limited if new 
participants

[[Page 3543]]

choose to enter the market to offset the impact of participants that 
exit the market. Further, in light of the importance of the role of 
mortgage bankers in the mortgage finance market, FINRA noted in the 
original filing that the proposed rule change has accommodated the 
business of mortgage bankers by including provision for members to 
treat mortgage bankers as exempt accounts with respect to their 
hedging, subject to specified conditions.\135\
---------------------------------------------------------------------------

    \132\ See MBA Letter.
    \133\ See supra note 3.
    \134\ Id.
    \135\ Id.
---------------------------------------------------------------------------

    Fourth, MBA suggested that FINRA neglected to analyze the impact of 
mortgage bankers being forced to switch from mandatory to best efforts 
delivery commitments in the process forsaking significant amounts of 
their gain on sale or limiting their competitiveness in various 
products.\136\ In response, FINRA has no basis to believe that the 
margin requirement would force mortgage bankers to switch from 
mandatory execution basis to best efforts execution. FINRA expects that 
the majority of the mortgage bankers' positions would be excepted from 
the proposed margin requirements, and market competition would maintain 
the origination of loans to the borrowers.
---------------------------------------------------------------------------

    \136\ See MBA Letter.
---------------------------------------------------------------------------

I. Risk Limit Determinations

    One commenter sought clarification as to whether paragraphs 
(e)(2)(F), (e)(2)(H) and (e)(2)(G) of the rule require a member to 
write a separate risk limit determination for the types of products 
addressed by each of those paragraphs for each counterparty.\137\ In 
response, FINRA notes that one written risk limit determination, for 
each counterparty, should suffice, provided it addresses the products. 
As set forth more fully in the original filing, FINRA notes that the 
proposed risk limit language in paragraphs (e)(2)(F) and (e)(2)(G) is 
drawn from language that appears under current, pre-revision paragraph 
(e)(2)(H) and which currently, by its terms, already applies to both 
paragraphs (e)(2)(F) and (e)(2)(G).\138\
---------------------------------------------------------------------------

    \137\ See SIFMA Letter.
    \138\ See supra note 3.
---------------------------------------------------------------------------

J. Advisory Clients of Registered Investment Advisers

    As set forth more fully in the original filing, proposed 
Supplementary Material .05 requires in part that, for purposes of any 
risk limit determination pursuant to paragraphs (e)(2)(F), (e)(2)(G), 
or (e)(2)(H) of Rule 4210, if a member engages in transactions with 
advisory clients of a registered investment adviser, the member may 
elect to make the risk limit determination at the investment adviser 
level, except with respect to any account or group of commonly 
controlled accounts whose assets managed by that investment adviser 
constitute more than 10 percent of the investment adviser's regulatory 
assets under management as reported on the investment adviser's most 
recent Form ADV.\139\ One commenter sought clarification as to whether 
the 10 percent threshold may be calculated as of the time of the credit 
review under the member's written risk analysis policy and 
procedures.\140\ Another commenter suggested that the 10 percent 
threshold is not necessary and FINRA should clarify whether the 10 
percent goes to the commonly controlled accounts at the member 
firm.\141\ A commenter requested guidance as to whether it would be 
permissible for the member to collect aggregated margin in a single 
account, given that the investment adviser may be contractually 
prohibited from disclosing details about customers in the sub-
accounts.\142\
---------------------------------------------------------------------------

    \139\ Id. See proposed FINRA Rule 4210.05 in Exhibit 5 of 
Partial Amendment No. 1.
    \140\ See Credit Suisse Letter.
    \141\ See SIFMA Letter.
    \142\ See Sandler O'Neill Letter.
---------------------------------------------------------------------------

    In response, FINRA believes it is consistent with the rule's intent 
that the 10 percent threshold may be calculated as of the time of the 
member's credit review pursuant to its written risk policies and 
procedures.\143\ FINRA expects that the 10 percent would be as to 
accounts of which the member is aware by virtue of the member's 
relationship with the investment adviser. As noted in the original 
filing, FINRA believes the 10 percent threshold is appropriate given 
that accounts above that threshold pose a higher magnitude of risk. 
FINRA believes that the rule does not prevent a member from aggregating 
margin, provided the member observes all applicable requirements under 
SEC and FINRA rules.\144\
---------------------------------------------------------------------------

    \143\ The proposed rule is not intended to prescribe specific 
intervals at which a member would need to review risk limit 
determinations. However, FINRA notes that, with respect to risk 
limit determinations pursuant to the proposed rule, proposed Rule 
4210.05(a)(4) provides that a member shall consider whether the 
margin required pursuant to the rule is adequate with respect to a 
particular counterparty account or all its counterparty accounts 
and, where appropriate, increase such requirements. FINRA believes 
members should be mindful, in the conduct of their business, of the 
need to revisit risk limit determinations as appropriate. See 
proposed Rule 4210.05(a)(4) in Exhibit 5 in Partial Amendment No. 1.
    \144\ See supra note 3.
---------------------------------------------------------------------------

K. Sovereign Entities

    As set forth more fully in the original filing, the proposed rule 
provides that, with respect to Covered Agency Transactions with any 
counterparty that is a federal banking agency, as defined in 12 U.S.C. 
1813(z),\145\ central bank, multinational central bank, foreign 
sovereign, multilateral development bank, or the Bank for International 
Settlements, a member may elect not to apply the margin requirements 
specified in paragraph (e)(2)(H) of the proposed rule provided the 
member makes a written risk limit determination for each such 
counterparty that the member shall enforce pursuant to paragraph 
(e)(2)(H)(ii)b.\146\ A couple of commenters said that sovereign wealth 
funds should be included among the entities with respect to which a 
member may elect not to apply the proposed margin requirements.\147\ 
One of the commenters said that FINRA should consider the credit 
profile of sovereign wealth funds rather than whether they are 
commercial participants.\148\ In response, FINRA does not propose to 
make the suggested modification. The proposed exception is designed 
specifically for selected sovereign entities performing the functions 
of governments. As commercial participants in the market, sovereign 
wealth funds are subject to risk. As noted in the original filing, 
FINRA believes that to include sovereign wealth funds within the 
parameters of the proposed exception would create perverse incentives 
for regulatory arbitrage.\149\
---------------------------------------------------------------------------

    \145\ 12 U.S.C. 1813(z) defines federal banking agency to mean 
the Comptroller of the Currency, the Board of Governors of the 
Federal Reserve System, or the Federal Deposit Insurance 
Corporation.
    \146\ See supra note 3.
    \147\ See SIFMA Letter and SIFMA AMG Letter.
    \148\ See SIFMA Letter.
    \149\ See supra note 3.
---------------------------------------------------------------------------

L. Federal Home Loan Banks and Farm Credit Banks

    Some commenters requested that FINRA amend the rule so that members 
would have discretion to except Federal Home Loan Banks (``FHLB'') and 
Farm Credit Banks (``FCB'') from the proposed margin requirements.\150\ 
One commenter requested that, in the alternative, a member should have 
discretion to except FHLB from the proposed margin requirements when 
the Covered Agency Transactions are entered into for the purpose of 
hedging risk.\151\ The commenters suggested

[[Page 3544]]

further that the rule should provide for a member's counterparty to 
have the right to segregate any margin posted with a FINRA member with 
an independent third-party custodian. In response, FINRA does not 
propose to make the requested modifications to the proposed rule. The 
requested exceptions would undermine the rule's purpose of reducing 
risk. With respect to third-party custodial arrangements, FINRA 
believes these are best addressed in separate rulemaking or guidance, 
as appropriate. FINRA welcomes further discussion of these issues.
---------------------------------------------------------------------------

    \150\ See Sutherland Letter and CoBank Letter.
    \151\ See Sutherland Letter.
---------------------------------------------------------------------------

M. Other Comments

    Several commenters expressed concerns, as set forth below, that 
FINRA believes raise issues that are outside the scope of the proposed 
rule change. As such, in response, FINRA does not propose any revisions 
to the proposed rule change. However, FINRA welcomes further discussion 
of these issues.
     A few commenters said that the proposed rule change should 
address the responsibilities of introducing and clearing firms, 
including such issues as assignment of responsibility for capital 
charges to one party versus the other for purposes of FINRA Rule 4311 
when engaging in Covered Agency Transactions. FINRA notes that the 
proposed rule change is not intended to address issues under Rule 
4311.\152\
---------------------------------------------------------------------------

    \152\ See BDA Letter, Sandler O'Neill Letter, and SIFMA Letter.
---------------------------------------------------------------------------

     A commenter said FINRA should work with international 
regulators to harmonize the proposed requirements with other regulatory 
regimes.\153\ As noted above, FINRA believes this is outside the scope 
of the proposed rule change.
---------------------------------------------------------------------------

    \153\ See SIFMA AMG Letter.
---------------------------------------------------------------------------

     A couple of commenters said that smaller and medium firms 
may find it difficult to develop in-house systems to comply with the 
proposed rule change.\154\ One commenter requested that FINRA clarify 
that members may utilize third-party providers to assist with their 
compliance.\155\ Broadly, FINRA believes third-party service providers 
should be permissible provided the member complies with all applicable 
rules and guidance, including, among other things, the member's 
obligations under FINRA Rule 3110 and as described in Notice to Members 
05-48 (July 2005) (Outsourcing).
---------------------------------------------------------------------------

    \154\ See Matrix Letter and BDA Letter.
    \155\ See Matrix Letter.
---------------------------------------------------------------------------

     A commenter said that FINRA should coordinate the rule 
change with the former Mortgage-Backed Securities Clearing Corporation, 
now part of the Fixed Income Clearing Corporation.\156\ As noted above, 
FINRA believes this is outside the scope of the proposed rule change.
---------------------------------------------------------------------------

    \156\ See Brean Capital 2 Letter.
---------------------------------------------------------------------------

     Two commenters said that FINRA should provide guidance 
that would permit collective investment trusts, common trust funds or 
collective trust funds to be treated as exempt accounts.\157\ One of 
the commenters further said that foreign institutions should be 
recognized as exempt accounts.\158\ Another commenter suggested FINRA 
should confirm that an omnibus account maintained by an investment 
adviser may be classified as an exempt account based on the assets 
under management in the account and a risk analysis conducted at the 
investment adviser level.\159\ FINRA notes that, other than for 
purposes of one conforming revision, as set forth in the original 
filing, the proposed rule change is not intended to revisit the 
definition of exempt accounts for the broader purposes of Rule 
4210.\160\
---------------------------------------------------------------------------

    \157\ See SIFMA Letter and SIFMA AMG Letter.
    \158\ See SIFMA AMG Letter.
    \159\ See Credit Suisse Letter.
    \160\ See supra note 3.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2015-036 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Exchange Act 
Section 19(b)(2)(B) to determine whether the proposed rule change 
should be approved or disapproved.\161\ Institution of proceedings 
appears appropriate at this time in view of the legal and policy issues 
raised by the proposal. As noted above, institution of proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the issues presented by the 
proposed rule change and provide the Commission with arguments to 
support the Commission's analysis as to whether to approve or 
disapprove the proposal.
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78s(b)(2). Exchange Act Section 19(b)(2)(B) 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
an additional 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
---------------------------------------------------------------------------

    Pursuant to Exchange Act Section 19(b)(2)(B),\162\ the Commission 
is providing notice of the grounds for disapproval under consideration. 
In particular, Exchange Act Section 15A(b)(6) \163\ 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.
---------------------------------------------------------------------------

    \162\ 15 U.S.C. 78s(b)(2)(B).
    \163\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA, in proposing margin requirements for Covered Agency 
Transactions, stated that it believes unsecured credit exposures that 
exist in the TBA market today can lead to financial losses by 
dealers.\164\ The Commission agrees with FINRA that permitting 
counterparties to participate in the TBA market without posting margin 
can facilitate increased leverage by customers, thereby potentially 
posing a risk to the dealer extending credit and to the marketplace as 
a whole.\165\ The Commission believes, however, that the proposed rule 
change, as modified by Partial Amendment No. 1, to impose margin 
requirements on Covered Agency Transactions raises questions with 
regard to the potential effects of the proposal on the mortgage market, 
as a whole, as well as on certain market participants. In particular, 
the Commission believes that the proposed rule change, as modified by 
Amendment No. 1, raises concerns that the potential operational 
difficulties and costs of implementing the proposed rule may cause some 
firms to either withdraw from the TBA market or cease dealing with 
certain types of counterparties. This raises questions as to whether 
the proposed margin requirements are consistent with the requirements 
of Section 15A(b)(6) \166\ of the Exchange Act, including whether the 
proposed rule is 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.
---------------------------------------------------------------------------

    \164\ See supra note 3.
    \165\ Id.
    \166\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues raised by the proposed rule change, as modified by Partial 
Amendment No. 1. In particular, the Commission invites the written 
views of interested persons on whether the proposed rule change, as 
modified by Partial Amendment No. 1, is inconsistent with Section 
15A(b)(6), or any other provision, of the Exchange

[[Page 3545]]

Act, or the rules and regulations thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\167\
---------------------------------------------------------------------------

    \167\ Exchange Act Section 19(b)(2), as amended by the 
Securities Acts Amendments of 1975, Pub. L. 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceedings--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments by February 11, 2016 concerning whether the proposed rule 
change should be approved or disapproved. Any person who wishes to file 
a rebuttal to any other person's submission must file that rebuttal by 
March 7, 2016. In light of the concerns raised by the proposed rule 
change, as modified by Partial Amendment No. 1, as discussed above, the 
Commission invites additional comment on the proposed rule change, as 
modified by Partial Amendment No. 1, as the Commission continues its 
analysis of whether the proposed rule change, as modified by Partial 
Amendment No. 1, is consistent with Section 15A(b)(6), or any other 
provision of the Exchange Act, or the rules and regulations thereunder. 
The Commission is asking that commenters address the merits of FINRA's 
statements in support of its proposal, as modified by Partial Amendment 
No. 1, as well as the comments received on the proposal, in addition to 
any other comments they may wish to submit about the proposed rule 
change, as modified by Partial Amendment No. 1. Specifically, the 
Commission is considering and requesting comment, including empirical 
data in support of comments, in response to the following questions:

    1. Will the proposed rule change, as modified by Partial 
Amendment No. 1, affect the operation and structure of the TBA 
markets as it exists today? If so, how?
    2. What are commenters' views with respect to the benefits and 
costs of the proposed rule change, as modified by Partial Amendment 
No. 1? What implementation and ongoing costs will result, if any, 
from complying with the proposed rule change, as modified by Partial 
Amendment No. 1?
    3. Will the proposed rule change, as modified by Partial 
Amendment No. 1, affect FINRA member firms differently based on 
their size (i.e., small, medium or large firms)? If so, how? Will 
the proposed rule change, as modified by Partial Amendment No. 1, 
create competitive advantages or disadvantages for member firms 
based on their size? If so, how?
    4. What are commenters' views on the impact of the proposed rule 
change, as modified by Partial Amendment No. 1, on other affected 
parties, such as non-member firms and other market participants?
    5. What are commenters' views on the exception for multifamily 
housing and project loan securities in the proposed rule change, as 
modified by Partial Amendment No. 1? Does the proposed exception for 
multifamily and project loan securities pose any risks to FINRA 
members, as well as other market participants? If so, please 
describe these risks?
    6. What are commenters' views on the implementation time 
required to comply with the proposed rule change, as modified by 
Partial Amendment No. 1?

    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-2015-036 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-036. 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-2015-036 and should be 
submitted on or before February 11, 2016. If comments are received, any 
rebuttal comments should be submitted by March 7, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\168\
---------------------------------------------------------------------------

    \168\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-01058 Filed 1-20-16; 8:45 am]
 BILLING CODE 8011-01-P


