FINRA Requests Comment on Proposed Amendments to the Margin Rule Regarding When Issued and Other Extended Settlement Transactions


FINRA seeks comment on proposed amendments to Rule 4210 (Margin Requirements) that would clarify and incorporate into the rule current interpretations regarding when issued and other extended settlement transactions, and provide relief to facilitate the application of the rule to these transactions. 

The proposed rule text marked to show changes from the current rule text is available in Attachment A. 

Two additional attachments are included to assist in the review of the proposed amendments. Attachment B consists of examples illustrating the operation of the rule under the proposed amendments. Attachment C is a flow chart outlining an analysis of the application of the proposed rule to these transactions. Attachments B and C are included for illustrative purposes only.


Background and Discussion

A.  Extended Settlement Transactions; Definition and General Rule

Rule 4210 protects member firms against customer credit risk by generally requiring firms to collect margin when they extend credit to their customers. Extensions of credit covered by the rule include transactions in which member firms permit customers to make partial or delayed payment on securities purchases (or partial or delayed delivery of securities sold). 

FINRA examinations have revealed some uncertainty in firms’ understanding about what constitutes delayed payment or delivery for purposes of the margin rules. This uncertainty regarding whether a payment or delivery should be considered delayed may be due in part to the fact that Federal Reserve Board (FRB) Regulation T allows transactions to be booked into a customer’s cash account based on the customer’s agreement to make full cash payment for securities purchased (or deposit securities sold) promptly (i.e., within the standard settlement cycle),3 but then allows two additional business days to resolve any issues with a customer’s payment4 before requiring a broker-dealer to cancel or liquidate the customer’s purchase of non-exempted securities (or obtain an extension of time).

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Source: FINRA

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