Margin Regulation: SEC Approves Proposed Amendments to FINRA’s Rule on Margin Requirements

Sullivan & Cromwell LLP - November 14, 2012

On October 5, 2012, the SEC approved a proposal by FINRA to amend Rule 4210, which establishes margin requirements. The amendments were approved substantially as proposed, and would

  • replace the current margin requirements for specific option spread strategies with broad requirements for all “spreads” utilizing similar methodologies;
  • eliminate the ability to count the current market value of non-margin eligible equity securities towards the maintenance margin requirements for all securities held “long” and clarify certain other requirements for non-margin eligible equity securities;
  • eliminate the current exemption from the free-riding prohibition for “designated accounts”;
  • eliminate the special definition of “exempt account” used in the context of maintenance margin requirements for OTC put and call options on U.S. Government and agency debt securities; and
  • eliminate the requirement to stress-test portfolio margin accounts in the aggregate.

In response to a comment on the proposed rules, FINRA amended its proposal to eliminate the proposed margin requirements applicable for non-margin eligible, non-equity securities. The amendments related to option spread strategies became effective on October 26, 2012 and all other amendments will become effective on January 23, 2013.