Proposed Rule Change to Amend FINRA Rule 4210 (Margin Requirements) To Replace the Day Trading Margin Provisions With Intraday Margin Standards

Summary

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on the proposed rule change (“Proposal”) ¹ filed by the Financial Industry Regulatory Authority, Inc. (“FINRA”) with the SEC to amend FINRA Rule 4210 to replace its current day trading margin provisions with modern intraday margin standards that will enable broker-dealers to implement better and more efficient customer margining processes while maintaining the rule’s important investor and risk management protections.

Excerpt

In our comments on RN 24-13, we expressed strong support for the need to update the day trading provisions in the current rule, noting that they have long been a source of frustration for retail investors, and particularly retail traders with smaller accounts who may become restricted from accessing the markets and investing if their account equity falls below $25,000.4 We noted that the current rule was adopted at a time when industry risk management systems monitored securities positions based on trades completed on the prior day. Based on the rule’s design, it can prevent investors from trading and effectively shut them out of the markets if they are deemed “pattern day traders.” We also noted the significant increase in retail investors with smaller accounts participating in the markets since the rule was adopted and the unfair impact the rule can have on them. In addition, we noted that technical advances have allowed firms to develop and deploy real-time risk management systems that can monitor investors’ trades and block trades that would create margin deficits, thus eliminating the clearing and settlement risks that the rules were designed to mitigate when broker-dealers and clearing firms were unable to monitor clients’ actual positions and equity levels throughout the trading day. In light of these factors, we urged FINRA to modernize the rule to account for these changes in the marketplace since the rule was adopted consistent with FINRA’s investor protection mandate.

In the Proposal, FINRA is proposing to replace the current day trading margin requirements, including the provisions relating to “pattern day traders,” the computation and use of “day trading buying power,” and the $25,000 pattern day trader minimum equity requirement, with new intraday margin requirements. Among other things, FINRA believes that the Proposal will benefit customers and members alike by reducing risks of intraday trading exposures more broadly and giving customers more freedom to participate in the markets, while reducing compliance costs for members. FINRA also anticipates that the Proposal, by requiring appropriate margin for intraday risk created by day trades and other intraday activity, such as transactions in options on their expiration dates (“zero day to expiration” or “0DTE” options trading), will be effective in avoiding the build-up of unmargined positions that could hurt both customers and members during large shifts in market prices.