May 14, 2021

VIA ELECTRONIC SUBMISSION

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506

Re: SIFMA Response to FINRA Regulatory Notice 21-11; Proposed Amendments to the Margin Rule Regarding When Issued and Other Extended Settlement Transactions

Dear Ms. Mitchell,

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on proposed amendments to the margin rule regarding when issued and other extended settlement transactions, as set forth by the Financial Industry Regulatory Authority, Inc. (“FINRA”) in FINRA Regulatory Notice 21-11 dated March 15, 2021 (“FRN 21-11”). Although we appreciate FINRA releasing this proposal for comment, we set forth the concerns of our members below.

Executive Summary:

Part I of this letter addresses our comments regarding FINRA’s margin proposals with respect to when issued securities offerings (new issues).

By excepting initial public offerings (“IPOs”) of equity securities from the requirement to collect margin or incur net capital charges, FINRA has recognized that there are circumstances where the collection of margin or the incurrence of net capital charges is not necessary to protect a FINRA member against credit exposure. These circumstances are not limited to IPOs, however, and we note that FINRA has not articulated a rationale for recognizing this exception for such IPOs, but not for other types of offerings. Given that “extended settlement” in offerings of new issues is generally driven by the financing terms/needs of the issuers or the logistical requirements of documenting the offering, we do not believe that a distinction between IPOs and other types of offerings is warranted in the scheme of the margin regulations applicable to broker-dealers as contemplated by Congress and the Federal Reserve Board. Therefore, we strongly urge FINRA to reconsider its proposal to exclude other offerings, other than IPOs of equity securities, from the scope of the exception. We believe that the collection of margin and the imposition of net capital charges for settlements of new issues that occur beyond T+22 – for all offering/security types (equity, debt, asset-backed securities, municipal and U.S. government securities) – would be operationally complex, and would require a substantial (in terms of cost and time) design and implementation effort for new operational processes and controls to (i) attempt to collect margin from customers who do not maintain margin accounts at the member and who likely will not be accustomed, or set up, to satisfy margin calls in a timely/required manner and (ii) monitor and calculate net capital charges in lieu of collecting margin under (i). Again, we strongly urge FINRA to reconsider its position on this topic.

While members with a larger capital base will more readily be able to absorb these net capital charges, smaller firms may be disadvantaged and may not be able to participate in certain new issue offerings. Even for larger firms, incurring these substantial and costly net capital charges could result in underwriters encouraging issuers to shorter settlement periods which could raise borrowing/financing costs for issuers. In this regard, we believe that FINRA’s when issued proposals may in some instances adversely impact the ability of issuers to take advantage of favorable market opportunities to manage their balance sheets/financial needs, and may result in the imposition of substantial, and costly, net capital charges on member firms whose customers will balk at the provision of margin because the issuer has chosen to settle the offering on a longer than T+2 basis, and not because the customer is unable to pay for the securities.

Because the closing/settlement dates of new issues of non-equity/debt securities (or any when issued offering) are generally driven by the issuer based on a myriad of considerations, and not due to the ability or willingness of investors to pay, we believe that a FINRA member is not extending credit in the sense contemplated by the margin rules. Rather, it is more akin to being an arranger of credit arising from a delay in setting the closing timeframe by the issuer. In any event, the typical investors in new issuances of debt and other new issues of securities (other than common stock and municipal securities) that are marketed by FINRA members are largely sophisticated and financially secure institutional investors who do not subject members to significant credit risk/exposure.

We emphasize the universal fact that it is the atypical debt securities (including for municipal securities and asset-backed securities) offering that will, or can, close by T+2. Requiring a T+2 settlement requirement, or otherwise requiring the collection of margin or, in certain cases, imposing a net capital charge in lieu of collecting such margin, could result in unnecessary additional costs to issuers as well as FINRA members. As noted, FINRA members would likely be subject to substantial additional (and costly) net capital charges as firms would choose to incur these charges in lieu of collecting margin from customers who would not be expecting or willing to provide margin in when issued transactions where the securities are not available for delivery to the customer for some period of time as determined by the issuer, and not by the customers/investors. We set forth herein the various key considerations that dictate the issuer’s need for a delayed, or extended, settlement, in particular, for high yield and investment grade debt offerings.

 

---

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 Where “T” refers to the trade date and “2” refers to the number of business days after the trade date. As used herein, “x” in “T+x” refers to the number of business days following the trade date, T.