FINRA 2021 009 proposed rule change and its 👌👌🔥🔥
Hello apes! Getting enough crayons?? Hope you are. So recently saw a post saying FINRA sent this rule for approval to the SEC. So I started to read it and decided to share it with you in detail (to the best of my knowledge) but for people in a hurry:
TD;WR – FINRA proposes that members should disclose their short positions, borrowed shares, lent shares and many other things if they cross specified financial thresholds.
Okay let’s start!
So FINRA had come up with this rule back in January 2018 and not just within these few months. But what is it all about?
FINRA is proposing to adopt a Supplemental Liquidity Schedule (SLS) in which SLS would be required to be filed by each member with $25 million or more in free credit balances (defined below), and by each member whose aggregate amount outstanding under repurchase agreements, securities loan contracts and bank loans is equal to or greater than $1 billion.
Now let’s understand what free credit balance means:
It refers to the amount held in a customer’s margin account that can be withdrawn at any point of time.
When a margin account is made, a customer is obligated to maintain certain amount in the account that can not be withdrawn. This is called margin requirement. I am sure by now we all are familiar with margin requirement and what happens if you failed to maintain it.
So, for example: if a customer has $500 in his account after his purchase, his margin requirement is $50. So, the amount that can be withdrawn will be $500- $50 = $450. This $450 is free credit balance.
Though this is extremely simplified explanation but you get the idea right?
Calculation of Free Credit Balance (skippable)
Free cash balance is calculated as the total uninvested remaining money in a margin account after margin requirements, short sales proceeds, received dividends, and purchase transactions awaiting settlement are taken into consideration.
Repurchase Agreement
A repurchase agreement functions in effect as a short-term, collateral-backed, interest-bearing loan. The buyer acts as a short-term lender, while the seller acts as a short-term borrower. The securities being sold are the collateral. Thus the goals of both parties, secured funding and liquidity, are met.
Its more like “Yo! I need money at the moment so can you buy these securities from me? I’ll buy them back from you when I have enough money and on higher price than the present price.
Now the question comes what all has to be disclosed in SLS
Here is the SS taken from the filing itself
So everything from shorting to borrowing, lending, margins, options and other derivatives. The last point states derivatives transaction NOT cleared through CCP. How I am interpreting it is as shares bought and sold for the purpose of options delivery which are not bought through lit exchanges have also to be mentioned. So more like if you buy from dark pools, you will have to mention them too? I am not sure about this once. Some wrinkle brained ape – enlighten us!
Moving on, Not just this, when the rule came out in 2018, the reporting member had to mention the name of the top 5 counterparties (the party opposite to you, so if you were the seller then counterparty would be the buyer) but after many comments and requests, FINRA amended it to just mentioning the type of counterparty (they can still name them if they want too)
Timing:
SLS has to be calculated on the last business day of each month and has to be filed with FINRA within 24 business days after the end of the month.
Applicability:
It will be applied to all the members crossing the specified financial threshold except for funding portal members because as stated by FINRA :
FINRA states that by implementing this rule, 85-100 of its members will have to report the SLS (ofcourse we know that already) and one quarter of these members are bank holding companies (BHC)
I think is a great step to bring, if not full, then some transparency in the market. The most amazing part that I felt was that they mentioned not just 2008 market volatility but also January 2021 market volatility and the stressed to monitor for events that signal an adverse change in the liquidity risk of the members because they know what’s coming!!!!!
Also I must add that I am neither a financial advisor nor an expert of financial markets. I am just an ape with a crayon. So please correct me anywhere I am wrong and add your opinions and anything of value that you wish too.
Hope it was easy to understand.
Posted May 14, 2021, 1:11 PM UTC