Updated: FINRA Proposes Rule Changes to Clarify the Application of Its Rules to Security-Based Swaps | Practical Law

Updated: FINRA Proposes Rule Changes to Clarify the Application of Its Rules to Security-Based Swaps | Practical Law

FINRA has filed a proposed rule change with the SEC to clarify the application of its rules to security-based swaps following the SEC's completion of its rulemaking regarding security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs, and together with SBSDs, SBS Entities).

Updated: FINRA Proposes Rule Changes to Clarify the Application of Its Rules to Security-Based Swaps

by Practical Law Corporate & Securities
Published on 20 Jan 2022 • USA (National/Federal)
FINRA has filed a proposed rule change with the SEC to clarify the application of its rules to security-based swaps following the SEC's completion of its rulemaking regarding security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs, and together with SBSDs, SBS Entities).
Update: On January 6, 2022, the SEC issued an order approving FINRA's proposed rule change to clarify the application of its rules to security-based swaps.
Update: On August 20, 2021, as stated in Amendment No. 1 (see below), FINRA filed a separate proposed rule change with immediate effectiveness to:
  • Extend the expiration date of FINRA Rule 0180 (Application of Rules to Security-Based Swaps) to February 6, 2022.
  • Extend to April 6, 2022 the implementation of Rule 4240 (Margin Requirements for Credit Default Swaps) and clarify that the rule does not apply if a member is registered with the SEC as an SBSD.
Update: On August 9, 2021, FINRA filed Amendment No. 1 to modify its proposed rule change to:
  • Extend the effective date of the proposed amendments to FINRA Rules 0180, 4120 and 9610 from October 6, 2021 to February 6, 2022.
  • Extend the effective date of the proposed amendments to FINRA Rules 4210, 4220 and 4240 from October 6, 2021 to April 6, 2022.
In addition, FINRA noted in Amendment No. 1 that it intends to extend the expiration dates of existing Rules 0180 and 4240 to align with the modified proposal. Following the filing of Amendment No. 1, the SEC issued an order to institute proceedings to determine whether to approve or disapprove the proposal, as modified by Amendment No. 1.
On April 26, 2021, FINRA filed a proposed rule change to clarify the application of its rules to security-based swaps (SBS) following the SEC's completion of its rulemaking regarding security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs, and together with SBSDs, SBS Entities). The Dodd-Frank Act granted the SEC with regulatory authority over SBS, and required the SEC to establish a registration process for SBS Entities. The compliance date for the SEC registration rules, as well as rules establishing business conduct, net capital, and margin requirements for SBS Entities, is October 6, 2021. For more information on the SEC's rulemaking process, see Legal Updates:
Currently, FINRA Rule 0180, which is set to expire in September 2021, provides a temporary exception from the application of FINRA rules to SBS, with certain limited exceptions. In October 2020, FINRA issued Regulatory Notice 20-36 to request comment on a concept proposal regarding the application of its rules to SBS (see Legal Update, FINRA Requests Comment on the Application of FINRA Rules to Security-Based Swaps), and FINRA had also previously solicited input and engaged with members on their anticipated SBS activities.
Informed by feedback received, FINRA is now proposing to amend FINRA Rules 0180, 4120, 4220, 4240, and 9610 to take into account members' SBS activities after SBS Entities begin registering with the SEC. FINRA's proposing release organizes the amendments into three categories:
  • The proposed rule change would adopt a new Rule 0180 that would generally apply FINRA rules to members' SBS activities and positions, with limited exceptions.
  • The proposal would amend FINRA's financial responsibility and operational rules to conform to the SEC's amendments to its capital, margin, and segregation requirements for SBSDs and broker-dealers, and to take into account members' SBS activities.
  • The proposed rule change would adopt a new margin rule specifically applicable to SBS, which would replace the interim pilot program establishing margin requirements for credit default swaps (CDS).
If approved by the SEC, the proposed rule changes will become effective on October 6, 2021.