What is FINRA Rule 4210?
FINRA Rule 4210 is a regulation that sets forth margin requirements for covered agency transactions. The rule applies to broker-dealers and requires them to maintain a minimum amount of margin in customer accounts when engaging in certain transactions.
The Financial Industry Regulatory Authority (FINRA) is the self-regulatory organization responsible for overseeing and regulating the securities industry in the United States. FINRA created FINRA Rule 4210 in response to the financial crisis of 2008. The rule was designed to address concerns about excessive leverage and potential systemic risk in the securities lending market.
The rule went into effect in 2016 after receiving approval from the Securities and Exchange Commission (SEC).
The margin requirements rule applies to transactions in securities, options, and futures contracts, and requires that broker-dealers collect and maintain margin in accordance with specific requirements. The amount of margin required is based on the risk of the transaction, with higher-risk transactions requiring higher levels of margin.
In addition to setting forth margin requirements, FINRA Rule 4210 also includes provisions for the calculation and maintenance of margin, as well as requirements for the use of collateral and the treatment of cash and securities in margin accounts.
The goal of the rule is to help ensure the stability and integrity of the financial markets by promoting responsible risk management practices among broker-dealers. By requiring margin for certain transactions, the rule helps to mitigate the risk of losses and reduce the potential for financial instability.
Changes to FINRA Rule 4210
While the rule was created by FINRA staff and approved by the FINRA Board of Governors, it was developed with input from various stakeholders, including member firms, industry groups, and regulators. The rule has since been updated several times in response to changes in the securities markets and feedback from industry participants.
FINRA has filed a proposed rule change with the SEC on February 24, 2023 to once again delay the effective date of changes to FINRA Rule 4210 that were previously implemented starting on December 15, 2016.
The new date for the proposed rule change will be October 25, 2023, for amendments to Rule 4210 (Margin Requirements) for Covered Agency Transactions.
FINRA originally filed the rule proposal in 2015, to amend FINRA Rule 4210 to establish margin requirements for “Covered Agency Transactions,” which includes the following:
(1) To Be Announced (“TBA”) transactions, inclusive of adjustable rate mortgage (“ARM”) transactions;
(2) Specified Pool Transactions; and
(3) transactions in Collateralized Mortgage Obligations (“CMOs”)
The SEC approved the proposal on June 15, 2016. However, the industry was looking for clarification regarding implementation, due to the potential impact on smaller and mid-sized firms. The industry asked FINRA to extend the implementation date.
FINRA has filed numerous extensions since then. Since the covered agency transactions continue to change there may be additional extensions, amendments and industry comments.
What you need to know before Investing “on Margin”
Margin trading is basically borrowing money from your broker-dealer to purchase stock. It’s like a loan and the stock you purchase is collateral. When you open a margin account, the “margin” is the amount of money you deposit into the account. Trading “on margin” not only increases your purchasing power and potential profits, but also your risk and downside. When you trade on margin you run the risk of losing more money than you invested.
To open a margin account your broker-dealer is required to obtain your signature and provide you with an agreement explaining the terms and conditions of the account. Before you begin trading on margin, FINRA requires a minimum deposit of the purchase price, though some broker-dealers may require more. Your deposit is known as “margin minimum.” The amount you borrow, called the “initial margin,” cannot exceed 50% of the purchase price of the stock.
Maintenance Margin Requirements
After you buy stock on margin, there are restrictions on your account called a “maintenance margin,” that require you to keep a minimum amount of equity in the account. Most broker-dealers require maintenance margins between 30% to 40%.
If your margin account falls below the maintenance margin requirements, your broker-dealer will issue a “margin call” and ask you to deposit more cash or stocks into your account. If you do not meet the margin call, your broker-dealer has the right to sell your stock. This is so you can increase your account equity until you reach the required maintenance margin. Although most broker-dealers will attempt to notify you, they are not required to make a margin call and can sell your stocks without consulting you first. Further, firms can increase maintenance margin requirements at any time and without prior notice.
It’s important that you are familiar with your brokerage firm’s margin policies. Even if you are notified and given a specific date to meet a margin call, your firm still has the right to immediately sell your stocks. This often occurs when the market value of your stocks continue to fall. Furthermore, you have no control over which stocks your broker-dealer chooses to sell so there can be collateral damage such as tax implications. See: Buying on Margin – Worth the Risk?
Some of the key risks of investing on margin include:
- Losses can be magnified. This is because when you buy securities on margin, you are essentially borrowing money to invest. If the value of the investment falls, you may be required to put up additional funds to maintain the required margin, and if you are unable to do so, their securities may be sold at a loss.
- Margin calls can occur when the value of the securities in the margin account falls below a certain level, and you are required to put up additional funds to maintain the required margin. If you are unable to meet the margin call, your securities may be sold at a loss.
- When you borrow money to invest on margin, you will typically incur interest costs on the borrowed funds. If the investment does not perform as expected, the interest costs can add up and increase the overall losses.
- Margin trading can be particularly risky in volatile markets, as the value of the securities in the margin account can fluctuate rapidly. This can increase the likelihood of margin calls and magnified losses.
- If you are unable to meet a margin call, your securities may be sold at a loss. This can be particularly problematic if the securities are part of a long-term investment strategy, as forced liquidation can result in significant losses and disrupt your overall investment plan.
FINRA Attorneys for Securities Disputes
When disputes arise between investors and securities firms or brokers, they may be required to resolve their differences through FINRA arbitration. FINRA arbitration is a process in which an impartial arbitrator or panel of arbitrators is appointed to hear the dispute and render a decision.
The White Law Group helps clients navigate the arbitration process and represent their interests throughout the proceedings. This can include preparing and filing the initial claim, conducting discovery, presenting evidence and arguments at the hearing, and appealing the decision if necessary.
In addition to their knowledge of FINRA rules and procedures, the FINRA attorneys at the White Law Group also have experience in securities law and litigation. They can provide valuable guidance to clients on the strengths and weaknesses of their case, the likelihood of success, and the potential risks and rewards of pursuing arbitration.
If you have a securities related dispute, the FINRA attorneys at the White Law Group may be able to help you. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases.
For a free consultation with a securities attorney, please call the offices at 888-637-5510 for a free consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington.
For more information on The White Law Group, and its representation of investors, please visit WhiteSecuritiesLaw.com.
Tags: Financial Industry Regulatory Authority, finra rule 4210, finra rule 4210 changes, margin accounts, margin requirements, margin trading, securities attorneys, trading on margin Last modified: May 23, 2023