FINRA Increases Margin Maintenance

FINRA announced that it is temporarily increasing the maintenance margin requirements for auction-rate securities. Effective immediately, all auction-rate securities that are backed by fixed income products (e.g. municipal bonds, collateralized debt obligations, etc.) will have a 25 percent maintenance requirement.

Recently, the auctions for these securities have been failing because investors concerned over the current credit market environment have not been willing to participate in the auctions. Consequently, holders of these securities have not been able to liquidate their positions. In order to provide liquidity to their customers, several member firms have asked FINRA whether margin can be extended to these securities.

Pursuant to NYSE and NASD rules, fixed income auction-rate securities that carry an investment grade rating are categorized as “investment grade debt securities” and normally would require equity of 10 percent of the current market value. Fixed income auction-rate securities that are below investment grade are categorized as “other marginable non-equity securities and normally require equity of 20 percent of the current market value or 7 percent of the principal amount, whichever is greater.

However, as a result of the reduced liquidity in these securities, member firms will be required to impose a regulatory maintenance requirement of 25 percent of the current market value for all fixed income auction rate securities, regardless of whether or not the security is investment grade.

If fixed income auction rate securities are used as collateral for non-purpose credit to any customer, firms are reminded that they must also consider the 25 percent maintenance requirement when determining any maintenance excess or deficiency. The amount of any deficiency between the equity in the account and the margin required shall be deducted in computing the firm’s Net Capital. Firms should consider the need to institute higher margin requirements if deemed appropriate and remember that auction-rate preferred securities issued by closed-end funds are not marginable.

FINRA is also advising member firms to give careful consideration to the classification of these securities on customer statements as cash or cash equivalents. Firms are also encouraged to review any references and characterization of these securities on the firm’s Web site as short-term securities.