New customer margin requirements go into effect next week for exempted securities mutual funds and exempted securities exchange traded funds (ETFs), as well as for money market mutual funds.  Effective date is Tuesday, 10/26.

    As Defined.   An exempted securities mutual fund ("ESMF")  is defined in Section 220.2 of Reg. T, as “any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C.80a-8), provided that the company has at least 95% of its assets continuously invested in exempt securities (as defined in section 3(a)(12) of the [Exchange] Act.”

ETFs typically are registered UITs or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.  Some ETFs, similar to ESMFs, have at least 95% of their assets continuously invested in exempt securities - i.e., exempted securities ETFs ("ESETF").  Further, some exempted securities ETFs are leveraged - meaning they're designed to generate multiples (e.g., 200%, 300% ++) of the performance of the underlying benchmark they track.

    Margin Requirements for ESMFs and ESETFs.   Reg. T, issued by the Board of Governors of the Federal Reserve, among other things, sets initial margin requirements for equity securities, providing exceptions for selected types of securities - including exempted securities, money market mutual funds ("MMFs") and exempted securities mutual funds, and provides that the margin for such products may be established by the creditor in good faith or by the regulatory authority, whichever is greater.  NASD Rule 2520(e)(2)(A) and (B) and Incorporated NYSE Rule 431(e)(2)(A) and (B) prescribe margin requirements for obligations for selected exempted securities - specifically for (i) government debt securities and (ii) all other exempted securities.

To clarify past confusion, FINRA is advising firms that the margin requirement for an ESMG and ESETF shall be commensurate with the margin requirements for other exempted securities.  Accordingly, effective 10/26, ESMFs and ESETFs shall have an initial and maintenance requirement of 7% of the current market value for Reg. T margin accounts.  In the case of a leveraged ESETF, the initial and maintenance margin requirement in a Reg. T margin account shall increase by a percentage commensurate with the leverage of the ETF.   For

e.g. - a 200% leveraged ESETF will have a maintenance requirement of 14% (2 x 7%).  The increased maintenance margin requirements has been effective sincew 12/1/09. 

    MMFs Requirements.   A money market mutual fund, as defined in Section 220.2 of Reg. T and excepted from Reg. T, has an initial and maintenance requirement of 1% of the current market value for both Reg. T margin accounts and portfolio margin accounts, provided the NAV of the fund is not below $1.00 per share.  If the fund “breaks the buck”, firms must abide by the provisions promulgated in Regulatory Notice 08-60.

FINRA also reminds firms that, before extending credit on MMFS, they must ensure that:  (i) customer waives any right to redeem the shares without the firm’s consent;  (ii) firm (or if shares are deposited with a clearing organization, the clearing organization) obtains the right to redeem the shares for cash upon request;  and, (iii) fund agrees to satisfy any conditions necessary or appropriate to ensure that the shares may be redeemed for cash promptly upon request.

For a complete read, click onto:  [ FINRA RegNote 10-53, October ]