FINRA Seeks Comments on an new Supplemental Schedule filed with FOCUS Report.

[ by Howard Haykin ]

FINRA published on Monday a proposed schedule - A SUPPLEMENTAL SCHEDULE FOR INVENTORY POSITIONS - that, if adopted, would be included in the firm obligations enumerated in FINRA Rule 4524, Supplemental FOCUS Information.   FINRA Rule 4524 requires each firm, in general, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate - as a supplement to the FOCUS Report. 

FINRA requests that all comments be submitted on or before 2/25/13.

Background & Discussion.   Pursuant to Rule 4524, FINRA proposes to adopt a supplemental schedule to the FOCUS Report that would provide more detailed information of inventory positions held by firms. The proposed Supplemental Inventory Schedule (SIS) is identical to the Aggregate Securities and OTC Derivative Positions schedule from the FOCUS Report Part II CSE. 

As proposed, all firms with inventory positions as of the end of the FOCUS Report reporting period would be required to file the SIS.  The proposed SIS would be due 20 business days after the end of a firm’s FOCUS reporting period.

Exceptions are available for firms that: 

• have inventory positions consisting only of U.S. Treasury securities or money market mutual funds; or
• file FOCUS Report Part II CSE.
• exempt firms would affirmatively indicate through functionality on the eFOCUS system that no filing is required for the reporting period.   

Purpose of Added Inventory Information.   The proposed SIS is intended to capture more details of a firm’s long and short inventory positions than what is captured on the FOCUS Report Part II and IIA.   - e.g.,  FOCUS Report Part II and IIA require total inventory of securities sold short to be reported in aggregate, providing no information on the types of securities sold short by firms. 

Further, long inventory is reported in categories that aggregate securities with different market risk profiles   - e.g.,  the Corporate Obligations category on the FOCUS Report Part II and Debt Securities on the FOCUS Report Part IIA includes single name corporate bonds, private label mortgage-backed securities (MBS's) and foreign debt holdings. 

The proposed SIS would provide FINRA with greater insights into the market risk associated with firms’ inventory positions, and would enable FINRA staff to assess the related impact on firms’ liquidity and funding needs.

Request for Comment.   In addition to generally requesting comments, FINRA specifically requests comment on:

• whether firms that have inventory positions consisting only of U.S. Treasury securities should be exempt from the filing requirement; and,
• whether there is a category of firms that should not be required to file the proposed SIS based upon a de minimis amount of inventory positions.

FINRA believes that the economic impact associated with completion of the proposed SIS would be minimal because the required information should be readily available to firms, as it is necessary for purposes of computing the haircut deductions required under the SEC’s net capital rule.

FINRA also believes that any operational burden imposed by the proposed SIS would be outweighed by the benefit to firms in allowing the staff to better understand a firm’s market risk, which will lead to more focused and effective examinations.

FINRA, however, specifically seeks comment on the economic impact of the proposed SIS, including costs incurred by a firm in determining whether it must file the SIS for each reporting period, completing the SIS and filing the schedule with FINRA. We request quantified comments where possible.

Following FINRA’s receipt of comments on the proposed SIS in response to this Notice, in accordance with the requirements of Rule 4524, FINRA will file the proposed SIS with the SEC pursuant to Section 19(b) of the SEA.
 

FINRA Staff Contacts.   Direct questions to:  Kris Dailey, VP, Risk Oversight & Operational Regulation, at (646) 315-8434; or  Matthew Vitek, Asst GC, Office of General Counsel, at (202) 728-8156.

For further details, go to:  [FINRA RegNote 13-5, January 2013].