The Financial Industry Regulatory Authority issued a notice this week increasing its margin requirements for auction-rate securities and suggesting that broker-dealers should perhaps no longer consider them to be the equivalent of cash or short-term securities.
The three-page notice said that the margin requirements would increase to 25% from either 10% or 20%, depending on whether they were investment grade or lower.
FINRA said it raised the margin requirements after numerous auctions of these securities failed because of lack of sufficient investor interest, leaving holders unable to liquidate their positions. Several broker-dealers began asking if, in order to provide liquidity to their customers, margin could be extended to these securities.
The notice reminds dealers that auction-rate preferred securities offered by closed-end funds are not marginable.
"In light of recent events in the marketplace, member firms should give careful consideration to the classification of these securities on customer statements as cash or cash equivalents," FINRA said in the notice. "Firms are also encouraged to review any references and characterization of these securities on the firm's Web site as short-term securities."
