From: Robert Tirschwell
Sent: February 17, 2016
To: rule-comments@sec.gov
Subject: File No. SR-FINRA-2015-036

Hello Mr. Errett,

My name is Robert Tirschwell. I am a managing member and head of trading for Brean Capital, LLC., a regional dealer based in New York City. Our firm specializes in some of the important, but less often trafficked sectors of the Agency mortgage market, and we're extremely concerned about the impact updated Rule 4210 will have on the marketplace. 

We have endeavored, through our written responses to Finra, to the SEC, and through our oral communications with our regulators, to bring to the Rule making authorities our thoughts and concerns as to the risks and benefits of the promulgation. And we do so again herein.

A regional dealer often finds its role in the fixed income marketplace as a liquidity provider in the more off the run, less liquid areas of the bond market. We provide bids and offers to institutional clients through a combination of matching buyers and sellers and by using balance sheet.  It should be fundamentally understood by the Rule making team that regional dealers —  and I include Brean here — do not compete in the TBA market against their larger cousins at big banks. Brean competes — and by that I mean takes risk — in non TBA  (Covered Agency Transactions which do not currently net MBSD).   We utilize expensive analytics, technology, strategists, and a highly skilled sales force that truly understands its customers needs, in our mission of trading bonds in the secondary market. 

The products which we traffic in do not currently clear on  a central exchange. And, taken together, the Agency bonds we trade do not make up small corner of larger market. Just the contrary;  roughly half the existing stock of tradeable Agency mortgage pools do not       net MBSD. These include every single Adjustable Rate FNMA, FGLMC, and GNMA pool;  this includes every single GNMA Reverse mortgage pool (HECM), this includes every single large loan balance FNMA (ck), FGLMC (t6), and GNMA (mjm) pool; this list includes every single GNMA II custom pool; this list includes every single relocation pool, every single IO pool, every single prepay penalty pool , every single CO-OP pool, every single project loan pool and this goes on and on and on.

Our primary concern with UPDATED 4210, is that it discriminates against regional dealers to the precise extent that the stock of pools which regionals trade do not net MBSD. If Morgan Stanley sells Brean a pool for the “good day” next month which does net (only a TBA or TBA eligible pool)  then our clearing bank posts margin on our behalf at MBSD.  However, If Morgan Stanley sells Brean a non-netting pool for settlement on “good day” next month, and the market moves against Brean ..Morgan Stanley invokes our MSFTA and we wire maintenance margin.  But why does this pool NOT net? Why don’t 50% of the universe of Agency pools net? WHY?  Because the MBSCC (MBSD) has not figured out how, in the modern age of trading, to net more, or all pools? And for their shortcoming in architecture, we all pay the price. That price, to be absolutely clear is liquidity.  We take precious excess net capital,  and use that excess money to make up for the shortcoming in clearing architecture upon which the RULE MAKING body is making a decision. That excess net capital is there to be used to create liquidity for our customers — to enhance our marketplace mission; instead that liquidity is being drained from our balance sheet and transferred around the marketplace in a very inefficient manor. MBSCC must net more or all pools before any rule changes are made. 

Brean creates liquidity in illiquid parts of the Agency mortgage market  — we maintain prices of the these off the run sectors — because current margin rules and current 4210 provide all the architecture we need to support us as we do this business. And this is right and sensible. As this understanding sunsets, the prices we can pay, the amount and timing of these purchases, the perverse use of excess net capital to provide for the MBSCC shortcoming …all conspire against this very important task and will have a grave impact on the efficient pricing of securities, and will force regional dealers to back away from a market that is important to both borrowers and savers, just when the largest bank players in the space are getting out of the business.

To understand the impact on mortgage pricing, It's important to remember that new mortgage loans are bundled into pools and sold as TBA securities. As the loans become older, they trade pool specific, based on the performance of each pool. The pools also become smaller, as the loans are amortizing. Without regional dealers focus on secondary market pools, the pools liquidity will suffer, and in consequence, so will its pricing. This degradation in pricing will likely cause the new issue market to reprice wider as well, costing borrowers more,  and potentially negatively impacting the housing market. And firms will continue to exit, a theme that is already playing out as we suspected in earlier musings to FINRA. 

Our recommendations is simple. Please do not invoke or update 4210 as it relates to “proposed maintenance margin” until and unless the MBSCC (MBSD) enlarges the universe of Agency mortgage Cusips that  it nets. Otherwise Updated Rule clearly discriminates unfairly against mid-size dealers to the exact extent that the universe of pools this community is focused on to earn its livelihood  does not net MBSD. If more or all Agency Mortgage cusips netted, then all dealers would post margin to the netting exchange through their Clearing Banks. The efficiency of this would allow dealers more capital to use for market making activities that enhance the marketplace for all participants. 

We would look forward to discussing with you any of the material we have referenced herein. It might be helpful, for example,  for the Rule Making body to more fully understand, from where we sit, the exact nature of the clearing plumbing…and the extent to which and upon what basis clearing bank posts margin on our behalf at present, where margin is not required at present and will be in the future…and where and how the change will impact this arithmetic…almost all point to a degradation in our ability to carry out our fundamental mission.

Yours Sincerely,
Robert Tirschwell