FINRA Requests Comment on Proposed Supplementary Schedule for Derivatives and Other Off-Balance Sheet Items

Supplemental FOCUS Information

Executive Summary

On February 9, 2012, the SEC approved FINRA Rule 4524 (Supplemental FOCUS Information), which requires each firm, as FINRA shall designate, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors or in the public interest as a supplement to the FOCUS Report.¹ FINRA requests comment on one such proposed schedule, a supplementary schedule for derivatives and other off-balance sheet items.

The proposed supplementary schedule for derivatives and other off-balance sheet items (including instructions to the form) is set forth in Attachment A.

Questions concerning this Notice should be directed to:

Action Requested

FINRA encourages all interested parties to comment on the proposal. Comments must be received by June 4, 2012.

Member firms and other interested parties can submit their comments using the following methods:

To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.²

Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).³

Background & Discussion

FINRA Rule 4524 (Supplemental FOCUS Information) requires each firm, as FINRA shall designate, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors or in the public interest as a supplement to the FOCUS Report. Pursuant to this rule, FINRA is proposing to adopt a supplemental schedule to capture important information that is not otherwise reported on certain firms' balance sheets. To that end, the proposal requires all carrying and clearing firms to file with FINRA a proposed Derivatives and Other Off-Balance Sheet Items Schedule (OBS) within 22 business days of the end of each calendar quarter.

In the aftermath of the financial crisis, FINRA began to closely monitor firms' levels of leverage and available liquidity to meet their funding needs and began to collect certain additional information from certain carrying and clearing firms with regard to their proprietary positions, financing transactions and certain off-balance sheet transactions. In proposing the OBS, FINRA's aim is to obtain more comprehensive and consistent information regarding carrying and clearing firms' off-balance sheet assets, liabilities and other commitments. This information will permit FINRA to assess more effectively on an ongoing basis the potential impact off-balance sheet activities may have on carrying and clearing firms' net capital, leverage and liquidity, and ability to fulfill their customer protection obligations.

The proposed OBS would require firms to report their gross exposures in financing transactions (e.g., reverse repos, repos and other transactions that are otherwise netted under generally accepted accounting principles, reverse repos and repos to maturity and collateral swap transactions), interests in and exposure to Variable Interest Entities, non-regular way settling transactions (including to be announced or TBA securities and delayed settlement/delivery transactions), underwriting and other financing commitments, and gross notional amounts in centrally cleared and non-centrally cleared derivative contracts involving equities, commodities, interest rates, foreign exchange derivatives and credit default swaps.

Request for Comment

While FINRA is interested in receiving comments on all aspects of the proposed OBS, FINRA seeks specific comment on whether there is a category of carrying or clearing firms that should not be required to file the proposed OBS based upon de minimis off-balance sheet activity. The comment period expires on June 4, 2012.

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

¹See Securities Exchange Act Release No. 66364 (February 9, 2012), 77 FR 8938 (February 15, 2012) (Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2; File No. SR-FINRA-2011-064).

² FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

³See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

Attachment A

Supplemental Quarterly Schedule To Focus Report

Derivatives And Other Off-Balance Sheet Items

General Instructions