FINRA Rule 11190

Paragraph (b) operates through two numbered subparagraphs — subparagraph (1) establishes that a contract submitted to a reconfirmation and repricing service which has been DK'd by the contra-party, or is otherwise deemed a DK under the rules of the service, may be closed-out by the submitting party without notice during normal trading hours promptly after completion of the service's reconfirmation and pricing cycle, for the account and liability of the non-confirming member; and subparagraph (2) establishes that notice of any such execution shall be made as promptly as possible on the day of execution, as provided in FINRA Rules 11810(g) and 11820(b). FINRA Rule 11190 was adopted by SR-NASD-90-1 effective December 17, 1990, amended by SR-NASD-96-54 effective February 19, 1997, and amended by SR-FINRA-2010-030 effective December 15, 2010 — no amendments have occurred since. Two selected notices are associated — 89-4 and 10-49.

FINRA Rule 11190 sits within the 11100 Scope of Uniform Practice Code subsection of the 11000 Uniform Practice Code as the final rule of that subsection, immediately following FINRA Rule 11170's part-redeemed bonds framework and immediately preceding FINRA Rule 11200's series marker for the Comparisons or Confirmations and Don't Know Notices subsection.

The Origin: RECAPS and the Aged Fails Problem

FINRA Rule 11190's origin traces to a specific operational problem in the late 1980s securities settlement infrastructure — aged fails. An aged fail is a securities transaction that has failed to settle — meaning the seller has not delivered the securities, or the buyer has not made payment — for an extended period beyond the normal settlement timeline, sometimes for weeks or months.

As confirmed in Notice to Members 89-4, in June 1987 the National Securities Clearing Corporation, at the request of various industry groups, offered its participants a new service called the Re-Confirmation and Pricing Service, commonly known by its acronym RECAPS. This service allowed NSCC participants the ability to reconfirm open aged fails, reprice such fails to the current market and, where possible, net the reconfirmed and repriced fails. The original RECAPS service was limited in scope to aged municipal bond fails — a category of security particularly prone to aged fails given the relatively illiquid and decentralized nature of municipal bond trading at the time.

Notice to Members 89-4 announced the NASD's proposal for a new Section 69 of the Uniform Practice Code — what would become FINRA Rule 11190 — that would require members who are participants in a registered clearing agency offering reconfirmation and pricing services to submit their aged fails in eligible securities subject to the Uniform Practice Code for RECAPS processing. The notice further explained that what is now FINRA Rule 11810's buy-in framework — then Section 59 of the Uniform Practice Code — would need to be amended to provide protection for members against potential liability or losses that might arise when a buy-in is pending during a RECAPS processing cycle, a cross-reference that survives in FINRA Rule 11190(b)(2)'s reference to FINRA Rule 11810(g).

FINRA Rule 11190(a): The Mandatory Participation Requirement

FINRA Rule 11190(a) establishes a mandatory — not optional — participation requirement: each member or its agent that is a participant in a registered clearing agency, for purposes of clearing over-the-counter securities transactions, shall participate in fail reconfirmation and pricing services when offered. The shall formulation leaves no discretion — a member that is a registered clearing agency participant for OTC clearing purposes must participate in a fail reconfirmation and pricing service whenever the clearing agency offers one, without the member having any choice to opt out.

This mandatory structure addresses a coordination problem inherent in any reconfirmation and pricing service. Such a service functions by bringing together the two counterparties to an aged fail — the party that has not delivered and the party that has not received — to reconfirm the terms of the failed transaction and reprice it to current market value, often with the goal of netting that fail against other open positions to reduce the overall volume of unsettled obligations in the market. If participation in such a service were optional, a member could simply decline to participate while its aged fails continued to sit unresolved on its books and on its counterparties' books indefinitely — undermining the entire purpose of the service, which depends on broad participation to achieve the netting and resolution benefits that make reconfirmation and pricing services valuable in the first place.

By making participation mandatory whenever a registered clearing agency offers such a service, FINRA Rule 11190(a) ensures that the entire population of relevant clearing agency participants is brought into the reconfirmation and pricing process, maximizing the service's ability to identify, reconfirm, reprice, and where possible net aged fails across the entire participant base rather than only among those members who happen to choose to participate.

The confirmed interpretive guidance regarding NSCC's enhanced reconfirmation and pricing service — including the creation of what NSCC termed the Obligation Warehouse, discussed in the 2010-era SEC filings — confirms that FINRA Rule 11190(a)'s mandatory participation requirement extends to enhanced and successor versions of the original RECAPS service, not merely to the service in its original 1987 form. As clearing agencies have modernized and enhanced their fail reconfirmation and pricing infrastructure over time — as NSCC did through its 2010 Obligation Warehouse enhancement — FINRA Rule 11190(a)'s participation mandate has continued to apply to these evolved services, since the rule's text is not tied to any specific named service but rather to the functional category of fail reconfirmation and pricing services when offered by a registered clearing agency.

FINRA Rule 11190(b)(1): The DK Close-Out Mechanism

FINRA Rule 11190(b)(1) addresses what happens when a specific contract submitted to a reconfirmation and repricing service encounters a DK — a Don't Know designation, meaning the contra-party either affirmatively indicates it does not recognize or agree to the terms of the submitted contract, or the contract is otherwise deemed a DK under the rules of the service itself, such as through non-response within the service's processing timeline.

For such a DK'd contract, FINRA Rule 11190(b)(1) authorizes the submitting party to close-out the contract — meaning to execute an offsetting transaction in the market to satisfy its own delivery or receipt obligation, since the counterparty has not confirmed the original contract's terms — without notice during normal trading hours promptly after the completion of the reconfirmation and pricing cycle of the service. The without notice formulation is significant — ordinarily, close-out and buy-in procedures under the Uniform Practice Code, such as those governed by FINRA Rule 11810, involve advance notice requirements giving the counterparty an opportunity to cure before a close-out is executed. FINRA Rule 11190(b)(1)'s without notice authorization for DK'd contracts in the reconfirmation and pricing service context represents a departure from that general notice-based framework — reflecting the fact that the DK itself already represents the counterparty's failure to confirm the contract through the service's own processing, such that an additional separate notice requirement before close-out would be redundant.

The close-out, when executed under FINRA Rule 11190(b)(1), is for the account and liability of the non-confirming member — meaning the financial consequences of the close-out, including any difference between the original contract price and the price at which the close-out transaction is executed, fall on the member whose failure to confirm through the reconfirmation and pricing service necessitated the close-out in the first place. This account-and-liability allocation mirrors the general principle found throughout the Uniform Practice Code's close-out framework — including FINRA Rule 11100(c)'s liability-for-damages provision and FINRA Rule 11810's buy-in framework — that the party whose non-performance or non-confirmation necessitates a close-out bears the financial consequences of that close-out.

FINRA Rule 11190(b)(2): The Notice of Execution Requirement

FINRA Rule 11190(b)(2) establishes a notice obligation that operates after the close-out authorized by paragraph (b)(1) has been executed — notice of any execution pursuant to this paragraph (b) shall be made as promptly as possible on the day of execution, as provided in FINRA Rules 11810(g) and 11820(b).

This as promptly as possible on the day of execution standard ensures that even though paragraph (b)(1) authorizes close-out without advance notice, the non-confirming member is nonetheless informed that a close-out has in fact occurred — and informed on the same day the close-out is executed, not at some later point. This same-day notification serves several functions: it allows the non-confirming member to update its own books and records to reflect that the previously open position has now been closed out; it allows the non-confirming member to assess whether the close-out price was reasonable, since the member bears the financial consequences of any price difference under paragraph (b)(1)'s account-and-liability allocation; and it provides the documentary record establishing when and how the close-out occurred, which could become relevant if a dispute arises regarding the close-out's propriety or pricing.

The as provided in FINRA Rules 11810(g) and 11820(b) cross-reference incorporates the specific notice mechanics — the form, content, and delivery method requirements — that FINRA Rule 11810's buy-in framework and FINRA Rule 11820's sell-out framework establish for their own respective execution notice provisions. Rather than establishing an independent notice mechanism specific to FINRA Rule 11190(b) close-outs, the rule incorporates the already-established notice frameworks from the broader close-out provisions of FINRA Rules 11810 and 11820 — another instance of the cross-reference-based drafting economy that recurs throughout the Uniform Practice Code, as this dictionary's entry on FINRA Rule 11160 also discussed in a different context.

FINRA Rule 11190 as the Capstone of the 11100 Subsection

FINRA Rule 11190's position as the final rule of the 11100 Scope of Uniform Practice Code subsection carries a structural significance worth noting as this dictionary completes its coverage of that subsection. The 11100 subsection began with FINRA Rule 11100's foundational scope provisions — establishing what transactions the Uniform Practice Code covers and the fundamental non-cancellation principle directing parties to the FINRA Rule 11810 buy-in and FINRA Rule 11820 sell-out remedies for failed performance. It continued through the governance cluster of FINRA Rules 11110 through 11112 establishing the UPC Committee and its panel-based decision-making authority, the definitional framework of FINRA Rule 11120, the trade date provisions of FINRA Rule 11121, the when-, as-, and if-issued/distributed contract framework of FINRA Rule 11130, and the ex-date frameworks of FINRA Rules 11140 through 11170.

FINRA Rule 11190 closes this subsection by addressing what happens at the far end of the settlement process — when a transaction has failed to settle entirely and has aged to the point where a reconfirmation and pricing service becomes the operative mechanism for resolution. In this sense, FINRA Rule 11190 represents the 11100 subsection's final word on the lifecycle of a transaction under the Uniform Practice Code: from the foundational scope and non-cancellation principles of FINRA Rule 11100, through the various ex-date and contract-type provisions governing how transactions are documented and priced, to FINRA Rule 11190's provisions governing what happens when, despite all of these provisions, a transaction simply fails to settle and ages to the point of requiring reconfirmation and pricing service intervention — with FINRA Rule 11190(b)'s close-out and notice provisions providing the final operative link to the FINRA Rule 11800 series' broader close-out procedures that the remainder of the Uniform Practice Code addresses in detail.

Connection to FINRA Rules 11100, 11810, and 11820

FINRA Rule 11190 connects to FINRA Rule 11100(c) — whose non-cancellation principle and direction to the FINRA Rule 11810 buy-in and FINRA Rule 11820 sell-out remedies for failed performance establishes the broader framework within which FINRA Rule 11190's reconfirmation-and-pricing-service-specific close-out and notice provisions operate as a specialized application. It connects directly and by explicit cross-reference to FINRA Rule 11810 — whose subsection (g) provides the notice mechanics that FINRA Rule 11190(b)(2) incorporates for close-outs executed under FINRA Rule 11190(b)(1), and whose broader buy-in framework represents the general close-out mechanism of which FINRA Rule 11190(b)(1)'s reconfirmation-and-pricing-service-specific close-out is a specialized variant. And it connects equally directly to FINRA Rule 11820 — whose subsection (b) likewise provides notice mechanics incorporated by FINRA Rule 11190(b)(2), representing the sell-out side of the close-out framework that FINRA Rule 11190(b)(1)'s authorization may invoke depending on which party — buyer or seller — is the non-confirming member whose failure necessitated the close-out.

Examination Relevance and Key Takeaways

FINRA Rule 11190 is tested on the Series 7 and Series 24 examinations as the reconfirmation and pricing service participation and close-out rule — the final provision of the 11100 subsection, addressing how aged fails are resolved through clearing-agency-administered reconfirmation and pricing services.

The key points to retain are these: FINRA Rule 11190(a) imposes a mandatory — not optional — requirement that every member or its agent that is a registered clearing agency participant for OTC clearing purposes shall participate in fail reconfirmation and pricing services whenever such services are offered by the clearing agency, a mandate that extends to enhanced and successor versions of such services as clearing agencies modernize their infrastructure; FINRA Rule 11190(b)(1) authorizes the party that submitted a contract to a reconfirmation and repricing service to close-out that contract without notice during normal trading hours promptly after completion of the service's reconfirmation and pricing cycle, where the contract has been DK'd by the contra-party or otherwise deemed a DK under the service's rules, with the close-out for the account and liability of the non-confirming member; FINRA Rule 11190(b)(2) requires that notice of any such execution be made as promptly as possible on the day of execution, as provided in FINRA Rules 11810(g) and 11820(b) — incorporating those rules' established notice mechanics rather than establishing an independent notice framework; the rule originated from Notice to Members 89-4's proposal addressing NSCC's RECAPS service for aged municipal bond fails, and was adopted as new Section 69 of the then-NASD Uniform Practice Code by SR-NASD-90-1 effective December 17, 1990; and the rule was amended by SR-NASD-96-54 effective February 19, 1997 and by SR-FINRA-2010-030 effective December 15, 2010 — no amendments since — with two selected notices, 89-4 and 10-49.