Table of Contents
SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 11740 is the final rule of the FINRA Rule 11700 Reclamations and Rejections subsection — and the mark-to-market mechanism FINRA Rule 11130(c) invoked for when, as and if issued/distributed contracts whose indefinite and potentially long-delayed timing creates accumulating counterparty exposure, as this dictionary's entry on that rule anticipated.
The rule operates through seven lettered paragraphs.
Paragraph (a), Demand for Deposit, establishes that the party who is partially unsecured by reason of a change in the market value of the contract's subject may demand from the other party a deposit equal to the difference between contract price and market price, without a mutual-deposit requirement, with the deposit held by the demanding member, a mutually agreed depositary, or — failing agreement — any Federal Reserve System member bank with an office in the financial district of the unsecured party's city.
Paragraph (b), Assignment of Contract, permits either party to assign the contract, at execution or at the time of a mark-to-market demand, with the other party's assent.
Paragraph (c), Refund of Deposit, requires refunds — total or partial — on demand when market value changes permit them.
Paragraph (d), Delivery of Demand for Deposit or Refund, establishes the written-demand, Federal-Reserve-bank-hours delivery framework, with immediate compliance required.
Paragraph (e), Failure to Comply with Demand, entitles the demanding party to close the contract without notice via offsetting purchase or sale, for the account and liability of the non-complying party.
Paragraph (f), Contract Closure, establishes a timing restriction tied to regular delivery time in the demanding party's community. And paragraph (g), Notice of Offsetting Purchase or Sale, requires same-day notice through specified written media plus formal confirmation copied to the Committee. FINRA Rule 11740 was amended by SR-FINRA-2010-030 effective December 15, 2010, with prior amendments effective February 21, 1969 and March 1, 1970. One selected notice is associated — Regulatory Notice 10-49.
FINRA Rule 11740 sits within the 11700 Reclamations and Rejections subsection of the 11000 Uniform Practice Code as its fifth and final rule, immediately following FINRA Rule 11730's called securities reclamation framework and immediately preceding FINRA Rule 11800, the series-level marker for the Close-Out Procedures subsection.
FINRA Rule 11740(a) provides the operative mechanism this dictionary's FINRA Rule 11130(c) entry anticipated — the party who is partially unsecured by reason of a change in the market value of the subject of a contract in securities may demand from the other party a deposit equal to the difference between the contract price and the market price, without being required to make a mutual deposit.
This provision directly addresses the risk FINRA Rule 11130(c) identified — that the time of issuance or distribution of securities under a when, as and if issued/distributed contract is indefinite and may be long delayed, during which period the contract's market value may diverge substantially from its contract price, creating a growing unrealized exposure for whichever party finds itself, as a result of that divergence, partially unsecured relative to the contract's original terms.
FINRA Rule 11740(a)'s mechanism operates straightforwardly — the partially unsecured party (whichever party that is, depending on the direction the market value has moved relative to the contract price) may demand a deposit from the other party, with that deposit equal to the difference between the contract price and the market price — precisely the amount of the unsecured party's current exposure. The without being required to make a mutual deposit clause is significant — it confirms that this is a one-directional demand mechanism, not a bilateral margining arrangement; the party who has become partially unsecured by an adverse market movement may demand a deposit from the now-advantaged counterparty, without itself being required to post any reciprocal deposit (since, by definition, the demanding party is the one currently disadvantaged by the market movement, not the one holding an unrealized gain that might warrant securing).
The second sentence establishes where such a deposit shall be held — such deposit shall be made either with the member demanding same or with a mutually agreed-on depositary or, on failure to agree on a depositary, with any member of the Federal Reserve System with an office in the financial district of the city where the unsecured party maintains its office. This establishes a three-tier hierarchy: first, the demanding member itself may hold the deposit; second, the parties may mutually agree on some other depositary; and third — as a fallback where the parties cannot agree on a depositary — any Federal Reserve System member bank with an office in the financial district of the unsecured party's city serves as the default depositary. This Federal Reserve System fallback connects to the broader regulatory infrastructure this dictionary touched upon in connection with FINRA Rule 11130(d)'s Regulation T compliance requirements — Regulation T being a Federal Reserve Board regulation — confirming that the Federal Reserve System's institutional infrastructure serves multiple functions within the when, as and if issued/distributed contract framework, both as a source of the margin rules FINRA Rule 11130(d) incorporates and, here, as the default depositary mechanism for FINRA Rule 11740(a)'s mark-to-market deposits.
FINRA Rule 11740(b) addresses a party's ability to assign its position in the contract — either party to a contract in securities may assign the contract, either at the time the transaction is effected or at the time a request is made for funds to "mark to the market," provided the other party to the contract assents to the assignment.
This provision establishes two specific points in time at which an assignment may occur — at the time the transaction is effected (the original contract formation), or at the time a request is made for funds to "mark to the market" (i.e., at the time a paragraph (a) demand for deposit is made). The provided clause establishes the condition for either assignment — the other party to the contract assents to the assignment. This consent requirement reflects that an assignment of a contractual position necessarily affects the counterparty's own position — the counterparty would, after the assignment, be dealing with a different party than it originally contracted with, and FINRA Rule 11740(b) ensures the counterparty's agreement is obtained before such a substitution occurs, whether that substitution is proposed at the contract's outset or specifically in connection with a mark-to-market demand.
The specific inclusion of the mark-to-market-demand timing as an assignment opportunity is notable — it suggests that a party facing a mark-to-market demand under paragraph (a) might, as one possible response, seek to assign its position to a different party (with the original counterparty's consent) rather than posting the demanded deposit itself — though FINRA Rule 11740 does not elaborate further on the relationship between this assignment option and the demand-and-deposit framework paragraphs (a) and (e) otherwise establish.
FINRA Rule 11740(c) establishes the converse of paragraph (a)'s demand mechanism — if the market value of the subject of the contract changes so as to permit a total or partial refund of any deposits which have been made in accordance with paragraph (a) of this Rule, such refunds shall be made on demand.
This provision confirms that paragraph (a)'s deposit mechanism is not a one-way ratchet — as the market value of the contract's subject continues to fluctuate over the indefinite and potentially long-delayed period FINRA Rule 11130(c) describes, a deposit made under paragraph (a) at one point in time may become excessive (in whole or in part) if subsequent market movements reduce or eliminate the unsecured exposure that deposit was intended to cover. Paragraph (c) requires that such excess — whether the entirety of a previously-made deposit or some portion of it — be refunded on demand, mirroring paragraph (a)'s on-demand structure but in the refund direction.
Together, paragraphs (a) and (c) establish a dynamic mark-to-market system — as the market value of the contract's subject moves in either direction relative to the contract price, the party disadvantaged by that movement may demand additional deposit under paragraph (a), while a party holding a deposit that has become excessive due to subsequent favorable movement must refund the excess under paragraph (c) on demand. This dynamic system directly implements the periodic marks to the market that FINRA Rule 11130(c) contemplated as the mechanism for limiting the accumulation of unrealized exposure over the when, as and if issued/distributed contract's indefinite pendency.
FINRA Rule 11740(d) establishes the formal requirements for both paragraph (a) demands and paragraph (c) demands — all demands for deposits or refunds shall be in writing and shall be delivered at the office of the party upon whom the demand is made during the business hours of member banks of the Federal Reserve System located in the community where such party maintains its office, and such demands shall be complied with immediately.
This provision establishes three requirements working together. First, the in writing requirement — demands under paragraphs (a) and (c) must take written form, consistent with the documentary formality this dictionary has observed throughout the Uniform Practice Code's various notice and demand provisions. Second, the delivery-timing requirement — delivery must occur during the business hours of member banks of the Federal Reserve System located in the community where the recipient maintains its office. This Federal-Reserve-member-bank-hours standard is distinctive — rather than the community hours established by rule or practice standard this dictionary has encountered in FINRA Rule 11320(h), FINRA Rule 11410(a), and FINRA Rule 11710(c)(1), paragraph (d) ties the relevant business hours specifically to Federal Reserve System member banks in the recipient's community — a more specific and verifiable standard, consistent with paragraph (a)'s Federal Reserve System depositary fallback, reinforcing the Federal Reserve System's role as the institutional reference point throughout FINRA Rule 11740's framework.
Third, and most significantly, the immediate compliance requirement — such demands shall be complied with immediately. This immediate standard stands in sharp contrast to virtually every other timing standard this dictionary has examined throughout its coverage of the Uniform Practice Code — even the shortest periods this dictionary has encountered (FINRA Rule 11410(f)'s ten-day deadline, FINRA Rule 11210(c)(3)'s one-business-day DK response window) provide some interval for response. FINRA Rule 11740(d)'s immediately standard reflects the urgency inherent in a mark-to-market system — the entire purpose of paragraphs (a) and (c)'s demand mechanism is to keep the parties' relative exposure continuously aligned with current market values; any delay in compliance would undermine this purpose by allowing the very exposure the demand seeks to address to persist (or, for a refund demand, by allowing the demanding party's funds to remain tied up in an excessive deposit) during whatever delay occurred.
FINRA Rule 11740(e) establishes the consequence for non-compliance with paragraph (d)'s immediate-compliance standard — failure of a party to comply with a demand for a deposit or refund made in accordance with paragraphs (a), (c) and (d) of this Rule shall entitle the party making the demand to close the contract without notice, by making offsetting purchase or sale contracts in the best available market for the account and liability of the party failing to comply with said demand.
This without notice close-out authorization directly parallels FINRA Rule 11190(b)(1)'s without notice close-out authorization for DK'd contracts submitted to a reconfirmation and pricing service, examined earlier in this dictionary's coverage. In both contexts, the without notice departure from the Uniform Practice Code's general notice-based close-out framework reflects that the triggering event itself — a DK under FINRA Rule 11190(b)(1); a failure to immediately comply with a mark-to-market demand under FINRA Rule 11740(e) — already represents the non-complying party's failure to respond through the available channel, such that an additional separate notice requirement before close-out would be redundant.
The offsetting purchase or sale contracts in the best available market mechanism, and the for the account and liability of the party failing to comply formulation, directly parallel the structure this dictionary has observed throughout the Uniform Practice Code's close-out provisions — FINRA Rule 11100(c)'s buy-in and sell-out remedies, FINRA Rule 11630(f)'s buy-in remedy for dishonored due-bills, and FINRA Rule 11190(b)(1)'s DK-based close-out all share this same account-and-liability allocation, placing the financial consequences of the close-out — including any difference between the contract price and the offsetting transaction's price — on the party whose non-compliance necessitated the close-out.
FINRA Rule 11740(f) establishes a timing restriction on when a paragraph (e) close-out may occur — no contract shall be closed pursuant to paragraph (e) of this Rule prior to the expiration of regular delivery time in the community where the party making the demand maintains its office, on the next business day following the day when notice of such demand was received by the other party.
This provision establishes a minimum waiting period before the without notice close-out authorization of paragraph (e) may actually be exercised — notwithstanding paragraph (e)'s without notice framing for the close-out itself, paragraph (f) ensures that some minimum interval has elapsed since the demand was received before that close-out can occur. The interval is defined by reference to regular delivery time in the demanding party's community — connecting to FINRA Rule 11320(h)'s community-hours framework for delivery generally — on the next business day following receipt of the demand notice.
This structure reconciles paragraph (e)'s without notice close-out language with paragraph (d)'s immediate compliance requirement — paragraph (d) requires immediate compliance with the demand itself, but paragraph (f) ensures that even where compliance does not occur immediately, the close-out remedy paragraph (e) authorizes cannot be exercised until at least until the expiration of regular delivery time on the next business day following the demand's receipt — giving the non-complying party at least this minimum window (running from receipt of the demand through the close of regular delivery time the following business day) within which to comply before facing an actual close-out, even though paragraph (e) itself does not require any additional notice once that window has elapsed.
FINRA Rule 11740(g) establishes the post-close-out notice obligations for the party that exercises paragraph (e)'s close-out remedy — the party making such offsetting purchase or sale contracts shall as promptly as possible on the day on which they are made (1) notify the other party via letter, facsimile transmission, electronic mail, or other comparable written media, and (2) mail or deliver formal confirmation of same to the other party and a copy of said confirmation to the Committee.
This two-part notice requirement parallels FINRA Rule 11190(b)(2)'s notice requirement for close-outs under that rule's reconfirmation-and-pricing-service framework, both reflecting the broader principle this dictionary has observed — that even a without notice close-out authorization (paragraph (e) here; FINRA Rule 11190(b)(1) there) is followed by a same-day notice obligation informing the non-complying party that the close-out has occurred.
FINRA Rule 11740(g)'s specific enumeration of acceptable initial-notice media — letter, facsimile transmission, electronic mail, or other comparable written media — provides a useful marker for this provision's amendment history; the inclusion of electronic mail among the enumerated media suggests this language postdates the widespread adoption of email as a business communication medium, consistent with FINRA Rule 11740's confirmed amendment effective March 1, 1970 representing an earlier-era formulation that the more recent SR-FINRA-2010-030 amendment likely updated to include electronic mail and other comparable written media alongside the more traditional letter and facsimile transmission options.
The second component — mail or deliver formal confirmation of same to the other party and a copy of said confirmation to the Committee — adds a formal confirmation requirement beyond the initial notice, with a copy specifically directed to the Committee. This copy-to-the-Committee requirement connects to the UPC Committee's general interpretive and oversight role under FINRA Rule 11110 — ensuring the Committee maintains visibility into mark-to-market close-outs occurring under FINRA Rule 11740's framework, potentially relevant to the Committee's broader role in maintaining uniform practice and resolving disputes regarding when, as and if issued/distributed contracts and other contracts subject to FINRA Rule 11740's mark-to-market mechanism.
FINRA Rule 11740's amendment history — effective February 21, 1969 and March 1, 1970, followed by SR-FINRA-2010-030 effective December 15, 2010 — situates its origins close in time to FINRA Rule 11120's March 1, 1970 amendment examined early in this dictionary's coverage, and shortly after FINRA Rule 11730's January 2, 1968 origin examined in this dictionary's immediately preceding entry.
With FINRA Rule 11740 now fully confirmed, this dictionary can close the loop on the FINRA Rule 11130(c) cross-reference this dictionary flagged at the outset of its coverage of the 11000 series and again in the FINRA Rule 11700 entry. FINRA Rule 11130(c) stated that when, as and if issued/distributed contracts should be marked to the market pursuant to the provisions of Rule 11730. The FINRA Rule 11700 subsection's current child rule list shows FINRA Rule 11730 as Called Securities (confirmed in this dictionary's immediately preceding entry) and FINRA Rule 11740 as Marking to the Market (confirmed in this entry) — with FINRA Rule 11740's seven-paragraph demand-deposit-refund-closeout framework matching precisely the marking to the market mechanism FINRA Rule 11130(c) described in substance. This dictionary therefore concludes that FINRA Rule 11130(c)'s textual reference to Rule 11730 reflects a numbering that predates whatever renumbering placed the current Marking to the Market provision at FINRA Rule 11740 rather than FINRA Rule 11730 — a textual artifact in FINRA Rule 11130(c) itself, rather than any inconsistency in FINRA Rule 11740's own content or position within the FINRA Rule 11700 subsection.
FINRA Rule 11740 connects directly and substantively to FINRA Rule 11130(c) — providing the complete mark-to-market mechanism that rule invoked for when, as and if issued/distributed contracts, with this entry resolving the textual Rule 11730/11740 numbering discrepancy this dictionary flagged across multiple earlier entries. It connects to FINRA Rule 11130(d)'s Regulation T cross-reference — both provisions situating the Federal Reserve System's institutional infrastructure within the when, as and if issued/distributed contract framework, here as FINRA Rule 11740(a)'s default depositary and FINRA Rule 11740(d)'s business-hours reference point. It connects to FINRA Rule 11100(c) and FINRA Rule 11630(f) — whose buy-in and sell-out account-and-liability allocation principles FINRA Rule 11740(e)'s offsetting-purchase-or-sale-for-the-account-and-liability formulation directly parallels. It connects to FINRA Rule 11190(b)(1) and (2) — whose without notice close-out authorization and same-day notice-of-execution requirements FINRA Rule 11740(e) and (g) respectively parallel in structure. It connects to FINRA Rule 11320(h) — whose community-hours delivery framework FINRA Rule 11740(f)'s regular delivery time restriction invokes. It connects to FINRA Rule 11110 — as the source of the Committee's interpretive authority and the recipient of the copy of said confirmation FINRA Rule 11740(g) requires. It connects to FINRA Rule 11700 as its parent series marker, the final rule completing that subsection. And it connects to FINRA Rule 11800 — the next subsection, CLOSE-OUT PROCEDURES, which this dictionary anticipates will house the FINRA Rule 11810 buy-in and FINRA Rule 11820 sell-out frameworks this dictionary has anticipated since FINRA Rule 11100(c) and referenced repeatedly throughout its coverage of FINRA Rules 11190, 11340, 11630, and 11710.
FINRA Rule 11740 is tested on the Series 7 and Series 24 examinations as the marking to the market framework — the final rule of the FINRA Rule 11700 subsection, providing the demand-deposit-refund-closeout mechanism FINRA Rule 11130(c) invokes for when, as and if issued/distributed contracts.
The key points to retain are these: FINRA Rule 11740(a) allows a party partially unsecured by a market value change to demand a deposit equal to the contract-price-to-market-price difference, without a mutual deposit requirement, held by the demanding member, a mutually agreed depositary, or — failing agreement — any Federal Reserve System member bank in the unsecured party's financial district; FINRA Rule 11740(b) permits either party to assign the contract, at execution or at the time of a mark-to-market demand, with the other party's assent; FINRA Rule 11740(c) requires total or partial refunds of paragraph (a) deposits on demand when market value changes permit; FINRA Rule 11740(d) requires written demands delivered during Federal Reserve System member bank business hours in the recipient's community, with immediate compliance; FINRA Rule 11740(e) entitles the demanding party, upon non-compliance, to close the contract without notice via offsetting purchase or sale in the best available market for the non-complying party's account and liability; FINRA Rule 11740(f) restricts such closure to no earlier than the expiration of regular delivery time in the demanding party's community on the business day following the demand's receipt; FINRA Rule 11740(g) requires same-day notice via letter, facsimile, electronic mail, or comparable written media, plus formal confirmation to the other party with a copy to the Committee; this entry resolves the FINRA Rule 11130(c) cross-reference to "Rule 11730" as a textual artifact reflecting superseded numbering, since FINRA Rule 11740 — not the current FINRA Rule 11730 (Called Securities) — is the marking-to-market provision; and the rule was amended December 15, 2010 through SR-FINRA-2010-030, with prior amendments effective February 21, 1969 and March 1, 1970, and one selected notice, 10-49.
