Evening Brief – 06.21.23
The Financial Industry Regulatory Authority (FINRA) is floating a concept proposal to implement liquidity risk management standards aimed at guaranteeing broker-dealer customers are covered if the company fails.
The proposal specifies a rule that would ensure members have enough liquid assets to cover their funding demands under normal and strained conditions. FINRA identifies three areas where a prospective rule could handle liquidity risk: liquidity stress testing, contingent financing strategies, and a requirement to maintain sufficient current liquidity at all times.
SEC rules, such as the net capital rule, the customer protection rule, and the recordkeeping rule, are in place to mitigate the risk to customer assets if a broker-dealer fails, but FINRA stated that liquidity risk, or the risk that a broker-dealer’s cash or liquid assets are insufficient to meet its obligations, “may not be adequately addressed by these rules.”
“One risk that may not be sufficiently addressed by [existing] rules is liquidity risk, which is the risk that a broker-dealer will not have sufficient cash or liquid assets to meet its obligations as they come due,” FINRA said.
FINRA would also have authority to restrict or suspend a firm’s business if it didn’t maintain sufficient liquidity, according to the regulatory notice.
The self-regulator also provided extensive information on factors that contribute to the presumption that a firm lacks liquidity, such as when a member firm borrows funds from a non-bank affiliate, borrows more than 70% of its customer debit balances, or has the funds secured by customer assets.
FINRA is soliciting comments until August 11. The SEC would have to approve a final rule.