Regulatory Notice 23-11

The Financial Industry Regulatory Authority, FINRA, has launched a consultation on a proposed new rule as regards the liquidity risk management of FINRA member firms. Specifically, FINRA seeks to implement new Rule 4610, entitled „Liquidity Risk Management,“ which would establish requirements for member organizations in relation to maintaining sufficient liquidity. The rule would apply to
(1) carrying members with $25 million or more in free credit balances,
(2) members carrying customer accounts on an omnibus or fully disclosed basis on behalf of another broker-dealer, and
(3) members with aggregate outstanding amounts under repurchase agreements, securities loan contracts, and bank loans equal to or exceeding $1 billion.
Members subject to the rule would have to maintain sufficient liquidity at all times. However, an exception would be made for those members controlled by a bank holding company subject to enhanced prudential and liquidity risk management obligations of the Federal Reserve Board. For other members, certain conditions create a presumption of insufficient liquidity, including borrowing funds from a non-bank affiliate without adequate liquidity, borrowing an amount exceeding 70% of customer debit balances secured by customer assets, performing reserve computations ad-hoc, reduction of bank lines of credit by 50% or more, reduction of funding from securities financing arrangements by 50% or more, reduction of intra-day credit facilities by 50% or more, loss of access to settlement bank services without timely replacement, or revocation of membership or imposition of material restrictions by a central clearing counterparty or settlement bank.
In addition to maintaining liquidity, members would have to establish and maintain a liquidity risk management program (LRMP) that includes written policies and procedures for assessing, managing, and periodically reviewing liquidity risks. The LRMP must incorporate a liquidity stress test (LST) conducted at least monthly over a rolling 30-calendar day period based on reasonable, data-supported assumptions. The member’s LST should indicate whether there will be a liquidity shortfall during the projected period. Furthermore, a written contingency funding plan (CFP) must be included in the LRMP to mitigate adverse liquidity fluctuations, meeting the requirements specified in the Supplementary Material.
Members subject to the rule would be obliged to notify FINRA within two business days if any of the conditions indicating insufficient liquidity are met. If seeking to rebut the presumption of insufficient liquidity, the member would have to provide a written rebuttal with supporting evidence within five business days of the notification. Upon request, members would have to provide FINRA with their liquidity risk management program, stress test design and parameters, CFP, and the results of LST(s) in the specified format. If FINRA determines that a member lacks sufficient liquidity, it may issue a notice directing the member to take necessary measures, including restricting or suspending its business, to restore liquidity sufficiency.
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As the above summary only briefly describes the proposed new rule, it is advisable to refer to the complete text of Rule 4610 for more detailed, comprehensive information.