Market Access Controls
Exchange Act Rule 15c3-5 (Market Access Rule) requires broker-dealers with market access or that provide market access to their customers to “appropriately control the risks associated with market access so as not to jeopardize their own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system.”25 FINRA has observed that some firms continue to encounter challenges with intra-day adjustment of pre-trade financial thresholds and oversight of third-party vendors.
- Inadequate Pre-Trade Financial Controls – Some firms FINRA examined did not maintain effective pre-trade financial controls, and other firms could not substantiate credit and capital thresholds for clients. For instance, in one examination, FINRA noted that a firm set a credit limit at several billion dollars for a client whose daily average credit usage was in the hundreds of thousands of dollars. Other firms failed to establish policies and procedures to govern intra-day changes to their credit and capital thresholds, including requiring or obtaining approval prior to adjusting credit or capital thresholds, documenting justifications for any adjustments, and ensuring thresholds for temporary adjustments revert back to their pre-adjusted values.
- Overreliance on Third-Party Vendors – In some instances, firms delegated to third-party vendors oversight of, or the power to make adjustments to, controls for pre-trade validations without the prior approval of the firms. Further, some firms engaged third-party vendors with ineffective controls or did not perform sufficient due diligence to ensure that the third-party controls were reasonably designed to comply with the Market Access Rule.
25 Exchange Act Release No. 63241, 75 Fed. Reg. 69792 (Nov. 3, 2010).