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October 16, 2019

Observations on Liquidity and Credit Risk Management

Effective liquidity and credit risk management controls are critical elements in a broker-dealer’s risk management framework, and should be documented in a firm’s books and records.19 FINRA routinely reviews firms’ practices in these areas, and in Regulatory Notice 15-33 (Guidance on Liquidity Risk Management Practices) shared observations on liquidity management practices.

FINRA shares the following practices that some firms used to strengthen their liquidity management programs.

  • Liquidity Contingency Plans – Small clearing and introducing firms developed contingency plans for operating in a stressed environment and outlined specific steps to address certain stress conditions. Further, firms’ contingency plans identified the firm staff responsible for enacting the plan, the process for accessing liquidity during a stress event or standards to determine how liquidity funding would be used.
  • Liquidity Risk Management Updates – Firms updated their liquidity risk management practices to take into account their current business activities.
  • Stress Tests – Firms conducted stress tests in a manner and frequency that was appropriate for their business model. In addition, such stress tests evaluated the potential impact of off-balance sheet items on liquidity. Some firms that relied on a shared funding source with affiliated entities for their liquidity stress test and their shared Master Credit Agreement confirmed that source would be ring-fenced for them during a stress event.
  • Credit Risk Management – Firms maintained a robust internal control framework to capture, measure, aggregate, manage and report credit risk.20 In particular, firms evaluated their risk management and control processes to review whether they were accurately capturing their exposure to credit risk; maintained approval and documentation processes for increases or other changes to assigned credit limits; and monitored exposure to their affiliated counterparties.

Additional Resources


19 See Exchange Act Rule 17a-3(a)(23).

20 See Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072 (July 30, 2013), 78 Fed. Reg. 51824 (Aug. 21, 2013), at 51848; see also FINRA’s Resource Page for the SEC’s July 2013 Financial Responsibility Rule Amendments.