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Credit Risk Management

Regulatory Obligations and Related Considerations

Regulatory Obligations

FINRA has consistently reminded member firms of the importance of properly managing credit risk and published Notices that offer guidance on effective funding and liquidity risk management practices (which are available in the “Additional Resources” section below). Material credit risk exposures can arise, for example, from clearing arrangements, prime brokerage arrangements (especially fixed income prime brokerage), “give up” arrangements and sponsored access arrangements.

Further, member firms should maintain a control framework where they manage credit risk and identify and address all relevant risks covering the extension of credit to their customers and counterparties. Weaknesses within the firm’s risk management and control processes could result in a member firm incorrectly capturing its exposure to credit risk. In particular, Exchange Act Rule 17a-3(a)(23) requires member firms that meet specified thresholds to make and keep current records documenting the credit, market and liquidity risk management controls established and maintained by the firm to assist it in analyzing and managing the risks associated with its business.

Related Considerations

  • Does your firm maintain a robust internal control framework to capture, measure, aggregate, manage, supervise and report credit risk?
  • Does your firm review whether it is accurately capturing its credit risk exposure, maintain approval and documented processes for increases or other changes to assigned credit limits, and monitor exposure to affiliated counterparties?
  • Does your firm have a process to confirm it is managing the quality of collateral and monitoring for exposures that would have an impact on capital?
  • If your firm engages in a fully paid securities lending program that enrolls retail customers (e.g., through auto-enrollment), how does your firm determine whether the program is appropriate for the customer? Does it accurately disclose the portion of fees generated on loaned shares that these customers would receive?

Observations and Effective Practices


  • No Credit Risk Management Reviews: Not evaluating firms’ risk management and control processes to confirm whether they were accurately capturing their exposure to credit risk.
  • No Credit Limit Assignments: Not maintaining approval and documentation processes for assignment, increases or other changes to credit limits.
  • Not Monitoring Exposure: Not monitoring exposure to firms’ affiliated counterparties.
  • Inadequate Systems to Monitor Customer and Counterparty Limits: Systems not designed to calculate firm exposure to customers and counterparties that trade across multiple affiliated entities or across multiple accounts within the same entity.

Effective Practices

  • Credit Risk Framework: Developing comprehensive internal control frameworks to capture, measure, aggregate, manage and report credit risk, including:
    • establishing house margin requirements;
    • identifying and assessing credit exposures in real-time environments;
    • issuing margin calls and margin extensions (and resolving unmet margin calls);
    • establishing the frequency and manner of stress testing for collateral held for margin loans and secured financing transactions; and
    • having a governance process for approving new, material margin loans.
  • Credit Risk Limit Changes: Maintaining approval and documentation processes for increases or other changes to assigned credit limits, including:
    • having processes for monitoring limits established at inception and on an ongoing basis, for customers and counterparties;
    • reviewing how customers and counterparties adhere to these credit limits and what happens if these credit limits are breached; and
    • maintaining a governance structure around credit limit approvals.
  • Counterparty Exposure: Monitoring exposure to affiliated counterparties, considering their:
    • creditworthiness;
    • liquidity and net worth;
    • track record of past performance (e.g., traded products, regulatory history, past arbitration and litigation); and
    • internal risk controls.

Additional Resources

  • Funding and Liquidity Topic Page
  • Regulatory Notice 21-31 (FINRA Establishes New Supplemental Liquidity Schedule (SLS))
  • Regulatory Notice 21-12 (FINRA Reminds Member Firms of Their Obligations Regarding Customer Order Handling, Margin Requirements and Effective Liquidity Management Practices During Extreme Market Conditions)