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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. Several Notices 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.

Effective credit risk practices include maintaining a control framework where it manages credit risk and identifies and addresses 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, maintaining approval and documented processes for increases or other changes to assigned credit limits, and monitoring exposure to affiliated counterparties (including any concentration of exposure to such)?
  • 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 its net capital?

Observations and Effective Practices


  • Credit Risk Management Reviews: Firms did not evaluate their risk management and control processes to ensure they were accurately capturing the credit risk exposure at the broker-dealer level.
  • Monitoring Exposure: Firms did not monitor for concentration risk or their credit exposure to affiliated counterparties.

Effective Practices

  • Credit Risk Framework: Developing a comprehensive internal control framework (e.g., systems, policies and procedures) to capture, measure, aggregate, manage and report credit risk, including:
    • establishing house margin requirements for margin-eligible securities;
    • identifying and assessing credit exposures in a real-time environment;
    • timely issuing margin calls and margin extensions (and resolving unmet margin calls);
    • establishing the frequency and manner of stress testing of collateral held for margin loans and secured financing transactions; and
    • having a governance process for approving new, material margin loans or other financing activities.
  • Credit Risk Limit Changes: Establishing approval and documentation processes for 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 use these credit limits, whether breaches occur and, if so, how they are handled; and
    • maintaining a governance structure around credit limit approvals.
  • Counterparty Exposure: Monitoring exposure to affiliated counterparties, considering factors including their:
    • creditworthiness;
    • overall financial resources, including their liquidity and net worth;
    • business activities and regulatory history (e.g., traded products, regulatory history, past arbitration and litigation); and
    • internal risk controls.

Additional Resources

  • Funding and Liquidity Key Topics Page
  • Regulatory Notices
    • 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)