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Liquidity Risk Management

Regulatory Obligations and Related Considerations

Regulatory Obligations

Effective liquidity controls are critical elements in a broker-dealer’s risk management framework. 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.

FINRA routinely reviews and has shared observations on member firms’ liquidity risk management practices, as discussed in Regulatory Notice 15-33 (Guidance on Liquidity Risk Management Practices) and 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).

As noted in Regulatory Notice 21-31 (FINRA Establishes New Supplemental Liquidity Schedule (SLS) and pursuant to FINRA Rule 4524 (Supplemental FOCUS Information), each member firm must file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors or in the public interest. The SLS is a supplemental filing to the FOCUS Reports and is designed to improve FINRA’s ability to monitor for events that signal an adverse change in the liquidity risk of firms with the largest customer and counterparty exposures.

Related Considerations

  • Is responsibility for liquidity risk management assigned to a specific individual or department?
  • Do your firm’s liquidity management practices include processes for:
    • taking into consideration the type of transactions that are impacting your firm’s liquidity needs;
    • reviewing and adjusting assumptions regarding clearing deposit requirements, including in its stress test framework;
    • accessing liquidity during idiosyncratic stress conditions—such as increases in firm and client activities—as well as market stress events;
    • establishing contingency funding sources; and
    • using empirical data from recent stress events to increase the robustness of its stress testing?
  • What kind of stress tests (e.g., market, idiosyncratic) does your firm conduct? Do these tests consider concentrations within securities or sectors, and incorporate holdings across accounts held at other financial institutions? Are these tests conducted and documented on a regular basis? Does your firm institute changes to its funding plan as a result?
  • If your firm’s business has grown significantly or has materially changed, or your firm plans to make a material change to its business, has your firm made commensurate changes to its liquidity management and stress test practices and related policies and procedures?

Observations and Effective Practices


  • Establishing Insufficient Stresses on Clearing Deposit Requirements: As part of its stress testing, firms are incorrectly basing stresses on clearing deposit requirements on information that doesn’t necessarily represent the firm’s business operations (e.g., using the amounts reflected on FOCUS reports rather than actual fluctuations in deposit requirements that may have occurred intra-month).
  • No Contingency Funding Plans: Failing to develop contingency funding plans that would provide sources of liquidity for operating under market or idiosyncratic stress conditions, including identifying the firm staff responsible for enacting the plan and the process for accessing liquidity during a stress event, as well as setting standards to determine how funding would be used.
  • Inaccurate SLS Reporting: Providing inaccurate or incomplete information in firms’ SLS, such as:
    • incorrectly identifying entities such as agent lenders or Fixed Income Clearing Corporation (FICC) members as counterparties to repurchase agreements, reverse repurchase agreements and securities borrowed transactions;
    • providing incomplete information regarding non-cash securities lending transactions (i.e., identifying either the received collateral or delivered collateral, but not both); and
    • not completing the line item for “Total Available Collateral in Broker-Dealer’s Custody” (or entering inaccurate information).

Effective Practices

  • Liquidity Risk Management Updates: Updating liquidity risk management practices, policies and procedures to conform with the firm’s current business activities, including:
    • establishing governance around liquidity risk management, including determining who is responsible for monitoring the firm’s liquidity position, the frequency of monitoring, and the communication and coordination protocols; and
    • creating a liquidity management plan that considers:
      • liquidity use assumptions that are based on both idiosyncratic and market-wide conditions and stress scenarios;
      • sources of funding in both business-as-usual and stressed conditions;
      • stability and other characteristics of funding sources;
      • the type and quantity of available collateral needed to secure funding;
      • potential mismatches in duration between liquidity sources and uses;
      • a contingency plan in the event of loss of funding sources; and
      • early warning indicators of liquidity loss and escalation procedures.
  • Stress Tests: Conducting stress tests in a manner and frequency that consider the complexity and risk of the firm’s business model, including:
    • assumptions specific to the firm’s business (e.g., increased haircuts on collateral pledged by firm, availability of funding from a parent firm) and based on historical data;
    • the firm’s sources and uses of liquidity;
    • changes to the stability and quality of liquidity sources relied upon for its funding needs in a stressed environment;
    • the potential impact of off-balance sheet items (e.g., non-regular way settlement trades, forward contracts) on the firm’s liquidity needs; and
    • periodic governance group review of stress test parameters.

Additional Resources

  • Funding and Liquidity Key Topics Page
  • Frequently Asked Questions: Supplemental Liquidity Schedule
  • Regulatory Notices
    • Regulatory Notice 23-11 (FINRA Seeks Comment on Concept Proposal for a Liquidity Risk Management Rule)
    • 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)
    • Regulatory Notice 15-33 (Guidance on Liquidity Risk Management Practices)
    • Regulatory Notice 10-57 (Funding and Liquidity Risk Management Practices)