Liquidity Risk Management

Regulatory Obligations

SEA Rule 15c3-3 requires firms to segregate customer assets and maintain reserve accounts, which constrains firms' available liquidity and necessitates careful planning to meet both customer protection requirements and operational funding needs. Additionally, SEA Rule 15c3-1 (Net Capital Rule) establishes minimum capital requirements that directly impact firms’ liquidity positions and funding flexibility.

FINRA continues to emphasize effective liquidity and funding risk management as an important component of broker-dealers’ financial responsibility. This is reflected in several Regulatory Notices, including Regulatory Notice 10-57 (Funding and Liquidity Risk Management Practices), 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). These Notices emphasize the importance of maintaining adequate liquidity buffers, stress testing and contingency funding plans.

FINRA’s Supplemental Liquidity Schedule (SLS)1 is designed to improve FINRA’s ability to monitor for events that signal an adverse change in liquidity risk of firms with significant customer and counterparty exposures.

FINRA has noted instances where firms have reported inaccurate or incomplete information on the SLS. Examples include:

  • incorrectly reporting agent lenders rather than underlying principals as counterparties to securities borrowed transactions, and/or failing to report the clearing organization as the counterparty to repurchase and reverse repurchase agreements for contracts novated to that clearing organization;
  • providing incomplete information regarding noncash securities lending transactions (i.e., identifying either the received collateral or delivered collateral, but not both) and within the Clearing deposit section (e.g., missing dates, including weekends in the Largest Single Intramonth Amount Deposited Line Items, reporting month-end deposits instead of the actual Largest Single Intramonth Deposits); and
  • not completing the line item for “Total Available Collateral in Broker-Dealer’s Custody” (or entering inaccurate information).

Impact Assessment: Daily Reserve Formula Computations

The SEC extended the compliance date for the amendments to Rule 15c3-3(e)(3)(i)(B)(1), which require certain firms exceeding a specified threshold to increase the frequency of their reserve formula computations from weekly to daily, to June 30, 2026.

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 for 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 (e.g., restrictive covenants or material adverse change clauses within funding contracts that could affect the availability of the funding under certain conditions);
      • 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, that would provide sources of liquidity for operating under idiosyncratic market or 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; 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 the firm’s 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;
    • material swings in customer cash balances (e.g., redemptions, interest payments, sweeps);
    • the potential impact of off-balance sheet items (e.g., nonregular way settlement trades, forward contracts and related margin requirements) on the firm’s liquidity needs;
    • substantial regulatory or product changes;
    • a robust data governance framework to enable accuracy, completeness, timeliness, and consistency of stress test and source data; and
    • periodic governance review of stress test parameters based on current data.
  • Contingency Funding: Considering any restrictive covenants and material adverse change clauses in contracts that could impact the availability of contingency funding.

Additional Resources

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1 See Regulatory Notice 21-31 (FINRA Establishes New Supplemental Liquidity Schedule (SLS)).