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Funding and Liquidity

Effective liquidity management is a critical control function at broker-dealers and across firms in the financial sector. Failure to manage liquidity has contributed to both individual firm failures and, when widespread, systemic crises.

In adverse circumstances, whether the result of firm-specific events or systemic credit events, the cost of funding a broker-dealer’s operations could become prohibitively expensive; in extreme cases funding could become unavailable. FINRA expects broker-dealers to develop and maintain robust funding and liquidity risk management practices to prepare for adverse circumstances. Further, FINRA expects broker-dealers affiliated with holding companies to undertake these efforts at the broker-dealer level, in addition to their planning at the holding-company level.

FINRA reviews the funding and liquidity practices of member firms. Among other things, we assess:

  • firm management's knowledge and understanding of the liquidity risks that their firm faces;
  • the firm's ability to measure liquidity needs in high stress situations;
  • management's preparedness and plans for addressing such a scenario should it arise; and
  • the specific steps the firm would take to address its needs.

FINRA recommends that firms rigorously evaluate their liquidity needs related to both market-wide and idiosyncratic stresses, that they develop contingency plans so that they have sufficient liquidity to weather those stresses, and that they conduct stress tests and other reviews to evaluate the effectiveness of their contingency plans.

2022 Report on FINRA’s Examination and Risk Monitoring Program

The Net Capital, Liquidity Management and Credit Risk Management sections of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.

  • 2022 Report on FINRAs Examination and Risk Monitoring Program
    The Credit Risk Management section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
    February 09, 2022
  • 2022 Report on FINRAs Examination and Risk Monitoring Program
    The Liquidity Risk Management section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
    February 09, 2022
  • 2022 Report on FINRAs Examination and Risk Monitoring Program
    The Net Capital section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
    February 09, 2022
  • 2019 Exam Findings Report
    The Observations on Liquidity and Credit Risk Management section of the 2019 Report on Exam Findings informs member firms’ compliance programs by describing recent findings and observations from FINRA’s examinations, and, in certain cases, also providing a summary of effective practices.
    October 16, 2019
  • 2018 Exam Findings Report
    The Liquidity section of the 2018 Report on Exam Findings informs member firms’ compliance programs by describing recent findings and observations from FINRA’s examinations, and, in certain cases, also providing a summary of effective practices.
    December 07, 2018
  • 2017 Exam Findings Report
    The Net Capital and Credit Risk Assessments section of the 2017 Report on Exam Findings informs member firms’ compliance programs by describing recent findings and observations from FINRA’s examinations, and, in certain cases, also providing a summary of effective practices.
    December 06, 2017
  • Guidance

    Regulatory Obligations and Related Considerations


    Regulatory Obligations

    Under the financial responsibility rules, and related supervisory obligations, firms need to properly capture, measure, aggregate, manage and report credit risk, including risk exposures that may not be readily apparent. Such responsibility can be incurred under clearing arrangements, prime brokerage arrangements (especially fixed income prime brokerage), “give up” arrangements, sponsored access arrangements (discussed above in the Market Access section) or principal letters.

  • Guidance

    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 firms that meet the thresholds specified under the rule 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.

  • Guidance

    Regulatory Obligations and Related Considerations


    Regulatory Obligations

    Exchange Act Rule 15c3-1 (Net Capital Rule) requires that firms must at all times have and maintain net capital at specific levels to protect customers and creditors from monetary losses that can occur when firms fail. Exchange Act Rule 17a-11 requires firms to notify FINRA in the event their net capital falls below the “minimum amount required” by the Net Capital Rule.