FINANCIAL RESPONSIBILITY RULES FOR BROKER-DEALERS

General

(New) Risk Mitigation Techniques for Uncleared Security-Based Swaps

The SEC is adopting final rules requiring the application of specific risk mitigation techniques to portfolios of uncleared security-based swaps. In particular, these final rules establish requirements for each registered security-based swap dealer and each registered major security-based swap participant with respect to, among other things, reconciling outstanding security-based swaps with applicable counterparties on a periodic basis, engaging in certain forms of portfolio compression exercises, as appropriate, and executing written security-based swap trading relationship documentation with each of its counterparties prior to, or contemporaneously with, executing a security-based swap transaction. In addition, the Commission is issuing an interpretation addressing the application of the portfolio reconciliation, portfolio compression, and trading relationship documentation requirements to cross-border security-based swap activities and is amending Rule 3a71-6 to address the potential availability of substituted compliance in connection with those requirements. Lastly, the final rules include corresponding amendments to the recordkeeping, reporting, and notification requirements applicable to SBS Entities.

Securities Exchange Act Release No. 34-87782 (December 18, 2019), 85 FR 6359 (February 4, 2020) (File No. S7-28-18; Final Rule): Risk Mitigation Techniques for Uncleared Security-Based Swaps
Securities Exchange Act Release No. 34-87780 (December 18, 2019), 85 FR 6270 (February 4, 2020) (File No. S7-07-19; Final Rules; Guidance): Cross-Border Application of Certain Security-Based Swap Requirements

 

 

Capital, Margin and Segregation Requiremnts

In accordance with the Dodd-Frank Act, the SEC, pursuant to the Securities Exchange Act of 1934 (Exchange Act), is adopting capital and margin requirements for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs), segregation requirements for SBSDs, and notification requirements with respect to segregation for SBSDs and MSBSPs. The Commission also is increasing the minimum net capital requirements for broker-dealers authorized to use internal models to compute net capital (“A NC broker-dealers”), and prescribing certain capital and segregation requirements for broker-dealers that are not SBSDs to the extent they engage in security-based-swap and swap activity. The Commission also is making substituted compliance available with respect to capital and margin requirements under Section 15F of the Exchange Act and the rules thereunder and adopting a rule that specifies when a foreign SBSD or foreign MSBSP need not comply with the segregation requirements of Section 3E of the Exchange Act and the rules thereunder. The effective date was October 21, 2019.

Securities Exchange Act Release No. 34-86175 (June 21, 2019), 84 FR 43872 (August 22, 2019) (File No. S7-08-12): Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers

 

SEC Financial Responsibility Rules

The SEC staff communicates and issues oral and written interpretations to the financial responsibility and operational rules, which FINRA publishes on the Interpretations of Financial and Operational Rules page on the FINRA website. FINRA has published a number of Regulatory Notices announcing updates to the interpretations to reflect the addition, revision or rescission of specified interpretations, including among other things updates to reflect the effectiveness of the new rule amendments.

FINRA Regulatory Notice 19-11 (April 9, 2019): FINRA Announces Update of the Interpretations of Financial and Operational Rules

 

Guidance on FOCUS Reporting for Operating Leases

In October 2018, the staff of the SEC Division of Trading and Markets (the SEC staff) issued no-action relief1 (the no-action relief letter) regarding the treatment of operating leases under SEA Rule 15c3-1 (Rule 15c3-1) in connection with the Financial Accounting Standards Board’s (FASB) Accounting Standards Update for Leases (the Lease Accounting Update). Based on discussions with the SEC staff, and in response to member inquiries, FINRA is issuing this Notice to provide guidance to members for reporting lease assets and lease liabilities on their FOCUS reports. Members should apply the guidance in this Notice going forward when preparing their FOCUS reports. Members are not required to refile any FOCUS reports that they have already submitted to comply with this guidance.

FINRA Regulatory Notice 19-08 (March, 2019): Guidance on FOCUS Reporting for Operating Leases

 

Liquidity Risk Management Practices

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. From an investor protection perspective, sound liquidity risk management practices enhance investor protection because they make it more likely that a firm’s customers continue to have prompt access to their assets, even in times of stress.

FINRA is providing guidance on effective practices that senior management and risk managers at firms should consider and implement. Regulatory Notice 15-33 is directed to firms that hold inventory positions or clear and carry customer transactions. Other types of broker-dealers may also find the Notice is of value to them when assessing their own liquidity risks.

FINRA Regulatory Notice 15-33 (September 2015):  Guidance on Liquidity Risk Management Practices