FINRA Reminds Members of Ongoing Obligations during Market Volatility

FINRA reminded its members of their ongoing obligations during times of market volatility, obligations which include duty of best execution, proper disclosures, adjustment of margin requirements and strong liquidity management.

FINRA reiterated that during times of market volatility, members must ensure the "fair, consistent and reasonable treatment" of customer orders, consistent with their duty of best execution under FINRA Rule 5310 ("Best Execution and Interpositioning"). This includes operational readiness to avoid "excessive or unwarranted activation of modified order handling procedures," meaning firms should appropriately plan and test that their systems do not get overwhelmed by periodic spikes due to high volume. FINRA also referenced SEC guidance that advises broker-dealers to, "at a minimum":

• promptly post for customers on their web page trading halts and an explanation regarding how pending or new orders will be handled; and
• have in place mechanisms that provide this information directly to any customer who enters orders while trading is halted.

FINRA also reminded firms of its Regulatory Notices 99-11 ("NASD Regulation Issues Guidance Regarding Stock Volatility") and 16-19 ("Guidance Regarding the Use of Stop Orders During Volatile Market Conditions"), which describe required disclosures (e.g., delays, types of orders, access).

In discussing the need for additional margin during market volatility, FINRA stated that members should compute appropriate "house maintenance margin requirements" - pursuant to FINRA Rule 4210 ("Margin Requirements") - by taking into consideration:

• volatility as well as concentrated positions in a single customer account and across all customer accounts; and
• the daily volume and market capitalization of each security.

FINRA stated that firms should take a "proactive" approach to liquidity management, which includes assessing:

• central counterparty ("CCP") margin, including: the CCP's framework for setting margin requirements; historical CCP margin requirements combined with a multiplier that factors in unprecedented events; adequacy of capital and availability of contingent funding sources; and
• temporary CCP, counterparty and customer margin mismatches.