FINRA Requests Comment on Liquidity Management Proposal
Commentary by Steven Lofchie
FINRA requested comment on a "concept" to establish liquidity risk management requirements.
In the Regulatory Notice, FINRA outlined "three areas where a potential rule [a proposed FINRA Rule 4610 is appended to the notice] might address liquidity risk": (i) liquidity stress testing, (ii) contingent funding plans and (iii) maintaining sufficient liquidity "on a current basis at all times."
FINRA stated that potential Rule 4610 would be designed to ensure that broker-dealers' liquid assets are sufficient to meet their funding needs in both "normal and stressed conditions." FINRA said it would include under potential Rule 4610 the requirement to establish and maintain a liquidity risk management program that includes both (i) liquidity stress tests and (ii) a contingency funding plan.
FINRA said that only those firms with the "largest customer and counterparty exposures" and that carry customer accounts or clear transactions for customers would be subject to the rule.
FINRA said that potential Rule 4610 would specify conditions that indicate a firm does not have sufficient liquidity on a current basis; and therefore, could result in its restriction or suspension of business. FINRA stated that the firm may be able to prevent suspension if the firm is able either to rebut the presumption it has insufficient liquidity or to take prompt corrective action
Comments on the concept rulemaking must be submitted by August 11, 2023.
Commentary
FINRA has had this proposal under study for a considerable period and has been testing various reporting requirements. Some version of the rule likely will be adopted. Firms should consider this concept proposal and carefully review both the substantive and the reporting requirements.