FINRA Issues Guidance on Liquidity Risk Management Practices (FINRA Reg. Notice 15-33)

FINRA issued guidance on liquidity risk management practices for senior management and risk managers at firms that either hold inventory positions or clear and carry customer transactions. The guidance was based on FINRA's review of forty-three firms' practices concerning managing liquidity needs in a stressed environment. The guidance was published on FINRA's Web site.

FINRA suggested that firms test for the following stresses (among others):

• Loss of funding from money market funds and loss of funding on the basis of collateral other than that of governments;
• A doubling of the margin requirements for clearing trades;
• Rapid withdrawals of customer cash balances; and
• Losses in proprietary positions.

FINRA recommended that each firm:

• Evaluate its liquidity needs rigorously as they relate to market-wide and idiosyncratic stresses;
• Devote sufficient resources to measuring risks applicable to its business and report the measurement results to senior management, including:
  • A review of risks in light of historical events that have affected the firm or other firms, and
  • Consideration of stresses that could occur but have not yet been observed;
• Develop contingency plans for addressing such risks to allow sufficient liquidity for the firm to operate after the stress occurs and to continue to protect all customers' assets;
• Conduct stress tests and other reviews to evaluate the effectiveness of the contingency plans; and
• Put in place a training plan for staff members, as well as tested processes on which the firm intends to rely if such stresses occur.