On April 15, the Securities and Exchange Commission’s Division of Trading and Markets issued guidance in the form of 19 frequently asked questions (FAQs) on Rule 15c3-5 of the Securities Exchange Act of 1934 (Exchange Act), which requires risk management controls and supervisory procedures for broker dealers with market access.
Among the issues addressed by the FAQs, the SEC staff stated that a broker dealer providing market access may contractually grant control over specific regulatory risk management controls and supervisory procedures to a broker dealer client only if the broker dealer client is better situated to implement the controls and procedures and is not trading for its own account. Broker dealers are also permitted to use independent third-party risk management tools or technology, provided that they retain exclusive control over and perform due diligence (beyond merely relying on the mere representations of the third party) on such tools or technology. The third party providing the tools or technology is permitted to be the exchange or alternative trading system. With respect to credit or capital thresholds, the broker dealer should be prepared to explain how a threshold was chosen and how it limits financial exposure. Such thresholds can be adjusted under appropriate circumstances, such as when they are met and orders exceeding such thresholds are blocked. Any reasons for modifying thresholds should be documented and retained in the books and records of the broker dealer.
Click here to read the full text of the FAQs, which includes additional topics.