SEC Adopts New Rule Concerning Risk Management Controls for Broker-Dealers with Market Access


On November 3, the Securities and Exchange Commission (SEC or the Commission) adopted a new market access rule for broker-dealers trading directly on an exchange or an alternative trading system (ATS).1 The new rule applies to broker-dealers with direct market access engaged in proprietary trading as well as firms that provide market access to customers (i.e., sponsored and direct access). Under new Rule 15c3-5, all broker-dealers with market access must have risk management controls and supervisory procedures designed to manage the financial, regulatory and other risks arising from such access.

The new rule requires that the risk controls be implemented on a pre-trade, automated basis. The SEC is particularly concerned about the quality of broker-dealer risk controls in sponsored access arrangements, where the customer order flow does not pass through the broker-dealer’s systems prior to entry on an exchange or ATS. The new rule also makes clear that pre-trade controls must be in place to prevent erroneous orders, a potential violation of a credit or capital limit or a failure to comply with SEC or exchange trading rules, among other things.

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