Due to the impact direct market access can have on market integrity and broker-dealer capital, the issue of Market Access remains on FINRA’s examination priorities. Rule 15c3-5 (Market Access Rule) requires firms with market access or that provide market access to their customers to “appropriately control the risks associated with market access so as not to jeopardize their own financial condition, that of other market participants, the integrity of trading on the securities markets and the stability of the financial system.” The Market Access Rule applies generally to securities traded on an exchange or alternative trading system, including equities, equity options, exchange-traded funds (ETFs), debt securities, security-based swaps, security futures products, as well as digital assets that meet the SEC’s definition of a security.
What should you be doing?
- Ensure that you have pre-trade order limits, pre-set capital thresholds and duplicative and erroneous order controls for accessing ATSs, including those that transact fixed income transactions.
- Ensure that your risk-based capital and credit pre-trade financial controls are reasonably designed and that you have a written procedure in place describing the process by which you make that determination.
- Ensure that you have adequate policies and procedures to govern intra-day changes to firms’ credit and capital thresholds, including:
- requiring or obtaining approval prior to adjusting credit or capital thresholds
- documenting justifications for any adjustments
- ensuring thresholds for temporary adjustments revert back to their pre-adjusted values.
- Ensure that, if you rely on third-party vendors’ tools, including those of an ATS or exchange, you perform adequate due diligence on their financial controls, understand how your vendors’ controls operate, and maintain direct and exclusive control over those controls.
- Conduct regular/periodic monitoring and testing of controls.
If your firm has or provides market access, FINRA will want to see that you have reasonably designed risk-management controls and WSPs to manage the financial, regulatory or other risks associated with this business activity.
Oyster’s industry experts have extensive experience in reviewing market access risk controls, no matter the size of your firm or technology platform. Our consultants provide recommendations and industry best practices to identify your firm’s risk and how to address those risks by enhancing existing controls and ensuring that your Market Access controls are tested regularly and correctly.