FINRA Proposed Liquidity Rule – What You Need to Know

By Fred Wagstaff

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Effective monitoring of liquidity and funding risks is a vital component of broker-dealers’ financial responsibility and has long been a focus for FINRA’s financial supervision programs. At SIFMA’s FMS Regional June 2023 conference, a representative from FINRA informed the attendees that FINRA had just issued Regulatory Notice 23-11 seeking comment on a Concept Proposal for a Liquidity Risk Management Rule (listed as Rule 4610). In Notice 23-11, FINRA indicated existing rules may not go far enough to protect the market and brokerage customers during times of market stress. Recent stress events include market volatility during the pandemic in 2020 and in 2021 around “meme stocks.” 

Currently, brokerages must comply with the Securities and Exchange Commission’s net capital rule, ensuring they have sufficient minimum capital and liquid assets to promptly satisfy their obligations to customers and other creditors, and the SEC’s Customer Protection Rule, protecting customer funds and securities by requiring “segregation of fully paid securities and funds held for customers, and prohibiting the use of those funds and securities to support the broker-dealers’ proprietary activities.” 

What Will Change Under the New Liquidity Rule

The proposed rule would require broker-dealers to establish and maintain a Liquidity Risk Management Program (LRMP) that includes liquidity stress testing, contingent funding plans, and maintaining sufficient liquidity on a current basis at all times. These requirements are intended to ensure that firms have sufficient liquid assets to meet their funding needs in both normal and stressed conditions.

According to FINRA, approximately 125 Member Firms would be subject to the potential rule.  These firms are generally broker-dealers that carry customer accounts and clear transactions for customers or other market participants.

Under the concept proposal, Members would be required at all times to have and maintain sufficient liquidity on a current basis, which means that they must have available cash and liquid assets sufficient to meet their funding obligations as they come due.  If FINRA determines that a firm does not have sufficient liquidity on a current basis, it may direct the firm to restore sufficient liquidity, including restricting or suspending all or part of its business.  In addition, the potential rule includes a process for firms to rebut the presumption of insufficient liquidity on a current basis.

Liquidity Stress Tests would be required to be performed no less than monthly and the results must be submitted to FINRA upon request pursuant to the concept proposal.  Member Firms would be expected to use data-supported assumptions that cover a range of outcomes, even if the likelihood of such outcomes is remote.

A Contingency Funding Plan (CFP) is a key element of a well-developed LRMP because it addresses funding shortfalls in liquidity stress situations. Given the importance of a CFP to an effective LRMP, the potential rule would require each subject member to establish a CFP that is reasonably designed to assist the member in mitigating materially adverse fluctuations in its liquidity. The CFP would be required to designate responsibilities and identify guidelines and conditions for its activation.

How Oyster Can Help

Oyster’ consultants are industry experts who can provide support and assist in the development or the expansion of an existing Liquidity Risk Management Program and a Contingency Funding Plan under proposed Rule 4610.  Our finance, accounting and operations consultants are leading experts in funding and liquidity processes and are ready to support Member Firms should this proposed rule be implemented.


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About The Author
Photo of Fred Wagstaff

Fred Wagstaff

Fred is an accomplished financial CFO and FINOP with extensive experience in the full-service broker-dealer, clearing, and registered investment advisory industry. Fred’s experience includes merger and acquisition financial responsibilities, financial and operational responsibilities including financial statement preparation, net capital computations, regulatory filings, incentive compensation development, commission payout systems and financial/accounting optimization and strategy.