What is SEC Rule 15c3-5 — Risk Management Controls for Brokers or Dealers with Market Access?


What is SEC Rule 15c3-5 — Risk Management Controls for Brokers or Dealers with Market Access?

http://www.sec.gov/rules/final/2010/34-63241-secg.htm

A Small Entity Compliance Guide1

Overview

On November 3, 2010, the Commission adopted a new rule to require brokers and dealers to have risk controls in connection with their market access. Rule 15c3-5 is intended to address the risks that can arise as a result of the automated, rapid electronic trading strategies that exist today, and bolster the confidence of investors in the integrity of our markets. Rule 15c3-5 would effectively eliminate the practice known as “unfiltered” or “naked” access to an exchange or an ATS.

Requirement to Maintain Risk Management Controls and Supervisory Procedures

Rule 15c3-5 is applicable to broker-dealers with access to trading securities, by virtue of being an exchange member, an ATS subscriber, or an ATS operator with non-broker-dealer subscribers. Such broker-dealers with market access would be required to establish, document, and maintain a system of risk management controls and supervisory procedures that, among other things, are reasonably designed to: (1) systematically limit the financial exposure of the broker or dealer that could arise as a result of market access, and (2) ensure compliance with all regulatory requirements that are applicable in connection with market access. Specifically, the risk management controls and supervisory procedures would be required to be reasonably designed to:

  • prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous;
  • prevent the entry of orders unless there has been compliance with all regulatory requirements that must be satisfied on a pre-order entry basis; and
  • prevent the entry of orders that the broker-dealer or customer is restricted from trading, restrict market access technology and systems to authorized persons, and assure appropriate surveillance personnel receive immediate post-trade execution reports.

Direct and Exclusive Broker-Dealer Control Over Financial and Regulatory Risk Management Controls and Supervisory Procedures

The broker-dealer with market access would also be required to have direct and exclusive control of its financial and regulatory risk management controls and supervisory procedures, with a limited exception that would permit the reasonable allocation of certain regulatory controls and procedures to a customer that is a registered broker-dealer.

Limited Exception for Routing Broker-Dealers

There is a limited exception from the provisions of the Rule for broker-dealers that provide outbound routing services to an exchange or ATS for the sole purpose of accessing other trading centers with protected quotations on behalf of the exchange or ATS in order to comply with Rule 611 of Regulation NMS, or the Options Linkage Plan for listed. These routing brokers would be required to comply with the provisions of Rule 15c3-5 designed to prevent the entry of erroneous orders to help ensure that order handling by an exchange or ATS router would not increase risk to the market.

Regular Review of Risk Management Controls and Supervisory Procedures

Rule 15c3-5 requires broker-dealers with market access to establish, document, and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures and for promptly addressing any issues; and no less frequently than annually, conduct a review of its business activity in connection with market access to assure the overall effectiveness of such risk management controls and supervisory procedures and document that review.

The Rule would also require the Chief Executive Officer of the broker or dealer to annually certify that the risk management controls and supervisory procedures comply with Rule 15c3-5, and that such regular review has been conducted. The Rule 15c3-5 CEO certification requirement is a separate and distinct certification from the FINRA Rule 3130 certification requirement; however a FINRA member firm could leverage its current process for compliance with FINRA Rule 3130 to perform the required certification under the Rule. For instance, a FINRA member could combine in the same document the CEO certification required by the Rule with the FINRA 3130 or other required certifications, if the substance of each of the required certifications is contained in that document.

Other Resources

The final adopting release for Rule 15c3-5 can be found on the SEC’s website at http://www.sec.gov/rules/final/2010/34-63241.pdf. The proposing release can be found on the SEC’s website at http://www.sec.gov/rules/proposed/2010/34-61379.pdf.

Contacting the SEC

The SEC’s Division of Trading and Markets is happy to assist small entities with questions regarding Rule 15c3-5. The Division’s Office of Interpretation and Guidance answers questions submitted by email and telephone. You can submit a question by email to tradingandmarkets@sec.gov or you can contact the Office of Interpretation and Guidance at (202) 551-5777.

Implementation

Rule 15c3-5 will be effective 60 days from the date of publication in the Federal Register in 2011. Once effective broker-dealers subject to the rule will have six months to comply with the requirements of Rule 15c3-5.

About carlarweir
I am a Cross Asset FIX Connectivity SME working for international banks. i also sit on the FIX Protocol Ltd Global Steering Committee, and am Co-Chair of the Global Cross Asset Committee. I also have a very strong background in Mobile Telephony, Cloud computing, SaaS, IaaS, PaaS, Big Data, innovation, and am a pioneer in Pseudolite technology.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

OTC Clearing and Regulations

My views on OTCs and Regulations

Knowledge Problem

Commentary on Economics, Information and Human Action

northoceanscm

4 out of 5 dentists recommend this WordPress.com site

Aditya Ladia's Blog

Forex, Investment and Finance

Soltis Consulting, Inc.

Business Concepts, Ideas, and Information

intradaynifty

An Endeavor To Explore The Uncertanity

All About Cyber Security and Financial Technology and Beyond

The Future of FinTech and Cybersecurity are Interlocked: Creating the Secure Future of Financial Technology Today

symphony

Read about latest trends in Algo Trading in India or visit our website symphonyfintech.com

Trading Smarter

Thought Leadership, Insight and Product Information from TradingScreen

Tales from a Trading Desk

Noise from an Investment Bank

NPA Computers

Bringing you info about the latest on Internet Technology

duanetilden

An online journal of International Energy Trends, Green Building, Sustainability and Climate, A&E, Data, Security, CryptoCurrency and Social Media

Trade News in Brief

International Economic Affairs & Relations / Regional & International Organizations / Global Commerce & Business

SingleDealerPlatforms.Org

The Single Dealer Platform Community

Carl A R Weir's Blog

A Cross Asset Connectivity and Finance WordPress.com site

%d bloggers like this: