The Financial Industry Regulatory Authority has issued Regulatory Notice 15-33 to provide guidance on liquidity risk management practices for senior management and risk managers to consider and implement.
Beginning in March 2014 and continuing into the first quarter of 2015, FINRA conducted a review of the policies and practices at 43 participating firms related to managing liquidity needs in a stressed environment. Each such firm conducted a stress test for a 30-day period using stress criteria selected based on FINRA’s review and analysis of broker-dealers whose businesses had failed during the past 30 years. In particular, the tested stresses included funding inventory positions, financing mismatched financing transactions, operational drains, funding customer withdrawals, losses from forced deleveraging and trading losses. As a result of this testing, FINRA found that the large majority of participating firms had sufficient resources, staff and liquidity plans to be likely to surmount the stress scenario posed. However, FINRA found that a small number of smaller firms did not demonstrate their preparedness to surmount the stress scenario.
Based on its review, FINRA expects firms to evaluate their liquidity needs related to market and idiosyncratic stresses, devote sufficient resources to measuring risks, report results to senior management, develop contingency plans for addressing risks, conduct stress tests to evaluate the effectiveness of contingency plans, have a training plan for its staff and have tested processes on which to rely if such stresses occur.
FINRA intends to continue to review firm liquidity risk planning and will use stress tests in the future with groups of firms or as part of the examination of individual firms.
Regulatory Notice 15-33 is available here.