SEC Rule 15c3-5
Risk Management Controls for Brokers or Dealers with
Market Access
BACKGROUND
• The SEC finalized Reg. 15c3-5 in November 2010 with a
compliance date of July 2011. In June 2011, the
compliance date was extended to November 30, 2011 for
fixed income securities.
• Though often talked about in relation to “naked access”
or “sponsored access”, the regulation is much broader.
Who is Covered?
• The Regulation applies to every broker-dealer
that is an exchange member, an ATS subscriber,
or is an ATS operator with non-broker-dealer
subscribers.
• The rule applies to ALL trades for customers,
broker-dealers and any proprietary trades done
through an Exchange or ATS.
• The rule does not apply to trades done outside
of an Exchange or ATS, e.g., directly between
broker-dealers.
Broker-Dealers must:
• Establish, document, and maintain a system of risk
management controls and supervisory procedures that 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 the market access.
• According to the SEC, these systems must be automated and
applied pre-trade.
• The fundamental idea is that if there are automated trading
systems, there must be automated controls.
Specifically:
The system would be required 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,
• assure appropriate surveillance personnel receive immediate
post-trade execution reports
Review
• The broker-dealer is required 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;
• 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 CEO must annually certify that the risk management
controls and supervisory procedures comply with Rule 15c3-5,
and that the regular review has been conducted
Bottom Line
• If you trade using your MPID on an ATS
for you or your client, you must have
established an automated system to stop
any trade in excess of credit limits.
• If you allow a client to use your MPID to
trade on an ATS, this automated system
must also apply.
• Your firm’s proprietary trades over an ATS
are also subject to this rule as if your firm
were the client.