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Regulatory Sanctions

Market Access and the Need for Risk Management Controls

February 6, 2019

by Howard Haykin


From July 2013 through December 2015, a NYC-based broker-dealer (“B/D”) failed to maintain adequate risk management controls reasonably designed to manage the financial, regulatory, and other risks associated with market access pertaining to fixed income transactions.



Exchange Act Rule 15c3-5, among other things, requires B/Ds with market access, or that provide customers or any other persons with access to an exchange or ATS, to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to: (i) systematically limit the financial exposure of the broker or dealer that could arise as a result of market access; and, (ii) ensure compliance with applicable regulatory requirements in connection with market access.


Exchange Act Rule 15c3-5(c)(1) further requires the risk management controls and supervisory procedures be reasonably designed to prevent the entry of: (1) orders that exceed appropriate pre-set credit or capital thresholds in the aggregate for each customer and the broker or dealer; and (2) erroneous orders, including duplicative orders.


Exchange Act Rule 15c3-5(e)(1) provides that B/Ds with market access must establish, document, and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures required by the rule, and also requires that the B/D review on at least an annual basis the effectiveness of such risk management controls and supervisory procedures and that each firm's CEO certify annually that the B/D conducted the required review.



WHAT WENT WRONG.    During the Relevant Period (July 2013 through December 2015), the Firm used multiple alternative trading systems to execute fixed income transactions.


  • From July 2013 to April 2015.   While the firm had certain controls and procedures in place to satisfy its supervisory obligations under Exchange Act Rule 15c3-5, it did not have any automated pre-trade controls to prevent the entry of orders that exceeded pre-set capital limits. As a result, the Firm's capital limits were breached on at least 4 occasions.


  • From April 2015 through December 2015.   While the Firm implemented hard blocks for its capital limits in April 2015, it failed to do so across all its order management systems; i.e., it did not have pre-trade controls to prevent the entry of orders in excess of capital limits for transactions in repo/reverse repo trades and approved requests for temporary capital limit increases for transactions executed through the Firm's Rates Desk without documenting the reasons for the modifications.


  • From July 2013 to April 2015.   While the firm began relying on automated alerts in April 2015 within its order management system to prevent duplicative orders, such controls were not in place to prevent duplicative orders for 2 asset classes until April 2016.


  • The 2014 Annual CEO Certification.   The firm failed to certify that the Firm's risk management controls and supervisory procedures, as required under Exchange Act Rule 15c3-5(e).


The firm agreed to pay a $50K fine to settle the FINRA charges.



This case was reported in FINRA Disciplinary Actions for January 2019.

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015047526601.