Broker-Dealers
FINRA Regulatory Notice 21-31: Supplemental Liquidity Schedule
Oct 20, 2023
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InnReg
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3 min read
Contents
Starting from March 1, 2022, the new Supplemental Liquidity Schedule (SLS), proposed in April 2021 by the Financial Industry Regulatory Authority (FINRA), has become effective following approval by the Securities and Exchange Commission (SEC).
The new SLS is due to be filed by May 4, 2022, to ensure full compliance with the FINRA regulations, such as Regulatory Notice 21-31.
The new SLS is of interest primarily to omnibus and clearing broker-dealers and will need to be filed as a supplement to the FOCUS Report. which constitutes the basic financial and operational report required of OTC derivatives dealers.
Subject-matter experts with decades of experience wrote this analysis, not freelance copywriters, third party agencies, or AI-based tools. We are global regulatory compliance experts.
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FINRA’s New Supplemental Liquidity Schedule Key Points
Proper monitoring of funding and liquidity risks presents a crucial element of a carrying broker-dealer’s financial responsibility and remains an ongoing focus of FINRA’s financial supervision programs.
Thus, the SLS is devised to enhance FINRA’s monitoring capacities for any potential adverse changes in the liquidity risk of subject members, including the following:
Reverse repurchase and repurchase agreements;
Securities borrowed and securities loaned;
Non-cash reverse repurchase and securities borrowed transactions;
Non-cash repurchase and securities loaned transactions;
Bank loan and other committed and uncommitted credit facilities;
Total available collateral in the member’s custody;
Margin and non-purpose loans;
Collateral securing margin loans;
Deposits at clearing organizations; and
Cash and securities received and delivered on derivative transactions not cleared through a central clearing counterparty.
The SEC and FINRA have stated that this implementation will allow for an adequate assessment of the ability of broker-dealers to continue funding their operations and meeting their financial obligations.
Furthermore, the SEC believes that: “regular and ongoing access to such information is important for the purpose of understanding the liquidity risks that member firms face, as well as differences in liquidity risks among firms that otherwise may appear to be similar based on similar characteristics in the firms’ balance sheets.”
The SEC underlines that the new SLS will provide information that is crucial to investors and public interest protection. The Commission believes that the new SLS will allow for a higher degree of anticipation of risk, and quicker responses to it, especially during stressful events that could endanger the ability of members to adequately fund their operations.
Who will need to file FINRA’s new SLS?
As per FINRA, the SLS applies solely to those members with the largest customer and counterparty exposures based on the following threshold requirements:
Each carrying member with $25 million, or more, in free credit balances (as defined under Exchange Act Rule 15c3-3(a)(8));
Each member with an aggregate amount outstanding under repurchase agreements, bank loans, and securities loan contracts is greater than $1 billion (as per the member’s most recent FOCUS report).
The SLS will need to be completed by the last business day of each month and subsequently filed within a period of 24 business days following the end of the month. If a firm does not meet the $25 million nor the $1 billion threshold - no SLS would need to be filed.
For further help and useful clarifications, FINRA has recently published an FAQ pertinent to the SLS. Throughout its ten sections, the FAQ goes into further detail about various types of transactions, securities, and agreements - and their interplay with the new SLS.
Where Can You Turn for Help?
As a carrying broker-dealer, the implementation of the SLS requirement will likely result in an impact on your operations and present nuanced compliance implications requiring expert counsel.
We recommend that companies seek help from industry experts, legal counsel, and regulatory experts such as InnReg. If you have specific questions about FINRA’s SLS requirement and your company’s readiness, we invite you to get in touch with us today.
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