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Division of Trading and Markets
Office of Broker-Dealer Finances

Dec. 30, 2019

The Division of Trading and Market’s Office of Broker-Dealer Finances includes five offices that administer the financial responsibility rules and supervise broker-dealers:

  • The Office of Financial Responsibility;
  • The Risk Assessment Program;
  • The Risk Supervised Broker-Dealer Program;
  • The Office of Broker-Dealer Inspections; and
  • The Office of Quantitative Risk Analysis.

Office of Financial Responsibility

The Office of Financial Responsibility (OFR) is primarily responsible for the legal aspects of administering the Commission’s broker-dealer financial responsibility rules (e.g., drafting proposing and final rule releases, exemption orders, no-action letters, and briefing memos regarding the financial responsibility rules and providing guidance to internal and external parties on the requirements of the rules). OFR also is responsible for the Commission’s oversight of SRO margin rules and the Securities Investor Protection Corporation. In addition, OFR administers the financial responsibility rules for security-based swap dealers.

Risk Assessment Program

The Risk Assessment Program monitors broker-dealers subject to the recordkeeping and reporting requirements under Section 17(h) of the Exchange Act (Risk Assessment Program).

The Risk Assessment Program was established under the Market Reform Act of 1990 following the collapse of Drexel Burnham Lambert Group, Inc. (Drexel), the holding company parent of Drexel Burnham Lambert, Inc. (DBL), a registered broker-dealer. Drexel’s collapse demonstrated that broker-dealers could encounter serious financial difficulty due to the loss of market confidence, loss of access to the capital markets, or failure of the registered broker-dealer’s affiliates or the holding company itself.

Generally, broker-dealers are subject to Rule 17(h) if they hold customer funds or have Regulatory Capital in excess of $20 million and are part of a holding company structure. The rule exempts broker-dealers that hold customer securities if Regulatory Capital is less than $250,000. Regulatory Capital is defined as equity plus subordinated debt. The rule also exempts broker-dealers that trade solely in mutual funds.

Broker-dealers subject to the Risk Assessment rules must keep records and file with the Commission information including the holding company organizational chart, risk management policy information, consolidating and consolidated financial statements, securities and other financial product position data of material associated persons, and other categories of financial and securities related information, as specified in Rules 17h-1T and 17h-2T and Form 17-H.

Risk Assessment Program staff review filings under the Risk Assessment Program relating to reporting broker-dealers or their material affiliates to analyze the activities and relationships of the broker-dealer and associated entities. Staff analyze financial dependencies and unregulated business activities which could potentially affect the net capital, liquidity, financing or profitability of the broker-dealer, as well as sources of funding for the broker-dealer and the parent.

Other resources:

Alternative Net Capital Broker-Dealers and OTC Derivatives Dealers

Two programs allow broker-dealers with strong internal risk management practices to apply to the Commission for authorization to use mathematical modeling methods for computing net capital:

Three offices within OBDF, the Risk Supervised Broker-Dealer Program, the Office of Quantitative Risk Analysis, and the Office of Broker-Dealer Inspections were created to provide an enhanced oversight program for broker-dealers in these two programs that augments the Commission’s other supervisory programs for U.S. registered broker-dealers.

  • The Risk Supervised Broker-Dealer Program (RSBD Program) reviews the internal risk management controls within the broker-dealer to assist in managing the risks associated with its business activities, including market, credit, leverage, liquidity, legal, and operational risks. The RSBD Program reviews monthly, quarterly, and annual filings containing financial, risk management, and operational data for ANC and OTCDD firms. RSBD Program staff also meet regularly with senior risk managers to review business unit risk taking and risk controls, aggregate risk metrics and the independent risk control function, and control processes supporting risk management. In addition, RSBD Program staff meet regularly with each firm to review financial, internal audit, and price verification results, the management of the firm’s balance sheet, and, in particular, the liquidity of the balance sheet.
  • The Office of Broker-Dealer Inspections (OBDI) focuses on the financial and operational condition of the ANC broker-dealers, subjecting their relevant controls to on-site testing. Ongoing RSBD Program monitoring activities are informed and enhanced by the results of timely and focused reviews of controls conducted by the OBDI staff. Inspections are designed to target identified risks and focus on the portfolio of controls around a particular business -- for example credit or equity trading – and may encompass the marking of positions, computation of risk exposure measures, transaction flow, permissioning, and computation of regulatory capital. Almost all projects are implemented across multiple firms. Conducting similar work at multiple firms within a short time interval enables the staff to develop a comprehensive understanding of the relevant business and control issues, and allows for more useful feedback to the firms.
  • The Office of Quantitative Risk Analysis (OQRA) is primarily responsible for reviewing and assessing the regulatory capital and margin models used by ANC broker-dealers, OTC derivative dealers, and clearing agencies. More specifically, OQRA reviews the market and credit risk models used by ANC broker-dealers under Rule 15c3-1e (“Appendix E”) and the market risk models used by OTC derivative dealers seeking model approval under Rule 15c3-1f (“Appendix F”). In addition, OQRA offers technical and quantitative support for the Office of Clearance and Settlement within the Division of Trading and Markets and the Office of Compliance Inspections and Examinations in their oversight of clearing agencies. Staff conducts quarterly model turnover meetings with each of the ANC firms to discuss past, current and future model-related changes.

    OQRA is supervised in DC but staff is located in both DC and the New York Regional Office. The educational background of OQRA staff is a mix of PhDs and master’s degrees in quantitative disciplines such as Economics, Finance, Mathematics, Physics, Mathematical Finance and Financial Engineering.

Inter-agency Efforts

In addition to its monitoring and inspections functions, OBDF provides technical expertise on market and risk management developments and emerging financial issues, assisting the Commission with its work in various domestic and international regulatory groups, including the Financial Stability Oversight Council, Senior Supervisors Group, International Organization of Securities Commissions, and Financial Stability Board.

OBDF cooperates and collaborates with the Federal Reserve Board, Federal Reserve Banks, the Bank of England, Financial Conduct Authority, and other regulators regarding the financial condition, internal controls, capital, liquidity, and funding sources of the firms it supervises and their holding companies, and regarding other regulatory and supervisory issues of mutual interest. In addition, OBDF cooperates, shares information, and coordinates its supervision with self-regulatory organizations to which broker-dealers belong, such as Financial Industry Regulatory Authority (FINRA), as well as the functional regulators of affiliates of broker-dealers.

This overview of the Office of Broker-Dealer Finances was prepared by staff of the Division of Trading and Markets. SEC staff statements represent the views of the SEC staff. They are not rules, regulations, or statements of the SEC. The SEC has neither approved nor disapproved their content. SEC staff statements, like all SEC staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

For further information, contact Michael A. Macchiaroli, Associate Director, at (202) 551-5525 or Thomas K. McGowan, Associate Director, at (202) 551-5521.

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