Document ID: SEC-2011-0922-0001
Agency: sec
Document Type: Rule
Title: Risk Management Controls for Brokers or Dealers with Market Access
Posted Date: 2011-06-30T04:00Z

[Federal Register Volume 76, Number 126 (Thursday, June 30, 2011)]
[Rules and Regulations]
[Pages 38293-38294]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-16467]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-64748; File No. S7-03-10]
RIN 3235-AK53

Risk Management Controls for Brokers or Dealers With Market 
Access

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; limited extension of compliance date for certain 
requirements.

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SUMMARY: The Commission is extending the compliance date for certain 
recently adopted requirements of Rule 15c3-5 under the Securities 
Exchange Act of 1934 (``Exchange Act''). Specifically, the Commission 
is extending the compliance date, until November 30, 2011, for all of 
the requirements of Rule 15c3-5 for fixed income securities, and the 
requirements of Rule 15c3-5(c)(1)(i) for all securities. The compliance 
date remains July 14, 2011 for all provisions of Rule 15c3-5 not 
subject to this limited extension. Among other things, Rule 15c3-5 
requires broker-dealers with access to trading securities directly on 
an exchange or alternative trading system (``ATS''), including those 
providing sponsored or direct market access to customers or other 
persons, and broker-dealer operators of an ATS that provide access to 
trading securities directly on their ATS to a person other than a 
broker-dealer, to establish, document, and maintain a system of risk 
management controls and supervisory procedures that, among other 
things, is reasonably designed to systematically limit the financial 
exposure of the broker-dealer that could arise as a result of market 
access, and ensure compliance with all regulatory requirements that are 
applicable in connection with market access.
    The Commission is extending the compliance date for all of the 
requirements of Rule 15c3-5 for fixed income securities, and the 
requirements of Rule 15c3-5(c)(1)(i) for all securities to give broker-
dealers with market access additional time to develop, test, and 
implement the relevant risk management controls and supervisory 
procedures required under the Rule.

DATES: The effective date for this release is June 30, 2011. The 
effective date for Rule 15c3-5 remains January 14, 2011. The compliance 
date is extended to November 30, 2011, for all of the requirements of 
Rule 15c3-5 for fixed income securities, and the requirements of Rule 
15c3-5(c)(1)(i) for all securities. The compliance date remains July 
14, 2011, for all provisions of Rule 15c3-5 not subject to the limited 
extension.

FOR FURTHER INFORMATION CONTACT:  Theodore S. Venuti, Senior Special 
Counsel, at (202) 551-5658; Marc F. McKayle, Special Counsel, at (202) 
551-5633; and Daniel Gien, Special Counsel, at (202) 551-5747, Division 
of Trading and Markets, Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On November 3, 2010, the Commission adopted Rule 15c3-5 under the 
Exchange Act.\1\ Among other things, Rule 15c3-5 requires each broker-
dealer with access to trading securities \2\ directly on an exchange or 
ATS, including a broker-dealer providing sponsored or direct market 
access to customers or other persons, and each broker-dealer operator 
of an ATS that provides access to trading securities directly on their 
ATS to a person other than a broker-dealer, to establish, document, and 
maintain a system of risk management controls and supervisory 
procedures that, among other things, is reasonably designed to (1) 
systematically limit the financial exposure of the broker-dealer that 
could arise as a result of market access,\3\ and (2) ensure compliance 
with all regulatory requirements that are applicable in connection with 
market access.\4\ The required financial risk management controls and 
supervisory procedures must be reasonably designed to prevent the entry 
of orders that exceed appropriate pre-set credit or capital 
thresholds,\5\ or that appear to be erroneous.\6\ The regulatory risk 
management controls and supervisory procedures must also be reasonably 
designed to prevent the entry of orders unless there has been 
compliance with all regulatory requirements that must be satisfied on a 
pre-order entry basis,\7\ prevent the entry of orders that the broker-
dealers or customer is restricted from trading,\8\ restrict market 
access technology and systems to authorized persons,\9\ and assure 
appropriate surveillance personnel receive immediate post-trade 
execution reports.\10\
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    \1\ See Exchange Act Release No. 63241 (Nov. 3, 2010), 75 FR 
69792 (Nov. 15, 2010) (``Rule 15c3-5 Adopting Release'').
    \2\ Rule 15c3-5 applies to trading in all securities on an 
exchange or ATS. Id. at 69765.
    \3\ See 17 CFR 240.15c3-5(c)(1).
    \4\ See 17 CFR 240.15c3-5(c)(2).
    \5\ See 17 CFR 240.15c3-5(c)(1)(i).
    \6\ See 17 CFR 240.15c3-5(c)(1)(ii).
    \7\ See 17 CFR 240.15c3-5(c)(2)(i).
    \8\ See 17 CFR 240.15c3-5(c)(2)(ii).
    \9\ See 17 CFR 240.15c3-5(c)(2)(iii).
    \10\ See 17 CFR 240.15c3-5(c)(2)(iv).
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    The Commission understands that, as broker-dealers with market 
access have worked to meet the July 14, 2011 compliance date, some have 
determined that additional time is needed to implement effective 
policies and procedures and complete the systems changes necessary to 
comply with certain requirements of Rule 15c3-5. The Financial 
Information Forum (``FIF''), the Securities Industry and Financial 
Markets Association (``SIFMA''), and the Wholesale Market Brokers' 
Association (``WMBA'') have submitted letters requesting that the 
Commission extend the compliance date for those requirements.\11\ 
Specifically, FIF, SIFMA, and WMBA have indicated that more time is 
needed to comply with Rule 15c3-5(c)(1)(i), which requires the 
implementation of risk management controls and supervisory procedures 
that are reasonably designed to prevent the entry of orders that exceed 
appropriate pre-set credit or capital thresholds, because the type of 
controls required by the Rule are not currently in place at many 
broker-dealers, and developing and implementing appropriate controls in 
this area can be a complex exercise.\12\ In addition, they have 
indicated that more time is needed generally to comply with the 
requirements under Rule 15c3-5 with respect to fixed income securities, 
because the type of pre-trade controls required by the Rule have 
generally not been used in the fixed income market, and developing and 
implementing controls that appropriately account for the differences in 
fixed income trading

[[Page 38294]]

will require substantial effort.\13\ SIFMA and WMBA requested that the 
compliance date for these provisions be extended until November 30, 
2011, and FIF requested an extension until January 2012.
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    \11\ See letter from Manisha Kimmel, Executive Director, 
Financial Information Forum, to David Shillman, Associate Director, 
Division of Trading and Markets (``Division''), Commission, dated 
April 15, 2011; see also letters from Sean Davy, Managing Director, 
et al., Securities Industry and Financial Markets Association, to 
Robert Cook, Director, Division, Commission, dated April 21, 2011; 
and Stephen Merkel, Chairman, Wholesale Markets Brokers' 
Association, Americas, to Robert Cook, Director, Division, 
Commission, dated May 31, 2011.
    \12\ Id.
    \13\ Id.
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    The Commission believes that providing a limited extension of the 
compliance date to November 30, 2011, for (1) all of the requirements 
of Rule 15c3-5 for fixed income securities, and (2) the requirements of 
Rule 15c3-5(c)(1)(i) for all securities, is reasonable to assure market 
participants have sufficient time to develop and implement the required 
risk management controls for activities where the application of these 
types of controls may not be widespread. Accordingly, the Commission is 
extending the compliance date to November 30, 2011, for (1) all of the 
requirements of Rule 15c3-5 for fixed income securities, and (2) the 
requirements of Rule 15c3-5(c)(1)(i) for all securities.

II. Conclusion

    For the reasons cited above, the Commission, for good cause, finds 
that notice and solicitation of comment regarding the extension of the 
compliance date set forth herein are impractical, unnecessary, or 
contrary to the public interest.\14\ The Commission notes that the 
compliance date is quickly approaching, and that a limited extension of 
the compliance date for the reasons cited above will facilitate the 
orderly implementation of Rule 15c3-5. In light of time constraints, 
full notice and comment could not be completed prior to the July 14, 
2011 compliance date. Broker-dealers with market access will have 
additional time to comply with the provisions of Rule 15c3-5 discussed 
above beyond the compliance date originally set forth in the Rule 15c3-
5 Adopting Release. Further, the Commission recognizes that it is 
imperative for broker-dealers with market access to receive notice of 
the extended compliance date, and providing immediate effectiveness 
upon publication of this release will allow them to adjust their 
implementation plans accordingly.\15\
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    \14\ See Section 553(b)(3)(B) of the Administrative Procedure 
Act (5 U.S.C. 553(b)(3)(B)) (stating that an agency may dispense 
with prior notice and comment when it finds, for good cause, that 
notice and comment are ``impractical, unnecessary, or contrary to 
the public interest''). This finding also satisfies the requirements 
of 5 U.S.C. 808(2), allowing the rules to become effective 
notwithstanding the requirement of 5 U.S.C. 801 (if a Federal agency 
finds that notice and public comment are ``impractical, unnecessary 
or contrary to the public interest,'' a rule ``shall take effect at 
such time as the Federal agency promulgating the rule determines''). 
Also, because the Regulatory Flexibility Act (5 U.S.C. 601--612) 
only requires agencies to prepare analyses when the Administrative 
Procedures Act requires general notice of rulemaking, that Act does 
not apply to the actions that we are taking in this release.
    \15\ The compliance date extensions set forth in this release 
are effective upon publication in the Federal Register. Section 
553(d)(1) of the Administrative Procedure Act allows effective dates 
that are less than 30 days after publication for a ``substantive 
rule which grants or recognizes an exemption or relieves a 
restriction.'' 5 U.S.C. 553(d)(1).
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    The Commission identified certain costs and benefits associated 
with the Rule in the Rule 15c3-5 Adopting Release. The extension of the 
compliance date for Rule 15c3-5 will delay benefits of the Rule, but 
the Commission believes that the limited extension is necessary and 
appropriate because it will provide broker-dealers with market access 
additional time to develop, test, and implement certain of the required 
risk management controls and supervisory procedures under the Rule. The 
extension also will delay the costs of complying with the Rule.\16\ The 
Commission believes that the extension does not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act, because the extension will give broker-dealers 
with market access additional time to develop, test, and implement 
certain of the risk management controls and supervisory procedures that 
are required under the Rule.
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    \16\ The Commission identified in the Rule 15c3-5 Adopting 
Release certain ongoing costs associated with Rule 15c3-5. Because 
of the extension of the compliance date, certain costs may be 
avoided from July 14, 2011 to November 30, 2011.

    Dated: June 27, 2011.
    By the Commission.

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-16467 Filed 6-29-11; 8:45 am]
BILLING CODE 8011-01-P