Staff representing the Securities and Exchange Commission’s (SEC) Division of Trading and Markets issued a statement Monday warning broker-dealers and other market participants to “remain vigilant to market and counterparty risks that may surface during periods of heightened volatility and global uncertainties.”
Though the statement does not specifically mention the Ukraine crisis, it comes at a time when Russia’s actions in the region and the subsequent response by the United States and other countries have had significant effects on the U.S. markets. Beyond stock fluctuations prompted by businesses halting operations in Russia in compliance with sanctions or to avoid consumer backlash, commodities like oil and wheat have been susceptible to wild price swings.
Given the level of volatility, the SEC’s Division of Trading and Markets reminded broker-dealers to be mindful of:
- Fully collecting margin from counterparties in accordance with applicable regulatory and contractual requirements;
- Seeking sufficient information to determine counterparties’ aggregate positions in any markets that may experience liquidity concerns;
- Stress testing positions with the proper severity and acting to manage the risk of positions, particularly those that are concentrated, appropriately; and
- Monitoring risk management limits and escalating any breaches promptly to senior management.
“It is always prudent that broker-dealers have strong risk management practices,” the staff said in the statement.
Rostin Behnam, chair of the Commodity Futures Trading Commission, issued a similar warning to regulated entities when discussing market volatility during a speech at the Futures Industry Association’s 2022 International Futures Industry Conference on March 16.
“Commission staff are actively monitoring compliance by exchanges, self-regulatory organizations, and intermediaries for trade processing, execution, and clearing,” Behnam said. “Where those obligations also include responsibility to maintain appropriate margin, customer segregation, and capitalization, compliance must unfailingly be maintained. Indeed, we must hold fast to our regulatory structures and resist the urge to make ad hoc decisions to avoid the natural outcomes of market forces.”
Editor’s note: This story was updated March 17 to include details from CFTC Chair Rostin Behnam’s FIA speech.
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