I’ve recently attended two events, talked to numerous experts, and read as much as I can find about the SEC’s Market Access Rule (Rule 15c3-5). One prevailing assumption on the street right now is that this rule only applies to firms that provide “naked access” or unfiltered, sponsored access directly to a trading venue.
But that is not accurate. While this unfiltered or “naked” access was the SEC’s primary concern, the rule affects ANY order that is sent by a customer to an exchange, ATS, or dark pool using the broker’s MPID involving equities, equity options, ETFs, debt securities, and security based swaps. As Gary LaFever of FTEN pointed out, “follow the MPID” (think “follow the money”).
So that means that if your broker-dealer allows any customers to access a market using your firm’s MPID, then you must comply with the requirements of the rule, regardless of whether that customer is a broker-dealer itself and also regardless of what platform the customer uses to send the order – whether through your order management systems, direct market access (DMA) platforms or through their own direct connections to the execution venue. The rule applies to any broker-dealer providing access including sponsored, direct, “naked,” or through an agency broker. Here is a quote from the rule:
“In all cases, however, whether the broker-dealer is trading for its own account, is trading for customers through more traditionally intermediated brokerage arrangements, or is allowing customers direct market access or sponsored access, the broker-dealer with market access is legally responsible for all trading activity that occurs under its MPID.”
The rule creates a number of thorny issues that broker-dealers need to address. For one, the rule requires broker-dealers to establish controls and supervisory procedures that ensure that the orders don’t exceed that customer’s credit and capital thresholds. These thresholds need to be applied across multiple markets and multiple asset classes. The asset classes included are equities, equity options, ETFs, debt securities, and security based swaps. Since most firms trade these instruments on multiple trading platforms and provide access to the markets through multiple silos, the rule will create an integration requirement that many brokers have not yet fully understood.
The rule requires pre-trade risk controls to be applied in order to prevent the entry of any order that exceeds the credit or capital thresholds or that does not meet other compliance obligations. While most order management systems already apply certain risk checks to prevent erroneous orders and ensure compliance with some regulatory requirements, they generally do not have an integrated view of the client’s overall position, exposure, or credit and capital thresholds. So the broker will need to aggregate positions and open order exposure across the trading platforms and across the affected asset classes.
In addition, the broker-dealer must have direct and exclusive control of the pre-trade risk controls that enable the broker-dealer to prevent non-compliant orders from being entered. There are some exceptions to this, but it will directly affect brokers who allow clients to trade using their own black boxes or third party trading platforms.
Here is a link to the rule: http://www.sec.gov/rules/final/2010/34-63241.pdf.
Here is a link to a PDF file containing an FAQ published by FTEN and NASDAQ OMX:
We’ll be spotlighting MAR in an upcoming TrendSpotters episode. Stay tuned.
Disclaimer: I’m not an attorney or a compliance expert, and this blog post is strictly my opinion and should not be construed as legal or compliance advice. I wrote this post strictly to bring your attention to some of the issues, but this is certainly not an exhaustive list of areas financial institutions should consider when looking at MAR compliance. Nothing on this blog should be construed as the practice of law, legal advice, compliance advice or investment advice.