FINRA Wants to See Liquidity Stress Testing
FINRA has issued a Regulatory Notice warning firms to conduct stress testing and assess their liquidity needs. FINRA’s recommendations arise from a sweep of 43 firms conducted in 2014-15. FINRA advises that firms should (i) understand that counterparties will become unavailable during stress events; (ii) anticipate cash outflows during stress events; (iii) plan for cash unusual cash outflows; (iv) establish a committed lending facility from an affiliate; (v) assume significant haircuts from counterparties; and (vi) plan for how to liquidate firm inventory. FINRA “strongly encourage[s] all firms to conduct a self-assessment of their businesses and incorporate firm wide liquidity stress testing into their risk and business planning.” FINRA also indicates that it “intends to review firm liquidity risk planning and will use stress tests with various designs from time to time in the future, either with a group of firms or as part of the examination of individual firms where appropriate.”
OUR TAKE: Add liquidity stress testing to the compliance testing pile. Also, expect some hard questions during your next exam.