SEC warns on counterparty risk in volatile markets

Dan Barnes
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Staff of the Security and Exchange Commission (SEC) division of trading and markets have urged 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.

“It is always prudent that broker-dealers have strong risk management practices,” the staff wrote. “In particular, broker-dealers should be mindful of the following.

1. Broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements.
2. Concentrated positions of prime brokerage counterparties pose particular concerns. Staff urges broker-dealers to seek sufficient information to determine counterparties’ aggregate positions in any markets that may experience liquidity concerns and work with the counterparties to mitigate risk.
3. Staff urges broker-dealers to stress test positions with the proper severity in light of current events and potential market movements, and act to manage the risk of the positions, particularly those that are concentrated, appropriately.
4. Staff urges broker-dealers to monitor risk management limits, calibrated to the financial resources of the broker-dealer, closely intraday and escalate any breaches promptly to senior management.

These notes are not a rule, regulation, or statement of the SEC and have no legal force or effect. However, a recent furore in commodity markets in which a nickel price spike nearly bankrupted a Chinese commodities speculator – who was only saved by the London Metals Exchange (LME) cancelling trades that would have triggered a high margin call, has raised awareness of the risks, which 14 years ago hit systemic levels as buy-side firms and banks were unable to fulfil margins calls following multiple credit events.

©Markets Media Europe, 2022
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