Our Take: financial services regulatory update – January 10, 2025

¹ A simple majority in both chambers of Congress can vote to overturn (and prevent future similar) Biden Administration regulatory actions finalized after August 1st via the Congressional Review Act without the threat of a filibuster.

• What happened? On December 20^th, the SEC adopted amendments to Rule 15c3-3, its broker-dealer customer protection rule that stipulates requirements for broker-dealers to safeguard their customers’ securities and funds.
• What will be required and what changed from the proposal? The amendments require certain broker-dealers to perform daily, rather than the current weekly, computations of reserve requirements for customer accounts and proprietary accounts of broker-dealers (PAB). Details include:
  • Threshold: The amendments apply to broker-dealers with average total customer and PAB credit balances equal to or over $500 million, up from $250 million in the July 2023 proposal. The SEC estimates that this $500 million threshold will apply to 49 of the 191 carrying broker-dealers subject to the customer and PAB reserve requirements of Rule 15c3-3. Firms below the threshold may voluntarily perform a daily computations but must provide written notification to their designated examining authority 60 days prior to reverting to weekly computations.
  • Monitoring period: Firms must calculate their average credit balances over 12 months, starting from June 2024 through June 2025. The amendments define average total credits as “the arithmetic mean of the sum of total credits in the customer reserve computation and the PAB reserve computation reported in the carrying broker-dealer’s 12 most recently filed month-end FOCUS Reports.”
  • Aggregate debit reduction: Under Rule 15c3-1, a carrying broker-dealer using the alternative method for calculating net capital must reduce aggregate debit items by 3% when performing customer reserve computations. The adopted amendment reduces this charge to 2% for broker-dealers performing daily computations and using the alternative method.
• What’s next? The amendments will be effective 60 days after publication in the Federal Register. Firms meeting the $500 million threshold must implement daily reserve computations by December 31st, 2025. Broker dealers exceeding the $500 million threshold in the future must start daily computations within six months of exceeding the threshold.

Our Take

This last-minute rule will probably survive, with some adjustments. Like Chopra, SEC Chair Gary Gensler is counting down his final days at the Commission; and like the open banking rule, these amendments are subject to being overturned by Congress or amended by a new Chair. However, this rule is less controversial, receiving somewhat guarded support from Republican Commissioner Hester Peirce and just one dissent from the other Republican Commissioner Mark Uyeda. Peirce said she looks forward to feedback on issues with “cash in motion” and operational challenges that arise as broker-dealers implement the amendments. Uyeda called for consideration of a number of changes, including a narrower hybrid threshold and omitting daily calculation on days when markets close early or a broker-dealer experiences disruptions outside of its control. It is not yet clear what Chair nominee Paul Atkins thinks of the amendments, but his prior advocacy for reducing compliance burdens suggests that he would favor adjustments that address the issues raised by the current Republican Commissioners. In addition, he may delay the compliance deadlines while he considers these adjustments.

What should broker-dealers do now? As the core requirement to perform daily reserve calculations will likely survive in some form, impacted broker-dealers should prepare for compliance. For some, this will require significant changes to their processes, systems, policies, and workflows. They will also likely need additional staffing and training to ensure teams are equipped to handle the operational and regulatory demands. Increased frequency of computations will put a burden on manual processes, so firms should identify opportunities to automate these processes through systematic data feeds, elimination of manual adjustments (where practicable), more robust calculation tools. Daily reserve requirements may also affect liquidity for firms heavily reliant on overnight financing. For these firms, evaluating cash flow models and diversifying funding sources will be essential to mitigate liquidity risk. As firms evaluate and prepare to implement these changes, they should take Commissioner Peirce up on her request for feedback on operational challenges and suggest reasonable modifications that maintain the amendments’ goal of reducing the risk that investors are delayed in recovering their assets in the event of a broker-dealer failure.

These notable developments hit our radar recently:

Fed to seek comment on stress tests. On December 23^rd, the Fed announced that due to the evolving legal landscape and changes to the framework of administrative law, it will soon seek public comment on significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.

FDIC Vice Chairman speaks on FDIC policy outlook. On January 10^th, FDIC Vice Chair Travis Hill spoke on policy changes he expects to see at the FDIC after current Chair Martin Gruenberg steps down on January 19^th. He was critical of supervisory polices that focus on compliance with risk management processes, stating that the FDIC will need to make adjustments to how it implements the CAMELS rating system, to its examination manuals, and to examiner training. He also foreshadowed more openness to innovation and experimentation with new technology, including reinvigoration of the FDiTech and new guidance on fintech partnerships, digital assets, AI and tokenization. With respect to digital assets, he spoke out against “debanking” of these companies. Hill called for further changes to Basel III endgame to address overlap with stress testing and the fundamental review of the trading book (FRTB) as well as amend the capital treatment of credit risk transfers. He also stated that he expects the FDIC to withdraw from the International Network for Greening the Financial System and refrain from issuing any climate disclosure requirements for U.S. banks under new leadership.

CFTC sets new reporting compliance date for DCOs. On January 10^th, the CFTC’s Division of Clearing and Risk announced a change to the date for registered derivatives clearing organizations (DCOs) to comply with the recently amended daily reporting requirements under Regulation 39.19(c)(1). The new expected compliance date for DCOs is December 10th, 2025. In the announcement, the Division stated that additional time was needed to conform and release an updated version of the Reporting Guidebook.

Treasury issues new sanctions against Russia and Venezuela. On January 10^th, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued additional sanctions against targeting Russia’s energy sector and new sanctions against leaders of key Venezuelan economic and security agencies. The new sanctions against Russia target its key revenue sources from energy, including blocking oil traders, and oil producers.