US financial regulator the Securities and Exchange Commission (SEC) voted unanimously on 3 November to adopt a new rule that requires brokers and dealers to have risk controls in place before providing their customers with access to the market.
The rule, proposed on 19 January 2010, focuses on a method of direct market access in which broker-dealers give a client their market participant identifier (MPID). The customer then gains direct access to the applicable exchange or alternative trading system.
The approved rule prevents broker-dealers from providing customers with unfiltered or ‘naked’ access to a venue, in which the MPID is handed over without any pre-trade risk management parameters being imposed. It requires brokers with market access ”” including those who sponsor customers' access to an exchange or ATS ”” to put in place risk management controls and supervisory procedures to help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.
“I have previously likened unfiltered access to giving your car keys to a friend who doesn’t have a licence and letting him drive unaccompanied,” said SEC chairman Mary Schapiro. “This rule requires that broker-dealers not only remain in the car, but also maintain control of it so we can all be assured the rules of the road will be observed before the car is ever put into drive.”