U.S. SEC warns brokers to ‘remain vigilant’ to market, counterparty risk

WASHINGTON, March 14 (Reuters) – In a rare public warning, the U.S. Securities and Exchange Commission on Monday told broker-dealers and other market participants to “remain vigilant to market and counterparty risk” amid heightened volatility and global uncertainties.

The agency urged broker-dealers to closely monitor counterparty risk, collect “margin” or collateral from counterparties to “the fullest extent possible,” and stress test their positions.

Global stock and commodities markets have been unusually volatile in the wake of Russia’s invasion of Ukraine and a slew of Western retaliatory sanctions on Russia’s financial system and its oil exports.

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Wild swings in the prices of oil, metals and other raw materials last week generated more margin calls at clearing houses and trading firms, forcing counterparties out of the money to stump up liquid collateral they must pledge to secure their trades. read more

Sudden, large margin calls can put financial stress on counterparties that do not hold sufficiently liquid assets.

“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,” the SEC said.

Regulators are more sensitive to issues with broker dealers’ counterparty risk management controls after several were left nursing around $10 billion in losses last year on derivative trades they had inked with New York family office Archegos.

On Monday, the SEC said that “concentrated positions” among prime broker counterparties “pose particular concerns” and that brokers should gather data to determine counterparties’ aggregate exposure, the SEC said

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Reporting by Katanga Johnson in Washington; editing by Michelle Price

Our Standards: The Thomson Reuters Trust Principles.

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