CH 3 S1 Uniform Net Capital Rule (Rule 15C3-1) Flashcards
NET CAPITAL RULE
UNIFORM NET CAPITAL RULE (RULE 15C3-1)
financial requirements that broker-dealers must meet
• provisions:
minimum dollar requirement
definition of Net Capital (NC)
Aggregate Indebtedness (Al)
maximum ratio of AI/NC
requirements for Debt Capital (subordinated
loans)
NET CAPITAL DOLLAR REQUIREMENTS
firm should have sufficient liquid assets to meet any
foreseeable liability
NET CAPITAL DOLLAR REQUIREMENTS
CLEARING BROKER-DEALER
$250,000 Net Capital
NET CAPITAL DOLLAR REQUIREMENTS
FULLY DISCLOSED (INTRODUCING) B-D
Receives But Does Not Hold Cust. Funds or
Securities
$50,000 Net Capital
may only be involved in firm commitment
underwritings as selling group members
•
Does Not Receive Cust. Funds or Securities
$5,000 Net Capital
may NOT be involved in any firm
commitment underwritings (best efforts or
all or none can be done if monies are
payable to escrow)
FULLY DISCLOSED (INTRODUCING) B-D
Fully disclosed Broker-Dealer is…
also known as an
Introducing Broker-Dealer (IB) because the
broker-dealer is introducing its customers to the
clearing firm
• the clearing agreement specifies the
responsibilities of each party
NET CAPITAL DOLLAR REQUIREMENTS
GIVE-UP CLEARING ARRANGEMENT
this is an agreement that allows the introducing finn to perform transactions "away" from the clearing broker (which is the "**prime broker**")
• here, the introducing finn “gives up” the name
of its clearing broker to each finn with which it
enters orders. alerting theses firms that payment
for securities transactions will be handled by the
clearing broker
NET CAPITAL DOLLAR REQUIREMENTS
PRIME BROKERAGE ACCOUNT
here, any number of executing brokers can
handle parts of a trade, but the entire trade is
cleared and settled by the prime broker
NET CAPITAL DOLLAR REQUIREMENTS
PRIME BROKERAGE ACCOUNT
Give-Up
Step-Out
Give-Up
the executing broker provides the clearing
number of the prime broker when reporting
the trade for comparison and clearance
the executing broker “gives up” the name of
the clearing prime broker when the trade is
reported
• Step-Out
the executing broker provides the clearing
number of the prime broker AFTER the
trade is reported for comparison and
clearance
the executing broker ‘‘steps out” of the
reported trade from the account of the
executing member to the clearing member -
it is a movement of position only
NET CAPITAL DOLLAR REQUIREMENTS
PRIME BROKERAGE ACCOUNT
Summary
Standard Clearing Agreement
here the introducing broker sends all trades
to the clearing broker-dealer who:
• executes and settles all trades;
• maintains custody; and
• provides financing •
Give-up Clearing Agreement
•
here the introducing broker sends trades
through different executing brokers to whom
the name of the clearing broker-dealer is
“given up”
· thus, the clearing broker:
• settles all trades;
• maintains custody; and
• provides financing
the clearing prime broker** must maintain **net
capital of $1.5MM and it must notify FINRA
that it will act as a prime broker
any executing broker in the prime broker
relationship must maintain minimum net capital of $1MM
annually, by July 1st
, the clearing broker-dealer
must provide (to the CEO and compliance
officer of the introducing member) a written list
of all reports that it can generate based upon
activities of the introducing finn
this is intended to help the introducing firm
supervise customer accounts and monitor
transactions
PRIME BROKERAGE ACCOUNT
MARKET MAKER
has higher requirements
$100,000 minimum Net Capital
$1,000,000 maximum Net Capital
$1,000 for each security at $5 or less
$2,500 for each security over $5 bid
i.e. firm makes a market in 10 stocks under
$5 and 10 stocks over $5
• $10,000 and $25,000 = $35,000
• this is NOT enough, as minimum is
$100,000
i.e. firm makes a market in 100 stocks under
$5 and 100 stocks over $5
• S 100,000 and $250,000 = $350,000
§] i.e. firm makes a market in 1,000 stocks
under $5 and 1,000 stocks over $5
• $ 1,000,000 and $2,500,000 =
$3,500,000, BUT requirement is
$1,000,000
PRIME BROKERAGE ACCOUNT
MUTUAL FUND/VARIABLE ANNUITY DEALERS
$25,000 Net Capital to take wire orders from
customers • $5,000 Net Capital to take subscriptions
NET CAPITAL COMPUTATiON
Total Assets - Total Liabilities= Net Worth
Liquid Assets - Total Liabilities= Net Capital
Net Worth
+ Subordinated Loans
Total Available Capital
- Non-allowable Assets
Tentative Net Capital
- Haircuts on Allowable Assets
Net Capital
DETERMINING ALLOWABLE/ NON-ALLOWABLE ASSETS
Listing of Allowable Assets••
Cash
• inventory (if firm is a market maker)
Cash in Reserve Account
• for clearing broker-dealers
Customer Debit Balances
• backed by marginable securities -
money receivable
Fails To Deliver
• arises when customer sells and fails to
deliver to you
• subject to a “haircut” if “aged”
Note Receivable
• as long as they are secured by
collateral (such as securities) - subject
to haircut
Securities Inventory
• securities positions are allowable, but
subject to a haircut
Stock Borrowed
• when a finn borrows stock from
another finn and gives the lender the
full amount in cash
• in a liquidation, the stock is returned
for the 100% cash deposit
Listing of Non-Allowable Assets
pre-paid expenses
exchange membership
real estate
furniture & fixtures
HAIRCUTS
Fails to Deliver
if the fails to deliver are under 5 business
days old from settlement, no haircut is
required
on the 5th business day after original
settlement, the fail to deliver is “ aged ‘‘ and
the position is marked to market and
subject to a 15% haircut
HAIRCUTS
Securities Inventory
the greater the risk of the security, the
greater the haircut
For Equity Securities With:
• 3 or more market makers aside
from your firm- 15%, haircut
• 1 or 2 market makers aside from
your firm - 40% haircut
• no market makers aside from your
firm - 100% haircut
