CH 3 S1 Uniform Net Capital Rule (Rule 15C3-1) Flashcards

1
Q

NET CAPITAL RULE

UNIFORM NET CAPITAL RULE (RULE 15C3-1)

A

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)

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2
Q

NET CAPITAL DOLLAR REQUIREMENTS

A

firm should have sufficient liquid assets to meet any
foreseeable liability

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3
Q

NET CAPITAL DOLLAR REQUIREMENTS

CLEARING BROKER-DEALER

A

$250,000 Net Capital

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4
Q

NET CAPITAL DOLLAR REQUIREMENTS

FULLY DISCLOSED (INTRODUCING) B-D

A

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)

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5
Q

FULLY DISCLOSED (INTRODUCING) B-D

Fully disclosed Broker-Dealer is…

A

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

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6
Q

NET CAPITAL DOLLAR REQUIREMENTS

GIVE-UP CLEARING ARRANGEMENT

A
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

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7
Q

NET CAPITAL DOLLAR REQUIREMENTS

PRIME BROKERAGE ACCOUNT

A

here, any number of executing brokers can
handle parts of a trade, but the entire trade is
cleared and settled by the prime broker

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8
Q

NET CAPITAL DOLLAR REQUIREMENTS

PRIME BROKERAGE ACCOUNT

Give-Up

Step-Out

A

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

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9
Q

NET CAPITAL DOLLAR REQUIREMENTS

PRIME BROKERAGE ACCOUNT

Summary

A

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

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10
Q

PRIME BROKERAGE ACCOUNT

MARKET MAKER

A

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

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11
Q

PRIME BROKERAGE ACCOUNT

MUTUAL FUND/VARIABLE ANNUITY DEALERS

A

$25,000 Net Capital to take wire orders from
customers • $5,000 Net Capital to take subscriptions

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12
Q

NET CAPITAL COMPUTATiON

A

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

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13
Q

DETERMINING ALLOWABLE/ NON-ALLOWABLE ASSETS

A

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

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14
Q

HAIRCUTS

A

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% haircu
t

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15
Q

HAIRCUTS

A

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

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16
Q

HAIRCUTS

A

Undue Concentration Haircut
firm is allowed to have up to 10% of its
Tentative Net Capital invested in one
security position
• if it has more than this, an extra 15%
haircut must be taken on the
concentrated amount

• furthennore, the firm is prohibited from selling
a domestic security for a customer if the firm
has a fails to deliver in that security that is older
than 60days
the time period is extended to 90 days if the
finn has a fail to deliver in a foreign
security

17
Q
A