Net Capital

What are the haircut schedules for ETF?

1. 10% Index Based High Capitalization 2. 15% Non High Capitalization

What is equity capital related to withdrawal notification?

1. 2 Business Days Prior notice, withdrawals of equity less 30% of excess 2. 2 Business Days Post Notice, withdrawals greater 20%

What is the haircut schedule for open contractual commitments?

1. 30% - IPO and Additional Issues, Nasdaq Cap Markets or Non Nasdaq 2. 15% Additional Issues, Listed, Nadaq Global, Global Select Market

What is subordinated debt related to repayment?

1. Agreement suspended if AI to NC ratio is greater than 12 to 1 after payment or 2. Net capital less 120% of minimum requirement.

What is subordinated debt to repayment?

1. Allowed if agreement in place for 1 year 2. Prepayment will not cause AI to NC to be greater than 10 to 1. 3. Net Capital less 120% of min requirement

What is the mutual fund broker dealer limitations? 2 of 2

3. Promptly transmit all customer transactions to fund or annuity sponsor and broker dealer may not hold customer funds or securities. 4. Occasional trade for own account.

What is the haircut schedule for options - listed?

50% of market value, if no other position in listed security

What is a carrying broker dealer?

Holds Customer money and securities. Also known as a clearing correspondent.

Alternative Net Capital Requirement

A broker dealer is required to maintain net capital of $250,000 or 2% of the aggregate debit items in the reserve formula, whichever is greater.

What are the adjustments for aggregate indebtedness?

A broker dealer may reduce it's Aggregate indebtedness by the lesser of the amount that is on deposit in the special reserve bank account or the amount required to be on deposit by rule 15c3-3.

What are the inclusions for aggregate indebtedness?

Current Payables, Firm Fail to Receive with no long position offset, Customer fail to receive, stock loaned with no long and customer, unsecured notes, short security difference reserve

What is a special note regarding fails to deliver?

Current: Corporations 4 business days after settlement Current: Municipals 20 business days after settlement Aged: Subject to 15% of Current Market Value Haircut Allowable portion cannot exceed contract value

What is subordinated debt related to filing?

SEC - 2 copies filed 10 days before effective date FINRA - 2 copies filed 30 days before effective date Temporary - 2 copies with both, 10 days before effective date

What is subordinated debt for secure demand note agreement?

Note payable secured by negotiable securities. Usually secured by common stock, 30% haircut

What is net capital computation step three?

Schedule all assets into allowable and non-allowable charges.

What is subordinated debt related debt to equity ratio?

Sub Debt cannot be greater than 70% of total available capital for greater 90 days.

What is subordinated debt related to equity subordination?

Sub Debt made by partners, stockholders or parent co originally 3+ years in length and greater $1m ytm and no accelerate provisions.

What is net capital computation step five?

Subtract haircuts on inventory positions from tentative net capital to determine net capital.

What is net capital computation step four?

Subtract non allowable assets from total available capital to determine tentative net capital.

What is the formula for total tentative net capital?

Total available capital minus non allowable assets equals tentative net capital

What are the relationships between open contractual commitments & gains?

Open Contractual Commitment haircut can be offset by gain but gain cannot increase net capital.

What is the dealer's minimum net capital?

$100,000

What are the haircut adjustments for undue concentration?

1. Applies to net position of long or short greater than 10% of tentative net capital 2. 15% Cut of amount that exceeds 10% of tentative net capital 3. Not applied to US Government, ETFs and MM

Net Capital Basic Formula

1. Assets minus Liabilities equals Net Worth 2. Net Worth minus Non Allowable Assets minus Other Charges equals Net Capital

What is alternative net capital?

1. Based on S E C Rule 15c3-3 2. Greater of $250,000 or Aggregate Debits reserve requirement

What is the mutual fund broker dealer limitations? 1 of 2

1. Dealer transaction: Purchase, Sale/Redeem shares and variable annuities. 2. Broker Transactions: Sale & Redeem of investment company or sale of securities for reinvest in investment company shares or units.

Define Haircut

1. Discount securities from full market value 2. Compensate for market price losses in liquidation

What are the expectations for an introducing k2i broker dealers?

1. Handle Cash, not margin. Receive not hold funds. 2. Minimum Net Capital of $100,000 or 1/15th of AI 3. Financial trans in special reserve bank account. Omnibus

Define Subordinated debt

1. Included in Net Capital if Broker Dealer approved by FINRA and S E C 2. Next to last to be paid in the event of failure 3. Structure of Loan must be approved

$5,000 Net Capital

1. Participates in a best efforts underwriting. 2. Receives customer checks made out to clearing firm.

Net Capital is a function of what?

1. Permitted lines of business 2. Aggregate Indebtedness

What are the limited introducing Broker Dealer Limitations?

1. Promptly forward all customer funds to clearing firm 2. Cannot hold customer funds or owe money to customers. 3. Participate in Best efforts or all or none underwriting or as a selling group member in firm commitments. 4. Occasional trades in it's investors account

What is the minimum net capital for mutual fund broker dealers?

1. Receive Cash & Securities is $25,000 or 1/15th of AI 2. No Receive Cash & Securities is $5,000 or 1/15th of AI

Minimum Net Capital for Introducing Broker Dealer?

1. Receiving BD's $50,000 2. Non Receiving BD's $5,000 3. K2i Exception $100,000 or 1/15th of Aggregate Indebtedness

What is the subordinated debt related to minimum standards for secure demand?

1. Securities pledged must be fully paid. 2. Cannot be in lenders name 3. Subject to haircut and undue concentration haircut 4. Lender can substitute collateral and remove excess collateral. 5. Collateral declines, broker dealer immediately sends notice

What are the exclusions for aggregate indebtedness?

1. Subordinated Loans - If Broker Dealer approved, otherwise included. 2. Firm Inventory Short Positions. 3. Payables Secured by Firm Assets

What are the haircut adjustments for open contractual commitments?

1. Underwriting commitments and when issued contracts. 2. First $150,000 of open contractual commitment charge doesn't apply.

What are the haircut schedules for nonmarketable securities?

10%

What is the haircut schedule for preferred stock?

10%

What are the types of subordinated debt?

2 Types: 1. Subordinated Loan Agreement 2. Secured Demand Note Agreement

What is a mutual fund broker dealer?

Acts as agents for customers and transacts business in investment company shares and variable annuities.

What is a market maker broker dealer?

Acts as principal in secondary market transactions.

What is net capital computation step two?

Add subordinated loans to find total capital.

What is the formula for total available capital?

Adjustment Net Worth Plus Subordinated Loans equals Total Available Capital

What is the relationship between aggregate indebtedness to net capital ratio?

After Year 1: Total AI to NC cannot be greater than 15 to 1. In Year 1: Total AI to NC cannot be greater than 8 to 1

What is the tentative net capital?

Also known as net capital before haircuts

Define Dealer

Any firm that- 1. Effects more that 10 transactions per calendar year in its investment account. 2. Endorses or writes unlisted options.

What are the haircut schedules for corporate convertible debt.

Applied to greater of long or short positions. 1. At or Above Par - 15% 2. Below Par - Follows Non convertible maturity schedule

What is the haircut schedule for municipals?

Applied to the greater of long or short position and increase with maturity.

What is the haircut schedule for corporate nonconvertible debt?

Applied to the greater of long or short position. 1. Investment Grade, 2% - Less than 1 year maturity 2. Investment Grade 9% - Greater than 25 year maturity

What are the haircut schedules for common stock?

Applied to the greater of long or short positions. 1. 15% usually 2. 25% additional of excess of smaller, greater 25% of larger

What are the haircut schedules for money market funds?

Applied to the greater of long or short positions. 1. 2% to 9% per composition of portfolio 2. Only money market 2%, 0% if held in bank.

What is a clarified definition for market maker for the minimum net capital?

Based on average number of securities in made markets 30 days before computation

What is the market maker's minimum net capital?

Based on market's made - 1. Greater of $100,000 2. $1,000 per security with bid value < $5, $2,500 > $5 3. $1M max based on per security calculation

What are the haircut schedules for limited trading market?

Based on number of other market makers. 1. 15% - 3 market makers 2. 40% - 1 to 2 market makers

What is the haircut schedule for us government?

Based on time remaining to maturity & net position. 1. 0% on T Bills maturing in less than 3 months 2. 6% on Bonds maturities of 25 years or more

K2i Exemption

Broker dealers that handle customer cash, but not margin, accounts and receive but do not hold funds. Net Capital Requirement of $100,000. Do not hold funds or securities for, or owe money or securities to customers.

Define Subscription Firm?

Broker dealers that transact business only in investment company shares and variable annuities that don't receive customer cash or securities.

What is equity capital related to withdrawal limitations?

Cannot be withdrawn if it causes: AI to NC ratio less 10 to 1 or Net Capital less 120% of minimum

General Securities

Carrying Broker Dealer

What is Broker Dealer Classifications?

Carrying, Introducing on a fully disclosed basis, Mutual Fund, Market Makers

What are allowable assets examples?

Cash in bank, S R B A cash, clearing deposits, customer balances, deficits in introduced accounts, fails to deliver, firm investment and trading accounts

What is the haircut schedule for short securities?

Charged if unresolved in 7 business days. Cut schedule based on business days. 7- 25%, 14 - 50%, 21- 75%, 28-100% No impact. Cannot add to net capital until difference is sold.

Define Equity Capital, FINRA Rule 4110 c 2

Clearing members. Firms without approval cannot withdraw capital, pay dividend, distribute a/t that reduces member's equity, and make unsecured loan/advance greater 10% of excess net capital.

What are the haircut adjustments for undue concentration exception?

Common Stock only applied on the greater of market value in excess of $10,000 or market value of 500 shares.

What is Net Capital computation step one?

Compute adjusted net worth. Net worth plus income or loss to date.

What is subordinated debt related to disclosure?

Deliver Disclosure documents to investor and receive signed copy from investor affirming understanding.

Define Net Capital

Excess of Firms liquid assets over all liabilities

What are allowable assets examples?

Good Faith Deposits within 60 days, Secured notes receivable, stock borrowed, mutual fund concessions receivable, dividend and interest earned not collected, floor brokerage earned not collected, commission income received, management fees from RIC, mortgage retained earnings

Minimum Net Capital for Carrying Broker Dealers?

Greater of $250,000 or 1/15th of Aggregate Indebtedness

What is the haircut schedule for options - Hedged?

In money- multiply market value of long shares by 15% Out Money - Market Value - Exercise Value

What are examples of non allowable assets?

Intangible assets, syndicate profits received, doubtful, no ready market assets, exchange memberships, real estate, ppe and prepaid expenses

What is subordinated debt related to subordinated loan agreement?

Lender gives broker cash in exchange for interest payments and repayment at some point.

What is the haircut schedule for options - unlisted?

Long- 15% of Market value, if no other position in unlisted security. Short - 15% of market value out of the money balance minimum $250

What is an introducing, fully disclosed, broker dealer?

May receive customer assets but must promptly transmit these assets to a carrying member.

What are the minimum standards for subordinated debt?

Minimum Term = 1 Year, Written, Specific Amount, Subordinated Claims, Proceeds used/at risk in business.

What is the advanced formula for net capital?

Tentative Net Capital minus Haircuts on Securities

Define Aggregate Indebtedness

Unsecured Liabilities of the firm plus customer related Liabilities