5 Liquidity Requirements That Underpin SEC Rule 15c3-1

What every broker-dealer or futures commission merchant needs to know to comply

SEC Rule 15c3, which specifically focuses on risk management controls, has been on the books since 1972—but it’s just as relevant now as it was 50 years ago. The markets have evolved over time and Rule 15c3 has been amended periodically to keep pace with change, forming the foundation for a financial responsibility framework for the securities industry.

Rule 15c3 originally had five components, but 15c3-2 was removed, leaving:

• 15c3-1: net capital requirements for brokers and dealers
• 15c3-3: customer protection – reserves and custody of securities
• 15c3-4: internal risk management control systems for OTC derivatives dealers
• 15c3-5: risk management controls for broker-dealers with market access

In a nutshell, 15c3 requires brokers and dealers, including firms registered as futures commission merchants (FCMs), to constantly monitor trades and positions and perform various daily and intraday calculations. To illustrate the broad compliance requirements of the rule, let’s focus in on 15c3-1 and what regulated entities need to know about this standard for liquidity that helps ensure sufficient resources are always available to satisfy claims promptly.

#1: Net capital requirements

Brokers and dealers must always have and maintain net capital that is no less than the greater of the highest minimum requirement applicable to their ratio requirement or their activities. This is meant to protect against insolvency. Additionally, their net capital cannot be less than their own net capital requirement plus the sum of the minimum net capital requirements of each of their subsidiaries or affiliates.

To ensure compliance, broker-dealers must perform two computations: one that determines net capital (liquid capital) and another that determines the appropriate minimum net capital requirement (base capital requirement).

#2: Moment-to-moment capital

Firms must always maintain sufficient net capital prior to, during and after purchasing or selling proprietary securities. At all times, including intraday, they must have sufficient net capital to meet the haircut requirements of the Capital Rule before taking on any new proprietary positions. This is required even if the firm intends to liquidate or cover the positions before the end of the same day. Moreover, firms are expected to be able to demonstrate moment-to-moment compliance with the Capital Rule.

#3: Ratio requirements

Aggregate indebtedness of brokers and dealers to all other persons cannot exceed 1,500% of their net capital (or 800% of net capital for 12 months after commencing business). Firms also registered as an FCM aren’t allowed to let their net capital drop below levels established by 15c3-1 or 4% of the funds required to be segregated under the Commodity Exchange Act. However, firms may elect to follow an Alternative Standard, if they notify their examining authority in writing. Under the Alternative Standard, their net capital is allowed to fall below the greater of $250,000 or 2% of aggregate debit items computed in accordance with a certain formula.

#4: Minimum requirements for brokers, dealers or FCMs

Brokers and dealers are required to maintain net capital of not less than $250,000 if they carry customer or broker-dealer accounts and receive or hold funds or securities for those persons. However, there are different requirements for firms that don’t carry margin accounts and which promptly transmit all customers’ funds and deliver all securities received in connection with their activities as a broker or dealer. These firms must maintain a minimum of $100,000 in net capital.

Broker-dealers that act as a prime broker must maintain net capital of not less than $1.5 million. Those acting as an executing broker in a prime broker relationship that self-clears, or broker-dealers clearing prime broker transactions on behalf of an introducing executing broker, must have minimum net capital of at least $1 million.

#5: Minimum requirements for market makers, specialists and certain other dealers

Dealers always have to maintain liquidating equity in securities positions in their market maker or specialist account. The liquidating equity must be equal to 25% (5% in the case of exempted securities) of the market value of the long positions and 30% of the market value of the short positions. The calculation reflects credit and debit balances.

Risk visibility is crucial to compliance

The major takeaway of 15c3-1’s requirements is that regulated firms need real-time visibility into their risk exposure to calculate net capital and liquidating equity to have a full understanding of the impact of trades and changes in market prices and positions.

Without these inputs, compliance may be an uphill climb. But with a solution that provides such real-time data and insights, brokers and dealers can seamlessly track risk exposure with the confidence and agility necessary to meet 15c3-1 liquidity requirements. Nasdaq Risk Platform is that exact type of tool that firms can use to:

• Gain visibility into aggregate net capital based on their house, subsidiary or customers’ start of day equity, positions and other assets.
• Calculate net capital and minimum requirements with dynamically updated, real-time positions as they relate to a firm’s positions, liquid equity, P&L and net exposure.
• Set limits and alerts to notify the firm well before a material threshold is reached.

Furthermore, the platform also supports stress testing and time-series visualization for calculations and limits, as well as a robust audit trail for books and records. Risk managers also need to consume and calculate credit and debit balances to maintain their required level of liquidating equity. From a technology perspective, Nasdaq Risk Platform’s flexible API and file integration can support that. Finally, time-series visualization for calculations and limits helps users make faster, better decisions.

SEC Rule 15c3 may not be new, but a proven technology solution can be invaluable in today’s fast-moving, complex markets. Click here to learn more about Nasdaq Risk Platform and how it can help your organization.

Malcolm Warne

Nasdaq

Malcolm Warne is Head of Product for the Nasdaq Risk Platform. 

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