Regulatory Capital Requirements Differ by
Type of Regulated Entity
the regulated entity fails.29 The objective of protecting investors does not
extend to the protection of the going concern of broker-dealers or FCMs,
nor does it extend to the protection of investors' holdings against market
losses. These rules, respectively, require SEC-registered broker-dealers and
CFTC-registered FCMs--the regulated entities--to continually maintain
sufficient liquid assets to protect the interest of customers and other
market participants if the firm ceases doing business, and as applicable, to
keep customer assets segregated from the regulated entity's assets. The
rules focus specifically on the regulated entity's financial condition and
activities. As noted above, SEC and CFTC do not have statutory authority to
regulate holding companies of broker-dealers or FCMs. The financial
condition of holding companies or other affiliates of the regulated entity
are generally not included in computation of net capital or compliance
with the customer segregation rule.30
SEC and CFTC Use Similar
and CFTC calculate broker-dealer and FCM liquid capital, respectively, in
Methods to Calculate Capital
a similar manner. However, their capital requirements, which are based on
either ratios of capital to assets or capital to liabilities of the firm, are
SEC's Net Capital Rule
Capital standards for brokers and dealers based upon liquidity have been
in effect since 1934 when the Securities Exchange Act was adopted.
According to SEC, it adopted the SEC Uniform Net Capital Rule31 in 1975 in
response to congressional concerns arising from the unprecedented
financial and operational crisis in the securities industry from 1967 to
1970. It is a conservative liquidity-based capital standard that requires
broker-dealers to maintain a minimum level of liquid capital sufficient to
promptly satisfy all of its obligations to customers and other market
participants, and to provide a cushion of liquid assets to cover potential
market, credit, and other risks. The rule focuses generally on the
registered broker-dealer; therefore, the assets and liabilities of a related
entity (e.g., an affiliate or parent) of the broker-dealer are generally not
taken into account in calculation of net capital.
Net Capital Requirements: With certain exceptions, the net capital rule
requires a registered broker-dealer to maintain the greater of an absolute
CFTC imposes capital requirements on both FCMs and Introducing Brokers. Because Introducing
Brokers do not hold customer funds and do not pose a significant risk to the functions of the markets,
their capital regulations are not considered further in this report.
An exception to this principle is when the registered broker-dealer guarantees or assumes
responsibility for the liabilities of the related unregistered entity. In such a situation, the broker-dealer
is required to consolidate into a single computation the assets and liabilities of both itself and the
guaranteed entity. See Rule 15c3-1(a)(1)(i) and Appendix C to the rule.
SEC Rule 15c3-1 under the Securities Exchange Act of 1934.
GAO/GGD-98-153 Risk-Based Capital
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