Chapter 6

Question 1

What is net capital under SEC Rule 15c3-1?

Answer 1

Liquid net worth of a broker-dealer after deductions and haircuts to reflect liquidity risk.

Question 2

How does net capital differ from net worth?

Answer 2

Net capital adjusts net worth by deducting illiquid assets and applying haircuts.

Question 3

Basic net capital formula?

Answer 3

Net Worth + Add-backs – Deductions – Haircuts = Net Capital.

Question 4

What asset is never deducted from net capital?

Answer 4

Cash.

Question 5

How are fixed assets treated?

Answer 5

Deducted 100% as non-allowable assets.

Question 6

General haircut for common stock?

Answer 6

15% of market value.

Question 7

What is tentative net capital?

Answer 7

Net capital before inventory haircuts are applied.

Question 8

Purpose of Rule 15c3-1?

Answer 8

Ensure broker-dealers maintain adequate liquid capital.

Question 9

What is a non-allowable asset?

Answer 9

An asset whose value cannot be included in net capital.

Question 10

Office furniture treatment?

Answer 10

Fully deducted from net capital.

Question 11

Stock inventory liquidity treatment?

Answer 11

Subject to haircut, usually 15%.

Question 12

What is aggregate indebtedness?

Answer 12

Total liabilities of the broker-dealer.

Question 13

Observable inputs meaning?

Answer 13

Market-based prices from active markets.

Question 14

Level 1 valuation?

Answer 14

Unadjusted quoted prices in active markets.

Question 15

Level 2 valuation?

Answer 15

Prices from less active markets with adjustments.

Question 16

Level 3 valuation?

Answer 16

Valuations using unobservable inputs and models.

Question 17

What adds back to net worth?

Answer 17

Satisfactory subordinated liabilities.

Question 18

Why does subordination increase net capital?

Answer 18

The liability is excluded if properly subordinated.

Question 19

Two types of subordination?

Answer 19

Subordinated Loan and Secured Demand Note.

Question 20

Minimum duration of subordinated loan?

Answer 20

One year.

Question 21

What haircut applies to SDN equity collateral?

Answer 21

30% haircut.

Question 22

Temporary subordination max duration?

Answer 22

45 days.

Question 23

Max temporary subordinations per year?

Answer 23

Three.

Question 24

When is SDN collateral deficient?

Answer 24

When collateral value after haircut is below note value.

Question 25

Action if SDN collateral falls?

Answer 25

Notify lender and DEA immediately.

Question 26

What is a repo?

Answer 26

Dealer borrows funds and agrees to repurchase securities.

Question 27

What is a reverse repo?

Answer 27

Dealer lends funds and agrees to resell securities.

Question 28

Reverse repo capital add-on for Treasuries?

Answer 28

10% of MV over 105% of contract price.

Question 29

Reverse repo capital add-on for agencies?

Answer 29

10% of MV over 110% of contract price.

Question 30

Reverse repo capital add-on for others?

Answer 30

10% of MV over 120% of contract price.

Question 31

What are fixed asset examples?

Answer 31

Furniture, equipment, exchange memberships.

Question 32

Real estate deduction method?

Answer 32

Book value minus mortgage.

Question 33

Insurance claims deduction timing?

Answer 33

After 7 days without legal opinion.

Question 34

Payments for order flow receivable?

Answer 34

100% non-allowable.

Question 35

Margin deficit within 5 days?

Answer 35

Reduced by margin call amount.

Question 36

Margin deficit after 5 days?

Answer 36

Fully deducted.

Question 37

Aged receivable cutoff?

Answer 37

30 days.

Question 38

Dividends receivable aging?

Answer 38

30 days from payable date.

Question 39

Short securities difference after 7 days?

Answer 39

25% deducted.

Question 40

Short securities difference after 28 days?

Answer 40

100% deducted.

Question 41

Open contractual commitment meaning?

Answer 41

Unsettled firm-commitment underwriting.

Question 42

Haircut for listed underwriting commitment?

Answer 42

15% of market value.

Question 43

Haircut for IPO commitment?

Answer 43

30% of market value.

Question 44

Fails to deliver aged when?

Answer 44

After 5 business days (non-munis).

Question 45

Fails to deliver haircut rate?

Answer 45

15% of market value adjusted for P/L.

Question 46

Fidelity bond deductible rule?

Answer 46

Deduct amount over 10% of coverage.

Question 47

General rule haircut step 1?

Answer 47

15% of greater of long or short.

Question 48

General rule haircut step 2 trigger?

Answer 48

Lesser side exceeds 25% of greater.

Question 49

Undue concentration threshold?

Answer 49

More than 10% of tentative net capital.

Question 50

Undue concentration equity exclusion?

Answer 50

Greater of $10,000 or 500 shares.

Question 51

Government bond haircut basis?

Answer 51

Maturity schedule.

Question 52

Municipal bond haircut method?

Answer 52

Apply to greater of long or short by maturity.

Question 53

Money market fund haircut?

Answer 53

2%.

Question 54

Convertible bond at premium haircut?

Answer 54

Same as common stock.

Question 55

Limited market security haircut?

Answer 55

40% of both long and short.

Question 56

Long option position haircut?

Answer 56

50% of option premium.

Question 57

Minimum uncovered option charge?

Answer 57

Greater of $250 or 7.5% of underlying.

Question 58

Covered call margin reduction?

Answer 58

15% of stock MV minus call intrinsic value.

Question 59

Covered call minimum deduction?

Answer 59

$25 per contract.

Question 60

Vertical call spread charge?

Answer 60

Strike difference × 100.

Question 61

Vertical put spread no charge when?

Answer 61

Long put strike ≥ short put strike.

Question 62

Unlisted option valuation rule?

Answer 62

Only in-the-money amount counts.

Question 63

Customer debit balances secured?

Answer 63

100% allowable.

Question 64

Customer debit balances unsecured?

Answer 64

Non-allowable.

Question 65

Exchange membership classification?

Answer 65

Non-allowable asset.

Question 66

Letter stock classification?

Answer 66

Non-marketable, non-allowable.

Question 67

Why haircuts exist?

Answer 67

To reflect market and liquidity risk.

Question 68

Purpose of tentative net capital?

Answer 68

Used to calculate certain charges.

Question 69

AI/NC max ratio?

Answer 69

10 to 1.

Question 70

Net capital minimum buffer?

Answer 70

120% of required minimum.

Question 71

When repo deficits ignored?

Answer 71

When counterparty is NY Fed.

Question 72

Allowable asset definition?

Answer 72

Any asset with some value included in net capital.

Question 73

Non-allowable asset definition?

Answer 73

Asset fully excluded from net capital.

Question 74

Prepaid expenses treatment?

Answer 74

Fully deducted.

Question 75

Why securities are haircut instead of deducted?

Answer 75

They are liquid but subject to price risk.

Question 76

Main goal of net capital rule?

Answer 76

Protect customers and market stability.