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For trading and investing firms, compliance is a dynamic function in two ways: one, staying up to date with regulatory changes, and two, optimizing how to comply with existing rules.
Take, for example, the U.S. Securities and Exchange Commission Rule 15c3-1, the Net Capital Rule, which has been on the books since 1975. The SEC’s premise is straightforward – to ensure that brokers and dealers have sufficient capital to meet their financial obligations to customers and creditors.
Almost a half-century later, the rule endures, and broker-dealers and futures commission merchants (FCMs) must meet numerous minimum capital levels relative to their size and trading activity, spanning measurables such as net capital, moment-to-moment capital, and ratio requirements.
Beyond just having sufficient capital, brokers must have the systems and technology in place to prove compliance, effectively in real time. That is where the landscape has changed, as markets are much faster and more complex, but there are much better tools and technology available for firms to manage through this.
Malcolm Warne, Head of Product for the Nasdaq Risk Platform, assessed SEC Rule 15c3-1, its implications, and the state of the art in compliance in a Sept. 13 article.
“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,” Warne wrote.
Warne cited Nasdaq Risk Platform as a tool that enables compliance with 15c3-1, by enabling brokers to gain visibility into aggregate net capital, calculate net capital and minimum requirements in real time, and set limits and alerts to notify the firm well before a threshold is reached.
“Without these inputs, compliance may be an uphill climb,” Warne wrote. “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.”
Implications of the Net Capital Rule were assessed in the 2023 Report on FINRA’s Examination and Risk Monitoring Program. In the annual report, which has some material carried over from year to year and some updated material, the brokerage self-regulatory organization added a new consideration amid the emergence of digital assets: “How does your firm assess the potential impact to net capital for new, complex or atypical transactions?”
FINRA also updated its findings and effective practices for Rule 15c3-1, in areas such as net capital assessment, moment-to-moment and net capital compliance for underwriting commitments, and net capital deductions.
Ultimately, for brokers and FCMs, Net Capital Rule is about establishing and maintaining compliance in the most effective and seamless way. Nasdaq’s Warne concluded: “SEC Rule 15c3 may not be new, but a proven technology solution can be invaluable in today’s fast-moving, complex markets.”
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