View Whole SectionText only Print Print Manager Link
Previous Next

99-44 SEC Approves Interpretations And Allocation Chart For Proprietary Accounts Of Introducing Broker/Dealers

View PDF File

SUGGESTED ROUTING

Senior Management
Advertising
Continuing Education
Corporate Finance
Executive Representatives
Government Securities
Institutional
Insurance
Internal Audit
Legal & Compliance
Municipal
Mutual Fund
Operations
Options
Registered Representatives
Registration
Research
Syndicate
Systems
Trading
Training
Variable Contracts

Executive Summary

On November 3, 1998, the Securities and Exchange Commission (SEC) issued a No-Action Letter to clarify its position under SEC Rule 15c3-1 (Net Capital Rule) regarding the capital treatment of assets in the proprietary account of an introducing broker/dealer (PAIB) held by a clearing broker/dealer. National Association of Securities Dealers, Inc. (NASD®) Notice to Members 98-99 discusses PAIB in greater detail and also provides a copy of the SEC's No-Action Letter.

The letter allows introducing broker/dealers to include PAIB assets as allowable assets in their net capital computations, provided the clearing broker/dealer adheres to the provisions, procedures, and interpretations set forth in the letter including the establishment of a separate reserve account for PAIB assets in accordance with SEC Rule 15c3-3 (Customer Protection Rule). The effective date of the No-Action Letter is June 1, 1999.

The SEC has approved six interpretations and an allocation chart relative to PAIB which are contained in this Notice to Members. Questions concerning this Notice may be directed to Samuel Luque, Jr., Associate Director, Member Regulation, NASD Regulation, Inc. (NASD Regulation®), (202) 728-8472; or Susan DeMando, Regional Compliance Supervisor, Member Regulation, NASD Regulation, (202) 728-8411.

SEC Interpretations On PAIB

  • The PAIB letter applies to all broker/dealers with cash and/or securities on deposit in a proprietary account at another broker/dealer.


  • Clearing deposits held by clearing brokers are to be included as credit items in the PAIB reserve formula computation.


  • If an introducing firm does not have a proprietary trading account, it still must enter into a PAIB agreement with its clearing firm in order to treat its deposit at the clearing firm as a good asset for capital purposes.


  • A U.S. broker/dealer's deposit held by a foreign entity is not affected by the PAIB letter. However, the deposit would be subject to the net capital treatment as is normally accorded to such deposits.


  • A proprietary account of a foreign broker/dealer is not included in the PAIB calculation.


  • If a clearing firm will not enter into a PAIB agreement, the introducing broker/dealer would need to take a non-allowable capital charge only on its net equity at the clearing firm.

PROPRIETARY ACCOUNTS OF INTRODUCING BROKERS (PAIB) ALLOCATION CHART

This allocation chart shows the relationship between the various allocable items and may be used in conjunction with the interpretations when an allocation is required to determine the debit and credit values includible in the PAIB reserve formula computation.

A. CREDITS

Short Location: Long Allocation Include Credit Debit
Customer Bank Loan vs:
  Customer Long No No
  Proprietary Long No No
  Non-Customer Long No No
  PAIB Accounts Long No Yes
  Stock Borrowed No No
  Fail to Deliver No No
Non-Customer Bank Loan vs:
  Customer Long, Stock Borrowed, or Fail to Deliver No No
  Non-Purpose Loan Accounts No No
  Proprietary and Non-Customer Accounts No No
  PAIB Accounts Long Yes Yes (see Note 1)
Proprietary Bank Loan vs:
  Customer Account Long No No
  Fail to Deliver or Stock Borrowed No No
  Proprietary, Subordinated, General Partners, Directors, and Principal Officers Accounts Long No No
  PAIB Accounts Long No Yes
  All Other Long Allocations No No
Any Bank or Custody Location with Cross Lien Provisions vs:
  Customer Account Long No No
  PAIB Accounts Long Yes Yes (see Note 2)
Collateral to Letter of Credit (LOC) or Collateral Pledged for OCC Customer Margin Requirement vs:
  Customer Accounts Long No No
  Proprietary Qualified Sec. No No
  Non-Customer or Proprietary Accounts No No
  PAIB Accounts Long Yes Yes (see Notes 8 & 9)
Collateral to Letter of Credit or Collateral Pledged for OCC PAIB Margin Requirement vs.
  Customer Accounts Long No No
  Proprietary Qualified Sec. No Yes
  Non-Customer or Proprietary Accounts No No
  PAIB Accounts Yes Yes (see Notes 6,7,8,9)
Collateral Pledged to Letter of Credit for Securities Borrowed vs:
  Customer Accounts Long No No
  Non-Customer or Non-Purpose Loan Accounts No No
  PAIB Accounts Long Yes Yes (see Note 3)
  Proprietary Accounts No No
Collateral Pledged for Securities Borrowed vs:
  Customer Accounts Long No No
  Non-Customer and Non-Purpose Loan Accounts No No
  PAIB Accounts Long Yes Yes (see Note 4)
  Proprietary Accounts No No
Securities Loaned vs:
  Customer Accounts Long No No
  Fails to Deliver No No
  Securities Borrowed No No
  Non-Customer and Proprietary Accounts Long No No
  PAIB Accounts Long Yes Yes
Fails to Receive vs:
  Customer Accounts Long No No
  Fails to Deliver No No
  Non-Customer Accounts Long No No
  PAIB Accounts Long Yes Yes
  Proprietary Accounts Long No No
  Securities Borrowed No No
Proprietary and Non-Customer Shorts vs:
  Customer Accounts Long No No
  Non-Customer Accounts Long No No
  PAIB Accounts Long Yes Yes (see Note 5)
Customer Short Position vs:
  Customer Long No No
  Proprietary and Non-Customer Accounts Long No No
  PAIB Accounts Long Yes Yes
PAIB Short Position vs:
  Customer Long No No
  Proprietary and Non-Customer Accounts Long No No
  PAIB Accounts Long Yes Yes

B. OTHER CREDITS OR VALUES INCLUDIBLE - REGARDLESS OF ALLOCATION

  Include Credit
Securities Borrowed Secured by an Irrevocable Letter of Credit Secured by Customer Margin Securities No
Securities Borrowed Secured by an Irrevocable Letter of Credit Secured by PAIB Securities Yes (see Note 3)
Stock Dividends Receivable, Stock Splits, and Other Distributions Over 30 Calendar Days Old No
Suspense Account Credits and Short Security Count, Unverified Short and Suspense Security Differences:  
Over seven business days old No
Over 30 calendar days old No
Transfer over 40 calendar days old No
Prepaid Fails to Receive No
Unclaimed Dividends and Interest Payable No
All outstanding drafts payable to customers which have been applied against free or other credit balances and checks drawn in excess of bank balances (per firm records) No
Drafts Payable to PAIB Yes
TEFRA Accounts Payable No
Accrued Interest Payable on Customer Credit Balances No
Accrued Interest Payable on PAIB Credit Balances Yes

C. DEBITS

Long Position: Short Allocation Include Debit Credit
Securities Borrowed Collateralized By Cash, U.S. Treasury Bills, Notes, LOC's Secured by Proprietary Qualified Securities, or any other Acceptable Collateral as per (b)(3) vs:    
  Customer Accounts Short No No
  Non-Customer or Proprietary Accounts Short No No
  PAIB Accounts Short Yes Yes
  Fails to Receive No No
  Customer Bank Loan No No
  Non-Customer or Proprietary Bank Loan No No
  Securities Loan No No
  Stock Dividend Receivable No No
  Transfer No No
  All Other Physical Control Locations No No
Securities Borrowed Secured By an Unsecured Irrevocable Letter of Credit, Unacceptable Collateral as per (b)(3) or Unsecured Borrows No  
Fails to Deliver Not Over 30 Calendar Days Old vs:    
  Customer Accounts Short No No
  Non-Customer and Proprietary Accounts Short No No
  PAIB Accounts Short Yes Yes
  Fails to Receive No No
  Customer Bank Loan No No
  Proprietary and Non-Customer Bank Loan No No
  Securities Loaned No No
  Transfer No No
  Other Physical Control Location for Not More Than Three Business Days No No

NOTES FOR PAIB ALLOCATION

Note 1 Include market value of the collateral up to the amount borrowed as a credit.

Note 2 When a broker/dealer pledges PAIB securities to a non-customer loan and also has proprietary and/or customer loans with the same pledgee, it must assure itself that the pledgee does not have a lien upon non-customer collateral for any loan other than for PAIB non-customers.

If a cross lien exists and could place PAIB securities at risk, there shall be included in the PAIB formula the amount of the PAIB loan, plus the lower of the value of PAIB collateral in excess of the loan or the amount of loans for other than PAIB.

Note 3 Include the market value of the borrowed securities as a credit.

Note 4 Include the market value of the pledged securities.

Note 5 Include the market value of the short securities.

Note 6 Letters of Credit Secured by Customer and Non-Customer Securities

When a letter of credit, collateralized by both customer and non-customer securities, is deposited with OCC as margin, only the amount required for customers' margin is included as a debit in the customer reserve formula. Therefore, the amount of margin required for Market-Maker accounts is included as a debit in the PAIB reserve formula to the extent it is collateralized by customer and PAIB securities. (The combined customer and non-customer margin requirement, up to the amount of the letter of credit, must be included as a credit in the customer's reserve formula only.)

Note 7 OCC Margin Requirement Met by PAIB Securities

When PAIB collateral is deposited with OCC to satisfy Market-Maker margin requirements, the actual amount of margin required is included in the formula as a debit and a credit.

Note 8 Letters of Credit Secured by PAIB Securities

Include as a credit, the amount of letters of credit which are collateralized by PAIB securities and deposited with OCC, to the extent of the margin requirement at OCC, which is covered by such letters of credit.

Note 9 Commingled Collateral as OCC Margin Deposit

When customer, non-customer, and qualified proprietary securities are commingled as margin on deposit with OCC, the customer margin requirement should be included in the customer reserve formula computation as a credit and the lesser of the customers' margin required or the total of the collateral value, less the amount representing the non-customer should be included as a debit in that formula.

Any amount not allowed as a debit in the customer reserve formula because the margin requirement was satisfied with PAIB securities should be included as a debit in the PAIB reserve formula and no credit need be included to the extent the credit is included in the customer reserve formula.


Previous Next